“Life is a series of natural and spontaneous changes. Don’t resist them-that only creates sorrow. Let reality be reality. Let things flow naturally toward in whatever way they like.” – Lao Tzu.
This piece from our “Real Estate Perspectives” series focuses on the investor’s angle to real estate.
Introduction
In management economics, there exist a concept called the Time Value of Money. Simply put, it’s the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
This explains the existence of interest. Interest, whether on a bank deposit or debt, compensates the depositor or lender for the time value of money.
The principle also underlies investment. Investors are willing to forgo spending their money now if they expect a favorable return on their investment.
1999 – 2008
Pre-2008, there weren’t enough luxury apartments within Ikoyi and Victoria Island to meet the demands of multi-nationals who were the major targets for such developments, considering they were essential the only category of people to afford such opulence. During this era, what was referred to as luxury apartments were really not as luxurious as contemporaries in the Upper East Side or Midtown Manhattan.
In subsequent years, oil prices rose, the real estate market boomed, the Lagos sky-line became dotted with eye popping skyscrapers, and property investors smiled all the way to the bank.
As a result, the market became saturated, and tenants were spoilt for choice. Factors such as address, all the way to the finishing on a property then came into play. It wasn’t out of place for embassies of affluent nations to probe into the quality of materials used in the construction of properties they were interested in.
This continued until the year 2014.
Post 2014
The last few months of the year 2014 saw a gradual descent of oil prices.
Economic indices began dropping, and a number of multi-nationals began downsizing.
Now when this started, a number of investors/developers refused to adjust prices to fit the prevailing reality. Denial was common place, and this persisted until a glut hit the market. Revenues dropped, investors found it difficult to offset loans, and relationship with banks, their majority financiers, soured.
It was at this stage, the wise ones began applying the wisdom in the words of Lao Tzu quoted earlier at the beginning of this piece. These set of investors, while not pleased with the turn of events, still have cause to smile… or at least, half-smile.