Is real estate investment the new fraud?
Real estate is usually a very attractive investment, because of the almost “fixed” size of land across the globe. However, the attractiveness of real estate, as an asset class, predisposes it to significant fraud risks. Arguably, the recent unattractive returns on saving and other investment products (e.g. treasury bills) will give further impetus to the real estate investment and property development companies to double their efforts at promoting their offers as the preferred investment destination.
A recent analytical text review of the advertised value propositions of the major players in this fledging sector shows that prospective retail real estate investors are offered “affordable products” that are “secure” and with the potential of “high returns” in the nearest future. In all, these propositions are aimed at reducing the associated vagaries of real estate transactions by taking off the responsibility of conducting the preliminary due diligence on the prospective real estate investments and following through with the administrative procedures (for instance – 12 procedures) required to acquire rights to a property in Nigeria. But how reliable are these propositions as preferred investment of choice? To answer this question, as part of a market research, PPO International recently conducted a fraud risk assessment of these offerings by real estate entrepreneurs.
The review uncovered material unethical advertisements in the offerings of the firms in this domain we have referred to as retail real estate investment. One major finding of the study is that these proprietors do not disclose all information reasonably required to make an informed investment decision. For instance, all the companies sampled did not inform prospective investors that there would be additional charges to the advertised face value of the property. In most cases, these additional charges were equal to the advertised face value while the advertised costs, as expected, were always grossly higher than adjoining property in the same location and condition. In other words, the offerings are designed to mask the real transaction costs. The situation is further worsened by the realisation that the investor only becomes aware of these supplementary or hidden charges after signing a contract and making a part payment. All the contracts reviewed for the study showed that the investor would lose part of all payments made (usually, ten percent) if the investor elects to terminate the contract at any point. Would such contracts stand the rigours of our judicial system? Maybe not. Has anyone tested in this in our courts? Again, maybe not and possibly because of the not too impressive perception people have of the judicial system here.
While the associated fraud risks are well documented, it is worth mentioning that, in Nigeria, these risks mainly arise from poor information (technically known as information asymmetry). Information asymmetry often leads to purchase of real property that have been sold to more than one person or currently under litigation, interfamily/communal struggle, and on the higher end of the spectrum, government acquired land.Other social/political risk issues arise from the 1978 Land Use Act, which gives the Government jurisdiction over land ownership. The social/political risks associated with real estate investments in Nigeria have often crystalised in the form of Government relying on this jurisdiction to “forcefully” acquire real estate from the original owners.
These identified risks are traceable to weak institutions in the country, which in turn give rise to inconsistent regulatory and legal environment, ineffective bureaucracy and judicial system, and inadequate property rights protections and enforcement. To put this into perspective, Nigeria ranked 184 out of the 190 countries surveyed for property registration in the World Bank Doing Business 2019 Report. According to the report, in Lagos – the commercial epi centre of Nigeria– property registration required an average of 12 procedures over 105 days at a cost of 11.1 percent of the property value.
The de-risking or mitigation of these institutional challenges has created a business opportunity. This appears to have formed the bedrock of the burgeoning real estate investment and property development companies with myriads of “Estates” on offer across the country. These products are advertised to prospective investors through a combination of methods in order to create awareness about the product to prospective customers.
Howbeit, from a business ethics point of view (a frame which is applicable to SMEs as well – and not just large corporates or multinational corporations), the sharp practices observed in this sector are not only unethical but are clear attempts at defrauding/extorting unsuspecting real estate investors. As shown, the deception is intentionally designed into the subscription process such that the investor only becomes aware of the additional charges after committing to a contract to lose ten percent of any payment they must have made and in fact making such payments. Definitely, another study is required to quantify the amount Nigerians have so far lost to this unethical advertisement in the retail real estate investment domain. The lack of transparency does not end at the threat of losing 10 percent of the paid sum. Where the investor decides to go ahead with the investment, they are crudely reminded that they do not have control over the pricing of and choice of vendors for associated services like architectural plans and drawings, building plans, etc etera.
Other findings from the study show that in most cases, the return on these investments have not measured up to the promises of the proprietors. While it is arguable that these proprietors do not have control over the macro economy, the study observed a trend where the firms on their own, without any compelling macroeconomic support, inflate the prices during the year and then reduce it (to as much as 50%) during specific times of the year – especially festive periods, in the name of “sales” to attract unsuspecting investors.
Aside the fact that the fate of the naïve real estate investors is now at the whims and caprices of these entrepreneurs, they are also left with almost junk investments that they cannot reasonably get out of in the nearest foreseeable future. This is the case of most investors who were promised “high returns in the nearest future” during the much-taunted Lagos Mega-city era of the first decade of 2000. This unethical advertisement was what drove the demand for land in the parts of Ogun state adjoining Lagos State – most of which can pass as junk investments more than 15 years after. We see this repeating itself along the Ibeju-Lekki corridor where almost all real estate investments are sold as “close to Dangote refinery.”
In conclusion, information asymmetry is at the heart of retail real estate investment and as Rafi Mohammed notes in this HBR article“good information is needed on products and prices for the free market to prosper”.
Donald Amaeshi is a governance practitioner with extensive corporate ethics and investigation experience.He can be reached at: [email protected].
https://businessday.ng/opinion/article/is-real-estate-investment-the-new-fraud/