Critical Issues in Economic Risks Consideration by Commercial Property Investors and Valuers in Nigeria: The Case of Lagos
Abayomi Ibiyemi1, Ezekiel Tella2
1Abayomi O. Ibiyemi, He is also a Principal Partner in the firm of Abayomi Ibiyemi & Co., Estate Surveyors and Valuers, based in Lagos, Nigeria.
2Ezekiel Tella, He is a Lecturer in the Department of Estate Management and Valuation, Lagos State Polytechnic, Lagos, Nigeria.
Manuscript received on October 11, 2013. | Revised Manuscript received on October 15, 2013. | Manuscript published on October 25, 2013. | PP: 35-43 | Volume-1, Issue-12, October 2013. | Retrieval Number: L05201011213/2013©BEIESP
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© The Authors. Published By: Blue Eyes Intelligence Engineering and Sciences Publication (BEIESP). This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Abstract: Rationality in property investment valuation is predicated on a coherent valuation theory and practice, generally acceptable methodology framework, and explicitness in risks appraisal and rental growth rates. This study hypothesises that Lagos real estate firms do not account for economic risks explicitly in property investment valuation practice. Many firms use the Payback Period, Residual, Discounted Cash Flow (DCF), and the conventional Risk Adjusted Discount Factor (RADF) that increases the discount rate implicitly, depending on the perceived volatility of the project relative to the risk-free rate of return. A questionnaire survey, using stratified sampling, recently asked 110 valuation firms and 40 Commercial property investors in Lagos Metropolis about comprehensive economic risks techniques applications, and perception of risks respectively. The data provided verified the hypothesis. The results, based on chi-square goodness of fit test, indicated statistical differences between theory and observed proportions. The conclusion of the study is that investment valuations are not explicitly influenced by comprehensive risk considerations. The firms lack the understanding of the methods and procedures of the contemporary risk models, hence, it is difficult for them to apply. Investors’ perception of risks is poor, so they are unable to query the Valuers’ valuation rationale. The implication of the findings is that economic risks may be understated: Future investment performance measurements must be qualified on the platform of comprehensiveness of risks appraisal. The paper recommends that application of comprehensive models be made mandatory by the Real Estate Professional Body, with a reliable property data bank that complies with international valuation best practices. Commercial property investors should be encouraged to diversify, share, or spread their risks accordingly.
Keywords: risk analysis, market risks, perception, valuation rationality, best practices, appraisal, Nigeria