REAL ESTATE INVESTMENT MAY BE IN TROUBLE SOON – EXPERTS WARN

Many investors have taken a flight to the safety of real estate in the aftermath of the worrisome protracted correction that had turned the Nigerian stock market into the grazing ground of the bears with stock prices continuously hitting new bottoms by the day.

Analyzing the prospects of a downturn in the real estate sector, a second tier bank managing director explained that the frenzy of investors’ movement to the real estate sector would end up in creating artificial value for property which, as result, will lead to a correction in the sector.

“Everybody is now rushing to the real estate sector because the stock market is no longer providing the kind of capital appreciation we witnessed up to March this year.” The bank’s MD observed.

“But the problem I see is that not many people are giving consideration to proper valuation of property. Like it happened in the stock market, the herd mentality is being enacted in the real estate sector, especially those that are rushing to take position in highbrow areas. For instance, in the Lagos area, most investors think that properties in the Lekki-Ajah corridor would continue to appreciate forever. This is a wrong notion because the price of these properties is high at this moment for reasons of high demand pressure.

“What I believe will eventually happen is that properties would soon be priced out of reach of usage. When you get to that point, people that had bought into these properties with intent at trading them off may not be able to free their investment because there would be nobody to buy, even letting may no longer be feasible because of over pricing. When we get to this scenario, the only plausible response would be another desperate bid to get out of the sector; the consequence would be too many properties asking to be bought by too few buyers. This leads to price crash” The MD argued.

“I will counsel that anybody who wants to go into property should consider newly developing areas that are just growing so that they can buy cheap and tend the properties with a medium to long term view.” He advised.

Mr. Ori Adeyemo, a forensic accountant, however, reviewed his consideration of the fate of the real estate sector from the background of the banking credit relationships with their customers.

“The logic is simple enough. The two most reliable forms of collateral for Nigerian banks are stocks and properties. Now with the protracted fall in the stock prices, stocks that have been pledged as collateral to banks have become more or less worthless such that stocks are no longer popular with banks as collateral.

“But there is a tie-in somewhere in the credit transaction between banks and their credit customer. Most customers had pledged their properties as collateral to secure credit to finance their stock market transactions, some had gone ahead to use the money from the credit transactions from their banks as margin participation funds with their stockbrokers and in some cases, their banks.

“Of course, I had always warned that the stock market was headed for a crash, but not many people heeded my call. Now that we found ourselves in this situation of price falling endlessly, it translates to mean that banks cannot redeem their funds from selling pledged stocks, so the next would be to start offering the properties pledged as securities in the open market in the desperate bid to recover their money from their credit customers. You will expect that so many properties would be in the market at the same time competing with those other properties investors had taken position in. The result is a saturation of the properties market on the supply side. What I see is properties prices falling drastically.

“At this point in time, I advise the average investor to remain calm and proper evaluation of whatever is his or her next investment step because situations tend to change drastically at time like this.” Adeyemo suggested.

STOCK MARKET REBOUND…WACTH OUT BEFORE YOU INVEST

The excitement returned to the Nigerian stock market last week when in two days in a roll the market recorded gains that had become foreign to a market that seems to be determined for a southern movement since March this year. For the first time in several weeks, the protracted decline in the measurement of performances of the market moved northward to the delight of investors and all of a sudden the scenario changed from a market saturated with stocks to one characterised by scarcity of stocks as investors desperate bids to buy certain shares were rebuffed by unavailability. Market analysts observed that volume of shares on offer dropped significantly, suggesting a possible retraction from selling, as investors hope for further price appreciation and the bid to purchase shares took an upturn indicating a possible restoration of investors’ confidence.

 

Some more perspective market watchers argued that the market is not yet an all comer affair. Those that offered to speak with FORTUNE & CLASS Weekly said they strongly believe that the market can for now be described as the players market…a market dominated by institutional investors and stock brokers. Private investigations conducted indicated that most small to medium investors wishing to join in the share buying fray so as to profit from the rock bottom prices of many of the now highly undervalued stocks were left in the lurch with bids unfulfilled.

 

Latest news in the market informed that the new momentum driving the market may not be unconnected with the early bird initiative of some commercial banks that have quickly exploited the opportunities offered about the extension of tenor for credit facilities for margin trading and the 360 days elongation of the Central Bank of Nigeria’s expanded discount window.

 

The CBN’s new policy on discount window liberalises access to funds by commercial banks and also extends the repayment tenor of funds borrowed from the CBN through the discount window.

 

A market source confided that some of these early starter banks had provided funds for the purpose of shares purchase to stockbrokers, of course with a proviso for the preferences of shares to be purchased.

This, according to FORTUNE & CLASS source influenced the sudden liquidity position of the market. In light of this, another market player has suggested that small to medium size investors should be very careful not to get their fingers burnt in the supposed reawakening of the market.

 

I can tell you that great opportunities are on offer in the market right now with otherwise fundamentally strong stocks been priced at low price. But as the market seemingly embarked on a rebound, small to medium size investors should be wary of falling into a regretful pit. I want to suggest that investors take note of the following: Nobody is sure at the moment if the market has completely bottomed out. As things stand, institutional investors are engaged in what is called fishing the bottom market and i can tell you that this is an herculean task, because the upturn following a decline is often short lived and results in a continued price decline and hence a loss of capital for investors that purchased stocks during a misperceived or fake market bottom.

 

“Besides, nobody can tell for certain that the market will not revert to the bearish swing again as a result of speculators taking profit from the marginal capital appreciation enjoyed by some of the stocks that gained last week. And no one is sure that a small time investor will get his order for shares purchase effected by his or her stockbroker.”