latest news, breaking news, business, finance analysis, comments and views from Nigeria :: Businessday

FEMI AKINTUNDE, managing director, AM Facilities explains the factors affecting the real value of real estate assets, insisting that current maintenance practices and past maintenance history certainly affect the value of a property.

Intensifying solvency concerns and a loss of confidence by investors in some of the largest financial institutions in Europe and the US, over the last two years, has pushed the global financial system to a state of crisis. Prices of oil and basic commodities have reached historically high levels in recent months and the capital market has taken a strong hit in capital decline the world over. This situation is having its impact on even developing countries and the Nigerian economy is not left out – particularly because of her overdependence on the oil sector. This situation presents a major cause of concern to the real estate investor who understands the relationship between real estate performance and the economy both on the international market and at the home front. It goes without saying that an improving economy will greatly affect the confidence of real estate property investors since they will be able to manage their debts well in an economy that is on the rise. The typical response of real estate market conditions to a downturn in economy is that there will be a higher supply of homes available for sale than there is buyer-demand. This is because a time of economic recession is also a time of job instability. Unemployment rates rise during these periods and there are a number of homebuyers who are forced to sell their home due to their inability to fulfil the numerous financial obligations that come with buying a home. Factors Affecting Value of Real Estate Assets Value of a real estate asset can be measured by the monetary value that a willing buyer will be ready to pay to gain ownership of the property from the current owner; it is determined by professional real estate valuers. However, such values are influenced by a number of factors and in order for the asset owner to be able to preserve the value, he/she needs to understand those factors and the dynamics that may either influence the value positively or negatively and put necessary strategies in place to safeguard the asset value against the potential impact of the current global economic recession. The International Valuation Standards defines market value as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion. In considering the various options available, the real estate investor must first understand the different factors that affect the value of his property. Some of the factors are highlighted below; Location: Many professionals, investors and renowned authors on real estates investment will emphasize the three most important considerations in investing in real estate, these are: Location, Location, Location. An appropriate location must be chosen for the specific type of building and to suit the specific circumstances of the owner. If a very expensive building is located in a relatively cheap area, it is very unlikely that the true value of the building either in terms of rental income or capital gain can be fully realized by the owner. Environment: The environment refers to the external factors to the building itself, it includes factors such as neighborhood, general security in the area, state of public infrastructure such as good access roads and drains, water, electricity, topography, type of land (dry or swampy), accessibility to basic social and commercial activities such as hospitals, shopping/markets, sports, social clubs etc. Social Factors: Every society recognizes the basis of social stratification as a way of differentiating the socio-economic levels of different individuals in that society. Therefore, certain areas of Nigeria have been identified and developed as exclusive to certain class of people. Properties are far more expensive in certain areas than the other not because of the difference in the colour of the land, physiological or genetic makeup of the people but just because the area has been designated as a reserved area for certain groups of people and as such, over time, such an area will attract more of such people and developments that fit the area will follow suit. Economic Factors: Value is also influenced by the general state of the economy, during time of inflation, prices are usually high and when the earning potential of people is high, most can afford good standard of accommodation and value of such assets will generally go up. Quality of Construction: Another differentiator of real estate asset value is the quality of construction and finishing. Two properties located within the same area, having almost exactly the same set of amenities will command different values based on the quality of the construction and finishing. A house that is well ventilated will provide more healthy living, a house with good electrical systems portends less risk of electrical fire hazard, a house with a good plumbing system will present less stress for maintenance. The grave consequence of not having a quality construction may even impact negatively on safety and become life threatening - eg: the recent wave of building collapses across the country, so if you are seeking to buy a property, structural and functional integrity of the building systems must be a primary consideration in your decision process and this will create lasting value in the asset. Features: Depending on the intended use of the property, it is important to make adequate provision for all necessary features that will maximise the value from the intended use. Luxury residential apartments that have the following provisions are likely to command very high value compared with those that have less of such; Good perimeter fence protected with a well secured security gate, security guard house, green area with good landscape, adequate provision for parking for both occupants and visitors, children play area, swimming pool, gymnasium, spacious rooms, storage, lift where levels are more than 4 (four), provision of adequately sized generator with backup capacity, water treatment plant, facility managers office, well paved road within the estate, aesthetically pleasing internal and external look, quality floor well finished, spacious and well fitted kitchen and bathrooms, quality plumbing and electrical fittings, etc. Fitness for Purpose: Facilities that were built with specific function in mind are usually more functional that those adapted and converted for a different use. A building constructed originally as residential may be found inadequate when future attempt is made to be use it as an as office, capacities required of certain services may not be adequate to cope with the new use e.g., number of toilets, car parks, electrical socket points relative size of open rooms etc. Cost implication of such conversions, sometimes make the decision uneconomical. Another difficulty often faced is the need to obtain regulatory authority’s approval for change of use, if this is not done, appropriate sanction or fine may be levied. Cost of Development and Occupancy: Certain locations require more cost to develop than others for instance, building on an island when sand filling and piling is required may make the land more exclusive but that would definitely come at its own cost which automatically boosts the value of the properties in the area due to higher entry barriers to those who cannot afford such land location. Also, the type and architectural beauty of the house make it more aesthetically pleasing to the external view and that also will influence value to a large extent. However, a great deal of caution should be exercised when considering the acquisition of such houses to be sure that functionality and maintainability has not been totally sacrificed for the aesthetic value otherwise the Total Life Cycle (TLC) cost of the facility will become very high on the long run as a result of unnecessarily high cost of operation and maintenance. Facility Condition: Current condition of the building and its components will influence the value of the property. That is to say that even if a building is well located and well built with adequate amenities in place, but not well maintained, it will certainly lose its functional value over time and will no longer be able to serve the intended purpose as at the time of construction. To enhance this value, there has to be a periodic condition assessment/survey of the facility to determine the aspects of it that require immediate correction and upgrade to keep pace with current development and maintain current functional integrity of the asset, this enables the owner to also have a plan for asset planning and improvement over time. (10) Maintenance: Current maintenance practices and past maintenance history also affect the value of a property. For properties to command high value owners must ensure that there is adequate provision for maintenance of the building systems so as to keep them in good functional state; this also helps to minimize frequent breakdown and expensive repairs at times of crisis. Professional facility managers’ services must be engaged to ensure these services are carried out on a regular basis. Routine facility inspection checklists are available and are to be used to guide systematic application of this tool. Ironically, many organizations concentrate mainly on the cost of initial construction and do not consider the total lifecycle of the facility which encompasses the stages of design, construction, occupancy and use, repair, rehabilitation and disposal. Yet the operations, maintenance and management of facilities account for up to 80 per cent of the overall costs in the lifecycle of a building as compared with the design and construction phase which only accounts for 20 per cent. Facility Management however has a wider scope than building operation and maintenance. In reality, the FM scope in building projects and management covers from Design-Procurement-Construction-Installation-Commissioning-Operation & Maintenance. Thus in evaluating factors which have the most profound impact on the RE asset life cycle management process, Facility Management would rank the highest and is the most needed to sustain the high value of the asset on a continuous and long term basis. Most advanced nations of the world that are acclaimed to have good standard of the built environment have been able to do so by according facility management practices a due recognition in the development and maintenance of the built environment and thereby encouraging the institutional growth of the profession that help to supply and manage the conduct of the professionals thus bodies like the International Facility Management Association (IFMA), Facility Management Association of Australia, IFMA Japan, British Institute of Facility Management (BIFM) have evolved and all collaborate at the global level with one mission - to make the world a better place to live, Nigeria can not be left behind in this train if we are to attain the desired leadership position in the world as espoused in our vision 2020 statement..