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FINANCING RETAIL COMMERCIAL DEVELOPMENTS IN
NIGERIA: OPTIONS AND CHALLENGES
A Thesis
presented to
The Graduate School of Business
University of Cape Town
in partial fulfilment
of the requirements for the
Masters of Business Administration Degree
by
Jan van Zyl
December 2010
Supervisor: Dr. Chipo Mlambo
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This thesis is not confidential. It may be used freely by the Graduate School of Business.
I wish to thank my supervisor, Dr. Chipo Mlambo of the UCT Graduate School of Business for
her valuable advice on my research report. Without her assistance and guidance this thesis
would not have been possible.
Furthermore, I would like to thank the various individuals that were willing to participate in
the research interviews. Without your assistance and input, this report would not have
materialized.
Lastly, I wish to thank my fiancée, Victoria Mendel for her support throughout this program.
Your love, understanding and assistance were invaluable. For that, I will always be grateful
to you.
I certify that except as noted above the thesis is my own work and all references used are
accurately reported in footnotes.
Signed:
Jan H. van Zyl
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FINANCING RETAIL COMMERCIAL DEVELOPMENTS IN
NIGERIA: OPTIONS AND CHALLENGES
ABSTRACT
This thesis evaluates the sources of financing, the financing mechanisms, as well as the
operational environment retail commercial developers in Nigeria utilize and have to deal with
when they pursue retail commercial developments. The results show that the emphasis is on
the developers to find the optimal sources of financing, by utilizing the correct financing
mechanisms. Furthermore, it is the responsibility of the developer to do everything in their
power to lower the risk-perception of financiers and investors in order to secure better terms
and conditions on loans, investments, and shareholders‟ agreements.
KEYWORDS: Nigeria, commercial real estate developments, retail
commercial developments, source of financing, financing
mechanism, challenges, operating climate, and difficulties.
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TABLE OF CONTENTS
1 INTRODUCTION ...................................................................................................................................... 7
1.1 RESEARCH AREA AND PROBLEM ....................................................................................................................... 7
1.1.1 Background: .................................................................................................................................... 7
1.1.2 Research Objective: ....................................................................................................................... 12
1.2 RESEARCH QUESTIONS AND SCOPE .................................................................................................................. 12
1.3 RESEARCH ASSUMPTIONS ............................................................................................................................. 13
2 LITERARTURE REVIEW ........................................................................................................................... 14
2.1 OVERVIEW ................................................................................................................................................. 14
2.2 PRIMARY SOURCES OF FINANCING .................................................................................................................. 16
2.2.1 Operating Cash Flows: .................................................................................................................. 16
2.2.2 Insurance companies and pension funds: ..................................................................................... 16
2.2.3 Banks: ........................................................................................................................................... 17
2.2.4 Stock Market: ................................................................................................................................ 17
2.2.5 Government: ................................................................................................................................. 18
2.2.6 Venture or private equity capital: ................................................................................................. 18
2.3 CONVENTIONAL FINANCING MECHANISMS ....................................................................................................... 19
2.3.1 Short-term debt (Three years and less): ........................................................................................ 19
2.3.2 Long-term Debt (More than three years):..................................................................................... 19
2.3.3 Real Estate Investment Trusts (REITs): .......................................................................................... 20
2.4 NEW TYPES OF INNOVATIVE FINANCING MECHANISMS ....................................................................................... 23
2.4.1 Convertible Mortgages: ................................................................................................................ 24
2.4.2 Participating Mortgages: .............................................................................................................. 26
2.4.3 Mezzanine Financing: ................................................................................................................... 26
2.4.4 Joint Ventures: .............................................................................................................................. 31
2.5 CONCLUSION .............................................................................................................................................. 34
3 RESEARCH METHODOLOGY .................................................................................................................. 36
3.1 RESEARCH APPROACH AND STRATEGY .............................................................................................................. 36
3.2 RESEARCH DESIGN, DATA COLLECTION METHODS AND RESEARCH INSTRUMENTS ....................................................... 36
3.2.1 Conversations and Semi-Structured Interviews ............................................................................ 36
3.3 DATA ANALYSIS METHODS ............................................................................................................................. 38
3.4 LIMITATIONS OF THE STUDY ........................................................................................................................... 38
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4 RESEARCH FINDINGS, ANALYSIS AND DISCUSSION ............................................................................... 39
4.1 RESEARCH FINDINGS .................................................................................................................................... 39
4.2 RESEARCH ANALYSIS AND DISCUSSION ............................................................................................................. 40
4.2.1 Sources of financing and their limitations .................................................................................... 40
4.2.1.1 Operating Cash Flows: ........................................................................................................................ 40
4.2.1.2 Insurance companies and Pension funds (Domestic): ........................................................................ 41
4.2.1.3 Insurance companies and Pension funds (Foreign): ........................................................................... 41
4.2.1.4 Banks: .................................................................................................................................................. 42
4.2.1.5 Domestic Stock Market (Nigerian Stock Exchange): ........................................................................... 43
4.2.1.6 Government: ....................................................................................................................................... 43
4.2.1.7 Venture Capital: .................................................................................................................................. 44
4.2.1.8 Private Equity Capital: ......................................................................................................................... 44
4.2.2 Challenges of Various Financing Mechanisms .............................................................................. 45
4.2.2.1 Short-term debt (Three years and less): ............................................................................................. 45
4.2.2.2 Long-term debt (More than three years): ........................................................................................... 45
4.2.2.3 Real Estate Investment Trusts (REITs): ................................................................................................ 47
4.2.2.4 Convertible & Participating Mortgages: .............................................................................................. 48
4.2.2.5 Mezzanine Financing:.......................................................................................................................... 48
4.2.2.6 Joint Ventures (JV): ............................................................................................................................. 49
4.2.2.7 Equity (Land/Cash/Professional Services): .......................................................................................... 50
4.2.3 Factors That Impact the Operating Climate in Nigeria and Potentially Solutions ........................ 51
4.2.3.1 High Building Cost: .............................................................................................................................. 51
4.2.3.2 High Financing Costs: .......................................................................................................................... 52
4.2.3.3 Relatively Low Initial Returns on Retail Commercial Developments: ................................................. 53
4.2.3.4 Lack of Local Expertise: ....................................................................................................................... 53
4.2.3.5 Importation Bans and Restrictions: ..................................................................................................... 54
4.2.3.6 Difficulty in Obtaining Financing: ........................................................................................................ 54
4.2.3.7 Lack of Potential Buyers for the End Product: .................................................................................... 55
4.2.3.8 Lack of Infrastructure: ......................................................................................................................... 56
4.2.3.9 Uncertain Investment Climate: ........................................................................................................... 57
4.2.3.10 High Land Costs: .................................................................................................................................. 57
4.2.3.11 No Private Land Ownership (Only long-term leases): ......................................................................... 58
4.2.3.12 Bureaucratic Procedures: .................................................................................................................... 59
4.3 RESEARCH LIMITATIONS ................................................................................................................................ 59
5 RESEARCH CONCLUSIONS ..................................................................................................................... 60
6 FUTURE RESEARCH DIRECTIONS ........................................................................................................... 63
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7 REFERENCES AND BIBLIOGRAPHY ......................................................................................................... 64
8 APPENDIX ............................................................................................................................................. 66
8.1 APPENDIX 1 – INTERVIEW QUESTIONS WITH SELECTIVE ANSWERS ........................................................................ 66
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1 INTRODUCTION
1.1 Research Area and Problem
1.1.1 Background:
The retail commercial development industry in Nigeria, Africa‟s most populous nation, is still
in its infancy. No private land ownership, high land costs, delays due to bureaucracy
resulting in substantial hidden costs, lack of local expertise and high building costs, difficulty
in obtaining financing as well as high financing costs are the most important reasons why
retail commercial developers are struggling to start and execute commercially viable retail
development projects in this West-African nation.
As is the situation in many African countries, no private land ownership exists in Nigeria.
Landowners are granted a 99-year lease from the local state or federal government. For the
duration of that 99-year lease period, as long as the landowner is in compliance with the
terms and conditions as stipulated on the Certificate of Occupation (C of O), the landowner is
regarded as the legal owner of that piece of real estate (Ojewumi, 2008, p. 114). Should such
a landowner want to become part of a real estate development, he or she can either contribute
that real estate as equity to the development project or sell the remaining term of what is left
on his or her 99-year assignment to the developer (Anonymous, Lawyer, Lagos Law Firm,
2010).
In addition, even though no outright land ownership title is granted to owners of real estate,
the cost of land in Nigeria is particularly high compared to similar African countries such as
South Africa. On the Lekki Peninsula, adjacent to Victoria Island, Lagos, a 30,000m2 parcel
of real estate land that has a commercial zoning reaches a price of round about USD400/m2 in
2010 while prices as high as USD750/m2 for commercially zoned property in that area are not
uncommon. Similar prices are reached in parts of Lagos as well as Abuja – one of the other
major commercial districts of Nigeria (Anonymous, Lawyer, Lagos Law Firm, 2010). Such
high costs to acquire land increase the cost of equity or debt to the developer and therefore, it
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increases the overall costs of retail commercial development projects in the country.
In order to ease the future transfer of land ownership and its associated costs, most
development projects are placed in the name of a newly formed Special Purpose Vehicle
(SPV). The land is assigned in the name of the SPV and governor‟s consent, usually an
amount between fifteen and seventeen percent of the total value of the land acquisition
transaction is granted to that SPV. However, the local law does not necessitate registering a
title or obtaining governor‟s consent. Nonetheless, such governor‟s consent is viewed as a
very secure title to the property. The reason for using an SPV, as explained by a lawyer
working for a reputable law firm in Lagos, is the following - should the owners/developers
ever decide to sell the development, the governor‟s consent will remain in the name of the
SPV and only the shares of the SPV is transferred to the new owners. Furthermore, at the
time of this paper, the sellers of the shares of an SPV were not subject to capital gains taxes
when they dispose of their shares in an SPV. Therefore, by placing a project in an SPV, the
owners can circumvent a duplication of the governor‟s consent fee that is paid every time a
property changes hands. As a result, this increases the marketability of the final product to
future potential owners (Anonymous, Lawyer, Lagos Law Firm, 2010). In other words, ways
and means to reduce the cost of land in Nigeria do exist, but the overall costs of obtaining
land, and registering that land in the name of an individual or other legal entity, such as an
SPV, remains high and cumbersome.
Furthermore, the cost of building in Nigeria is extremely high, especially when a quality good
such as a large shopping mall is the required end product. Compared to Ghana, for example,
where the building costs of the Accra Mall (19,000m2) in 2006/2007 was round about
USD1,300/m2, the building costs of a similar size mall in Nigeria during the same time period
is above USD2,000/m2. A small number of credible building companies pushing up the
construction prices, a lack of local expertise, as well as high import tariffs on items such as
quality steel and other finished goods (Import taxes are 40% on a variety of building
materials) are mentioned as the biggest culprits responsible for high building costs in Nigeria
(Halliday, Business Development Manager, Shoprite, 2010). Hence, developers are not only
faced with high costs of acquiring land, but the overall capital layout required to construct a
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shopping mall in Nigeria is also escalated due to high construction costs.
Moreover, locally obtained finance in Naira, the local currency of Nigeria, is very expensive
with regards to interest charged on loans. During 2009/2010, well-established domestic
developers were paying in excess of seventeen percent interest, and as high as twenty-four
percent per annum on locally denominated loans, even though such debt was secured against
sufficient collateral assets. Therefore, for any developer to pay an interest rate in excess of
seventeen percent during the eighteen to twenty-four month construction period severely
increases the costs of the overall development. For that reason, developers of large-scale
commercial developments are reluctant to rely on Naira debt financing in order to finance
their developments. This fact was reiterated during a recent discussion with Mr. P. Pantham.
He is Senior Advisor to Persianas Properties, the current owners of the Palms shopping centre
in Lagos (Pantham, Senior Advisor, Persianas, 2010). As a result, developers are forced to
look for alternative financing mechanisms.
One such option is to use an alternative currency other than Naira based finance. A US dollar
based loan is the obvious choice in an oil rich African country exporting the majority of its
oil to the USA. Nonetheless, Nigeria has a chronic shortage of US dollars. In addition, local
banks receive deposits in Naira, and thus, have an excess of this currency that they can make
available for lending to developers. Moreover, it is illegal in Nigeria to receive income in
any other currency other than Naira unless it is an exporting company earning foreign
revenue. For those reasons, developers find it extremely difficult to obtain US dollar based
financing, and thus, are sometimes forced to settle for high interest bearing Naira based loans.
Furthermore, should a developer such as Persianas have access to US dollar based loans, the
developer exposes himself to exchange rate fluctuations. A weakening of the Naira versus
the US dollar could reduce the ability of the borrower, who receives his income from leases
in Naira, to service his US dollar based loan. In the end, most developers of large-scale
developments such as the Palms Shopping Centre rely on US dollar based loans. Rentals of
the shops in the centres are stated in US dollar and the developer is paid in Naira based on the
US dollar/Naira exchange rate at the time the lease payment is due.
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However, as emphasized by Mr. Halliday, Business Development Manager for Shoprite in
Ghana, Democratic Republic of Congo, Namibia and Nigeria, a lease stated in US dollars
does not necessarily keep trend with the locally based Naira inflation rate. Thus, even though
the developer states his rental amount in US dollars, but gets paid in Naira, based on the
exchange rate at the time of settlement, the long-term impact of Nigerian inflation is not
always reflected in such lease agreements (Halliday, Business Development Manager,
Shoprite, 2010). Though, should a developer be able to obtain US dollar based loans, there
are ways to lessen the effects exchange rate fluctuations can have on the developer‟s ability
to service its US dollar based debt but it is not fully possible to incorporate the long-term
effects of Nigerian inflation on the lease agreements with lessees in the shopping centres.
In 2010, the Palms Shopping Centre was the only retail development (in excess of 20,000m2)
that was operational in Nigeria. This shopping complex located in Victoria Island, Lagos,
opened its doors in 2005 and consists of 22,000m2 leasable area with two anchor tenants
(Shoprite and Game) occupying approximately 9,000m2 of the centre. This retail commercial
development was made possible due to private equity funding received from Actis, a private
equity firm that deals exclusively with emerging markets in Africa and South-East Asia. This
development was Actis‟ first such investment in Nigeria, and it paved the way for a similar
investment in Ghana namely the Accra Mall. This equity funding, combined with an
additional equity investment of land by Persianas Properties, the current owners of the Palms
Shopping Centre, made this retail development a possibility. In 2007, Persianas Properties
became the sole owner of the Palms Shopping Centre by buying out Actis‟ equity shares and
consequently taking full responsibility of the debt of the overall development (“Actis: Private
Equity”, 2008).
The success of the Palms Shopping Centre has led to Actis providing new equity financing
for a second mall development in Ikeja, Lagos. This project is done in partnership with RMB
Westport – a South African bank (Rand Merchant Bank) that joined forces with a local
development company, named Westport. Westport was also the local consultants on the
Palms project and instrumental in the successful completion of the Palms Shopping Centre in
2005. Because of the success of the Palms, RMB Westport was willing to join forces with
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Actis in order to make this new project in Ikeja a reality. Groundwork for the construction of
the Ikeja City Mall was started in middle 2010. Standard Bank South Africa, in partnership
with Stanbic IBTC Bank PLC, an active debt provider in Nigeria, is the debt financier of this
development. Of this project‟s total cost of USD100 million, the bank is providing USD48.6
million in the form of a US dollar based loan (Gbajumo, 2010, p. 7).
Furthermore, Persianas Properties has expanded beyond Lagos and, in 2010, was building
two additional shopping malls. The Polo Parks Shopping Centre is located in Enugu, about
200km north of Port Harcourt, Nigeria. The mall is about the same size as the Palms
Shopping Centre, with Shoprite and Game also filling the role of anchor tenants.
Construction was started in 2009 and the mall is scheduled to open its doors middle of 2011.
This mall was made possible based on the fact that the developer, during construction, was
relying on local Naira finance from two Nigerian Banks – Fidelity and Stanbic IBTC Bank
PLC. This debt was secured because of the willingness of the two anchor tenants (Shoprite
and Game) to provide each a bank guarantee that guaranteed the first ten-years of rent upon
beneficial occupation of their respective shops. Based on those two guarantees, the two local
banks were willing to release short-term Naira-based finance to the developer that allowed
him to continue construction of the Polo Parks Centre. Once the mall has reached a
predetermined level of completion, Standard Bank has agreed to refinance the complete
project with a US dollar based loan. The new US dollar based loan would allow the
developer to repay his high interest bearing Naira based loans to the two local finance
institutions and consequently reduce the ongoing debt service payments because of the new
lower interest bearing US dollar based loan. Since this is the first large retail-shopping mall
located outside of Lagos, various individuals and institutions are eager to find out the success
of this development. Should the Polo Parks Shopping Mall in Enugu be successful, it could
potentially pave the way for various similar projects outside of the regional trade hubs such
as Lagos and Abuja (Pantham, Senior Advisor, Persianas, 2010).
The second Persianas investment is located in the city of Ilorin situated 45 minutes by plane
north of Lagos. Since the buying power of Ilorin is less than the conventional trade hubs of
Lagos, Abuja and Port Harcourt, only a 9,000m2 “strip mall” is planned with Shoprite filling
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the role as sole anchor tenant. The total cost of this development is substantially less than the
larger malls in Enugu and Lagos, and thus, the developer is relying solely on local financing
in Naira for the construction phase to be converted into a US dollar based loan after
completion. Also, the local state government of Kwara wants to increase commercial activity
in their state. As a result, the Kwara State Government was willing to contribute the land as
equity at a very low cost – decreasing the overall project costs, and consequently increasing
the financial returns of the real estate project (Pantham, Senior Advisor, Persianas, 2010).
In the end, a strong need for major retail commercial developments exist in Nigeria.
However, the ability of developers to raise adequate financing at reasonable returns remains
one of the greatest hurdles in turning commercial shopping centre developments into realities.
This paper examines the various sources of such financing, critically analyzes the various
financing instruments available to developers, as well as scrutinizes the operating climate
developers of retail commercial developments in Nigeria have to deal with.
1.1.2 Research Objective:
This thesis investigates and analyzes the various financing mechanisms commercial retail
developers in Nigeria have at their disposal in order to finance such developments in the
country. The author compares current mechanisms employed by developers to obtain
financing with that of the theory found primarily in peer review journal articles. Lastly, the
research focuses on the operating climate developers of retail commercial developments face
in Nigeria.
1.2 Research questions and scope
From the literature, what are the sources of financing use to finance retail commercial
real estate developments?
From the literature, what are the viable financing mechanisms use to finance retail
commercial real estate investments?
What limits / hinders developers in Nigeria from using these financing options?
What are the difficulties in the operating climate developers of retail commercial
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developments face in Nigeria and what can be done to lessen the impact of those
difficulties?
1.3 Research Assumptions
This research is based on the assumption that developers of retail commercial developments
in Nigeria will only initiate and strive to finalize and complete such developments should the
developer believe that there is a financial incentive for him or her in doing so.
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2 LITERARTURE REVIEW
2.1 Overview
Up until the 1980s, retail investments were seen as an entrepreneurial business in the USA.
However, due to the competitive nature of the industry, combined with the sheer size of
capital requirements for such retail developments, developers had to find institutional
investors in order to raise equity and debt financing for their developments (Ori, 1998, p. 34).
As a result, since 1983 the commercial property industry has experienced a “metamorphosis”
in the USA, with a trickling down effect on the rest of the world. In order to raise the
required debt and equity needed to finance such retail developments, companies and
organizations operating in this industry had to change their mindset by starting to think along
the same lines as that of the major Fortune 500 companies (Ori, 1998, p. 34).
Kevin Deeble (1999) states that real estate should not be seen as an investment vehicle by
real estate investment firms, but rather as an item of raw material required in the production
process of such a firm (p. 144). According to Deeble, such a “raw materials procurement
approach” results in three outcomes to such an investment:
1) Maximize reliability - the supply of corporate real estate is available when needed
by occupants;
2) Maximize flexibility – Flexibility is the degree to which procurement commitments
can be reduced without incurring any or excessive costs when business conditions
change (p. 145), and
3) Minimization of costs – current and future costs such as brokerage fees, current
occupancy costs, and potential future costs of accessing inventory. Deeble argues that
such potential future costs, which he calls „over commitment costs,‟ can be thought of
as costs of inadequate flexibility.
In other words, by applying the so-called raw materials procurement approach, corporate real
estate investment companies could increase their reliability and flexibility, and at the same
time, reduce their costs. However, it should be noted that the three outcomes are at times in
conflict with one another, and thus, each investment decision should be judged on its own
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criteria. However, such a raw material approach has a direct impact on the types of financing
a corporate real estate investment company uses in order to facilitate their objective (Deeble,
1999, p. 146). By applying this raw materials procurement approach in Nigeria, with its high
associated costs related to retail commercial developments, developers stand to gain
significant benefits in terms of reliability, flexibility and costs.
Moreover, Ezeoha and Okafor (2010) point to the effect an ownership structure can have on
financing decisions. In emerging markets, where the tradition of family ownership is strong,
there remains a strong emphasis on control. As a result, companies operating in such
markets, such as Nigeria, tend to defer the issue of equity, and would rather try to settle for
higher levels of debt (high leverage) in order to maintain control of the development. Such
financing decisions increase the financial exposure of a company (p. 257). In addition,
access to capital markets in Nigeria is “highly inadequate”. As a result, firms mostly rely on
short-term debt and internal capital financing as mechanisms to generate financing (p. 258).
Likewise, the use of debt financing does send a positive message to investors of real estate
development (Redman, Tanner & Manakyan, 2002, p. 182). The reason is that investors see
that as an indication that the developer is confident of the future success of his or her
development, and therefore, the developer is willing to take on additional risk in the form of
debt in order to make the development a reality. However, for larger retail commercial
development projects, this option becomes not viable due to the large capital requirements of
these projects.
Furthermore, as noted by King (1977, p. 87), the means by which control over funds is
exercised influences the method by which real estate investment is financed, either for private
individuals or institutional investors. This aspect becomes even more important in a country
such as Nigeria where the issue of trust in individuals and institutions is critical to determine
the success of a project. Consequently, it is up to the developer and financier to decide
whomever they want to liaise with in order to acquire access to financing for retail
commercial development projects.
In general, financing costs, interest costs of debt, financial market conditions and tax savings
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are the primary criteria used to evaluate what types of financing to seek and acquire –
assuming a wide variety of types of financing is available to the developer (Redman, Tanner
& Manakyan, 2002, p. 182). The following section discusses the various sources of finance
providers for retail commercial developments. Thereafter, a critical analysis follows to
analyze the various financing mechanisms a retail commercial developer potentially should
have access to in order to finance their retail commercial developments in Nigeria.
2.2 Primary Sources of Financing
2.2.1 Operating Cash Flows:
In many instances, companies use operating cash flows as a source of financing. However, in
the case of retail finance, developers do not have access to such a funding source (Redman,
Tanner & Manakyan, 2002, p. 182). In a country such as Nigeria, where the overall costs of
retail commercial developments are extremely high, developers usually do not have the
financial means to rely on operating cash flow to finance their developments. As a result, this
financing option is not a viable mechanism for financing retail commercial developments
unless very small amounts are required to finalize a project.
2.2.2 Insurance companies and pension funds:
Although insurance companies and pension funds have a comparatively higher degree of
stability in their funding availability for investments in development projects, these types of
institutions tend to take a longer-term view than other types of lenders. At the same time,
such institutions are even more cautious of future potential risks (Ratcliffe, Stubbs, &
Keeping, 2009, p. 431). President Obasanjo, President of Nigeria from 1999 to 2007, is
credited with legislative reform named the “Pension Reform Act of 2004”. This act allowed
the Nigerian government to regulate the pension industry in the country. Up until 2004, the
pension fund industry in Nigeria was in shambles with large-scale corruption and
mismanagement leaving the industry debilitated. However, in an attempt to force diversity
and to limit the exposure of pension funds to risky investments, the Pension Reform Act of
2004 legislation limits the overall investment a pension scheme can make in a real estate
development (“National Pension Commission”, 2007). This legislation limits the
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involvement of pension funds to only four percent of their portfolio value to invest in a
commercial project. This fact was reiterated during a recent discussion with Mr. Ejekam,
General Manager for Actis Nigeria. He did however note that pension funds in Nigeria, if
significant enough with regards to size, sometimes do break their overall fund into small
entities, and as a result, can then invest up to a maximum of four percent each in real estate
projects. It is an effective mechanism to circumvent the law, and as a result, increase the
overall fund‟s interest in a project (Ejekam, General Manager, Actis, 2010).
2.2.3 Banks:
As in most countries, banks are a major source of finance. However, due to the way banks
try to limit their risk exposure, banks tend to be more concerned with the security cover the
borrower can provide than the actual project that is financed. For this reason, banks provide
to developers a more open and flexible climate in which to operate and factors such as time,
cost, and quality can be leveraged against the borrower‟s ability to generate funds or to
produce additional collateral (Ratcliffe, Stubbs, & Keeping, 2009, p. 432).
However, the recent sub-prime crisis that started in the United States in the mid-2000s led to
a substantial reduction in the liquidity of borrowers. Consequently and also as a result of
their own financial problems due to domestic bad debt, Nigerian banks were very reluctant to
lend money to individuals and developers. At least in 2009, a gradual reversal of this trend is
being observed due to the intervention from the Federal Government (Ratcliffe, Stubbs, &
Keeping, 2009, p. 432). As a result, borrowers are starting to find it easier to obtain access to
finance via Nigerian banks.
2.2.4 Stock Market:
A developer, if sizeable enough to meet the minimum requirements in order to qualify for a
stock market listing, can utilize the stock market to generate capital that is primarily used for
equity investments in developments. Stocks are usually issued in the form of ordinary shares.
Capital raised in this manner is then used to buy equity in new investments, or increase the
share in existing and possibly expanding property portfolios. Because this form of capital
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generation takes place in the public domain, it usually involves a tremendous amount of
analysis and investigation of the developers and the proposed areas they plan to invest in
(Ratcliffe, Stubbs, & Keeping, 2009, p. 434). REITS, to be discussed below, is in the First-
World a very effective financing mechanism used by institutions to raise capital for real
estate developments. However, due to the current lack of a legislative framework that would
be required for such investments to optimally operate on the Nigerian Stock exchange, this
form of raising capital is relatively underutilized in Nigeria (Pantham, Senior Advisor,
Persianas, 2010).
2.2.5 Government:
As pointed out by Ratcliffe, Stubbs, and Keeping, in their book, Urban Planning and Real
Estate Development (2009, p. 436), governments are also at times acting as finance providers
for real estate developments. Governments usually act as finance providers when they are
trying to achieve certain strategic objectives such as commercial developments in a specific
area of a city or province. The Kwara Mall, located in Ilorin, Nigeria, developed by
Persianas, is an example of such an objective. The local government of Kwara wants to
encourage commercial development within the borders of their state. Therefore, the local
government not only contributed land to the developer at an attractive price in return for an
equity stake, but also contributed cash to the project in order to increase their equity stake in
the overall development (Pantham, Senior Advisor, Persianas, 2010).
2.2.6 Venture or private equity capital:
Venture or private equity capital providers are in general financiers that are willing to invest
in higher-risk proposals in return for an equity stake in the development, and as a result, a
certain level of control over how the project is managed (Ratcliffe, Stubbs, & Keeping, 2009,
p. 448). In view of the higher potential returns in Nigeria on retail commercial developments
as a result of the comparable higher risks compared to other countries such as South Africa, a
number of private equity capital providers have shown interest in investing in such
developments in Nigeria. One such firm that already made a success of its private capital
investment in the Palms Shopping Centre in Lagos is Actis. Based on the financial returns of
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its Palms Shopping Centre investment, Actis is already committed to a second similar
investment in Nigeria, namely the Ikeja City Mall in Lagos - the mall was already under
construction at the time this report was written.
2.3 Conventional Financing Mechanisms
2.3.1 Short-term debt (Three years and less):
One mechanism to obtain access to financing is the utilization of short-term debt to acquire
real estate. This is usually done in situations where the developer has adequate access to
short-term credit such as bank overdraft facilities in order to finance the acquisition of real
estate (Redman, Tanner & Manakyan, 2002, p. 182). However, due to the high land prices in
Nigeria, combined with the high price of Naira based debt, this option could only be used for
small scale acquisitions, and therefore, would not be a viable financing mechanism for
developers of retail commercial developments.
On the other hand, should a major anchor tenant in Nigeria, such as Shoprite or Game, decide
to develop and finance their own portion of the retail commercial development, the retailer
could potentially rely on short-term debt, usually in the form of a locally provided bank
overdraft facility. A transaction of that nature is only made possible when the parent
company of the organization is able and willing to underwrite such debt (Halliday, Business
Development Manager, Shoprite, 2010).
2.3.2 Long-term Debt (More than three years):
Arguably one of the most common forms of debt financing is the utilization of long-term debt
from large-scale financiers. However, in Nigeria, a very limited availability of such funds
makes financiers very reluctant to provide long-term debt as a form of financing. Mr. Laide
Subair (2010), MD/CEO of Gateway Savings and Loans Ltd in Nigeria points to the
difficulty financiers have in securing funds in order to issue long-term debt. At present, most
loans have a five to seven year payback with no provision for delayed payment until
construction is completed. As a result, developers often find that their cash flows are
depleted before construction is completed; forcing these developers to seek additional
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financing, and as a result, increasing the leverage and risk of the overall investment (Bruwer,
Head of Investments for Africa, Novare, 2010).
In addition, the construction costs can often increase during the construction phase due to
increased building costs over the duration of the project. Therefore, at times developers find
their initial loans insufficient to complete a large-scale development, and as a result, such
developers have to return to the original financier to request an increase in the size of their
loan. This not only causes delays in the construction of the project, resulting in increased
costs, but it also leads to a loss in confidence in the developer‟s ability to complete a project
within a set budget. Consequently, this increases the risk profile of the development, leading
to higher interest charges (Subair, 2010).
2.3.3 Real Estate Investment Trusts (REITs):
A REIT is a corporation or trust that uses capital that is obtained from a wide variety of
investors to purchase and manage property (Wang, Sun & Chen, 2009, p. 141). Furthermore,
REITs are typically self regulated with regards to percentage of debt financing, but in general
rely on very low gearing (Hallowes & Manham, 2007). In return, REITs receive income in
the form of equity or, less commonly used, mortgage loans (mortgage REIT). REITs are
traded on most major stock exchanges in the same manner as stocks (Wang, Sun & Chen,
2009, p. 141). REITs have helped to increase the cash flow and equity value of commercial
real estate investments in the USA (Ori, 1998, p. 34). The fact that REITs are publicly traded
forces owners of such trusts to be competitive compared to competitors that supply similar
offerings in the market place. As a result, REIT institutions were required to transform
themselves into efficient management organizations. A lack of proper management and
oversight most times results in the public selling of stock in low performing REIT institutions
– something that generally leads to mergers and takeovers by more efficient competitors (Ori,
1998, p. 34).
From the time of REITs origin in 1960 to the present day, they have offered a way for
investors to participate in real estate markets without necessarily committing a large sum of
money or even developing an expertise in property ownership (Benefield, Anderson, &
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Zumpano, 2009, p. 76). Ori (1998, p. 34) noted that REITs and real estate operating
companies have transformed the commercial real estate market in the USA. The expansion
of REITs and commercial mortgage backed securities (CMBS), combined with other factors,
has enabled real estate to emerge as a distinct and significant asset class that makes its special
contribution to the investment portfolio available to investors.
South Africa, Nigeria and Egypt are Africa‟s largest stock markets. However, when
compared to the traditional giants of the United Kingdom (UK) and United States (USA) the
African Stock Exchanges are characterized by much lower levels of liquidity – the times
stocks are bought and sold are much lower in the African markets than in the UK and USA.
On 31 August 2010 the total trade value for the day on the Nigerian Stock Exchange (NSE)
was 2.64 billion Naira – equal to USD17.6 million (NSE Daily Trade, 2010, p. 18). A similar
day of trading on the New York Stock exchange, for example, totalled over USD44.5 billion
(Daily Market Summary, 2010). This lower level of liquidity hampers the price disclosure
process because it is more difficult to reach a natural equilibrium between the supply and
demand prices of stocks. At the same time, the small size of the markets may constrain the
availability of liquidity that is a positive function of economies of scale and network
efficiencies, also known as the agglomeration effects (McMillan & Thupayagale, 2009, p.
279). During a recent interview with McKinsey Quarterly, ABSA‟s CEO, Maria Ramos
noted how low levels of trade on African stock markets, in general, hamper the liquidity of
stocks traded on those markets (Fine, 2010, p. 4). Levine and Zervos (1998) revealed that
liquidity is an integral feature linking stock market development with economic growth.
Also, the efficiency of a market in processing information affects its allocative capacity, and
therefore its contribution to economic growth in that country (McMillan & Thupayagale,
2009, p. 289). Thus, although REITs can be traded on African stock markets such as the
Nigerian Stock Exchange, the low levels of liquidity in that market slows down the ability of
developers to raise capital in the form of REITs.
Furthermore, Ori stated that REITs have helped to increase cash flows from commercial real
estate developments, and also led to the formation of more efficient and proactive
organizations that manages these developments (1998, p. 34). The reason for this is that in
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order for REITs to remain competitive and consequently attract investors, REITs primarily
invest in developments with good returns – something that is required by investors in the
short, medium and long-term. Consequently, in order to attract REITs as a source of funding,
developers need to focus on cash flows with the intention of guaranteeing a consistent return
on the investment. Moreover, this requires the effective management of the overall
development, before, during and after completion. A well maintained development not only
increases the value of the development, but also it creates positive impressions about the
developer and management agent to potential investors (Ori, 1998, p. 34).
In most cases, REITs receive a special tax status. As a result of their structure, REITs offer
several benefits over direct ownership of properties. First, REITs are highly liquid, especially
when compared to traditional real estate investments. Also, REITs enable all types of
investors to share in income-producing non-residential properties such as hotels, malls, and
other commercial and/or industrial developments. In addition, REITs have no minimum
investment requirement, and as a result, it allows small-scale investors to participate in large-
scale projects. Furthermore, REITs pay yields in the form of dividends irrespective of how
well their shares perform (Wang, Sun & Chen, 2009, p. 141). Most importantly, REITs are a
tool that gives the general public access to profits that are generated in the real estate sector –
something that was mainly beyond the reach of the general public before the formation of
REITs (Wang, Sun & Chen, 2009, p. 158).
In addition, REITs are a very effective financing method. It also allows real estate
developers and property owners to raise capital by selling existing property to REITs as an
investment, thus elevating the pressure on banks to provide commercial loans for such large
transactions. In other words, REITs are a mechanism for such developers and owners to
generate capital on a stock market. Furthermore, REITs are an attractive investment tool for
institutional and retail investors who require a higher return on their investments than
traditional bank deposits, but who are not willing to invest in the stock market in stocks with
potentially high risks (Wang, Sun & Chen, 2009, p. 158). In addition, REITs in general help
to sustain and increase property values – a trend that was emphasised by Wang, Sun and Sun
(2009). According to their study, properties that have a single owner, in general, are better
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maintained than “strata owned” properties (p. 158). This fact is also stressed by Peterson
(2007), who indicates that the condition of a REIT owned property could be a reflection of
the fund, and thus, it is of critical importance for such REITs to ensure their respective
properties are properly maintained (p. 15-16).
Most importantly, REITs encourage private equity investments in real estate developments.
REITs can at a later stage, provide such equity investors with a buyer for their investment.
This alleviates the pressure that is created by having to find a future buyer, and thus, reduces
the risk to the investor should he or she wishes to sell the investment at a later stage – a factor
that can greatly enhance the liquidity of real estate trade (Wang, Sun & Chen, 2009, p. 158).
In the USA with an estimated real estate property market equal to USD4.6trn, about four per
cent is held by public REITs. A daily trading volume in REITs of about 12 million shares is
an indication of the liquidity of these shares in the USA (Petersen, 2004 p.10). By 1998, for
example, Ori (1998) noted that REITs already owned USD250billion of commercial real
estate in the USA.
However, as emphasised by Mr. Prakash Pantham, Senior Advisor of Persianas Properties in
Lagos, Nigeria, the immediate future of REITs in Nigeria is gloomy. The lack of liquidity in
the local stock market, combined with basically no offering of REIT stocks on the Nigerian
Stock Exchange, make investors reluctant to invest in such limited stocks. At the same time,
developers are hesitant to raise capital by means of this financing mechanism due to the
uncertainties associated with this financing instrument. Therefore, a REIT offered and traded
on the Nigerian stock market will first have to prove itself to investors and developers as an
effective means of investing in real estate as well as raising capital for such projects
(Pantham, Senior Advisor, Persianas, 2010).
2.4 New Types of Innovative Financing Mechanisms
In addition to the traditional forms of financing, an assortment of new financing mechanisms
have emerged and are being used on a more frequent basis by modern-day commercial
developers in order to obtain financing for retail commercial development projects. Iblher
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and Lucius (2003) called these types of financing mechanisms “innovative financing” (p. 90).
However, it has to be noted that these forms of innovative financing only become viable
options once certain capital threshold requirements are exceeded. In Germany, for example,
the capital threshold for such forms of financing is USD 4.4 million (Iblher & Lucius, 2003,
p. 90). For the purpose of this report, the author assumes that this threshold of round about
USD 4.4 million can be universally applied to all other countries, Nigeria included.
In order to qualify for innovative financing mechanisms, banks and lenders, in most cases,
require a share of the project‟s profit as a form of compensation. Other options include
participation in the cash flow of the project, as well as an equity stake in the development
(Iblher & Lucius, 2003, p. 93).
In addition, innovative financing instruments can be a method to circumvent high equity
requirements as traditionally placed on smaller developers (Iblher & Lucius, 2003, p. 93).
The following section will discuss the various forms of innovative financing and how such
financing forms are applied to finance retail commercial developments.
2.4.1 Convertible Mortgages:
In a simplistic form, a convertible mortgage is nothing more than a straight mortgage loan
with a voluntary option to convert the debt into equity should the lender decide to do so at a
certain time in the foreseeable future. It is a hybrid structure because it is in effect part debt
and part equity. This aspect is very important to keep in mind because debt financing has an
“explicit” cost while equity financing carries an “implicit” cost. The explicit costs of debt
financing refer to the stated interest rates that the borrower pays on the debt and the lender
receives in return for his or her investment. However, in the case of equity financing, the
implicit cost is reflected in the opportunity costs the lender foregoes by deciding to invest in a
certain development (Tung, 1990, p. 58).
The difference in implicit versus explicit costs associated with debt and equity financing
explains why convertible debt usually has a lower coupon rate than its counterpart - straight
debt. While the equity‟s implicit costs are less quantifiable, the equity investor usually banks
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also on benefitting from the upswing in the investment at a later stage and therefore he or she
is willing to settle for a lower coupon rate (Tung, 1990, p. 58).
Both convertible and participating mortgages (to be discussed below) are secured by means
of a charge over the invested property. Moreover, the lender also has the prospect of a future
equity share in the final property. In the case of convertible mortgages, even after the
principle loan is repaid, the investor will continue to have a share in the equity of the project
until the investor receives his or her predetermined share of the profit (Ratcliffe, Stubbs, &
Keeping, 2009, p. 440).
Unlike conventional mortgages, a convertible mortgage is relatively insensitive to differences
in risks as is reflected in the coupon rates a borrower is charged for two non-similar risk-
profile investments. The argument is made that convertible mortgages are oblivious to
various risks profiles. However, “as the volatility of the real estate increases, the incremental
increase in the value of the call option more than offsets the incremental loss in value of a
straight mortgage” (Tung, 1990, p. 58). In other words, the lender is not necessarily
compensated for a difference in risk between one investment compared to another by means
of the coupon rate, but rather by means of the final amount the lender receives once they
exercise the call option on the equity share they received from the convertible mortgage.
In addition, a convertible mortgage can also be used as a tool to shift risk and/or costs away
from the borrower and onto a third party, while at the same time, not significantly increasing
the costs or overall risks to the borrower. This shift in risk and/or cost is primarily achieved
by means of tax arbitrage opportunities such as depreciation benefits, savings in management
fees, and the prospect of negotiating a better repayment schedule on the borrowed debt
(Tung, 1990, p. 58).
Furthermore, considering the costs of obtaining potential buyers for a property in the future, a
convertible mortgage assists the initial investor by providing not only a financier for the
initial stages of his or her development, but also potentially provide the owner with a future
buyer of the investment should the conditions be favourable to the convertible mortgage
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provider. This benefit is particularly useful in markets, such as Nigeria, where access of real
estate market information is rather limited, and as a result, the ability to have a possible buyer
aligned with the development before it is even completed, can greatly increase the overall
attractiveness to the developer and other financiers (Tung, 1990, p. 58).
2.4.2 Participating Mortgages:
The other form of hybrid mortgage finance is participating mortgages. Developers use both
of types of hybrid mortgages (Convertible and participating) in an attempt to improve the
loan-to-value ratio and/or to secure a lower interest rate by forfeiting a percentage of equity
or profit (Ratcliffe, Stubbs, & Keeping, 2009, p. 440).
Unlike convertible mortgages, the lender of a participating mortgage must receive his or her
share of the equity at a certain predetermined time. “The value of the equity charge is usually
predetermined; either by amount or by formula, and, whether or not the profits have been
realized, the lender‟s share becomes due” (Ratcliffe, Stubbs, & Keeping, 2009, p. 440).
In general, both forms of this hybrid loan structure are designed to aid development scenarios
where the supplier of the mortgage can share in the profits of the final project in return for
taking on additional risk (Ratcliffe, Stubbs, & Keeping, 2009, p. 440).
As in the situation of convertible mortgages, this form of financing is not very popular in
countries where developers are resistant to giving up a share of their profits to other parties
(Iblher & Lucius, 2003). This characteristic of both convertible and participating mortgages
makes this financing mechanism less attractive in the Nigerian market due to the reluctance
of developers to give up equity, and consequent total control of the final product.
2.4.3 Mezzanine Financing:
In the case of residential property, banks in general are willing to provide financing to buyers
for up to 95 percent of the property‟s value. However, with regards to retail commercial
developments, this percentage banks are willing to finance is considerably reduced and
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usually not in excess of 50 to 60 percent. As a result, developers of such real estate need to
find alternative financing mechanisms to fund the shortfall. Mezzanine financing is one such
tool. Because this form of financing is unsecured with the investor running the risk of losing
his or her investment should the development sell for less than its market value, a high rate of
return is required – higher interest rate (Advertiser, 2006, p. 18). Mezzanine financing
providers are the source of additional capital that is used to fill the gap between what the
owners want to borrow and what the first mortgage lenders are willing to provide (Watkins,
Hartzell, & Egerter, 2003, p. 36).
As a result of its structure, mezzanine financing occupies the middle ground – mezzanine-
financing providers bear greater risk than mortgage providers because it is generally
unsecure, but at the same time mezzanine-financing carries less risk than equity providers due
to its higher ranking with regards to access to cash flow. First, mortgage, thereafter
mezzanine-financing and last equity providers have a claim to cash flow should the borrower
default on any payments or obligations. Should a borrower default, a mezzanine-financing
provider has the option to take on the obligations of the first mortgage. In case the
mezzanine-financing provider does not assume such obligations, the first mortgage provider
can decide to foreclose on the mezzanine-financing provider as well as the owner of the
investment. At the same time, the mezzanine-financing provider is not forced to assume any
obligation from the first mortgage and therefore, can decide to walk away from the
investment without any responsibility towards the existing or new owner, or any other
creditors (Watkins, Hartzell, & Egerter, 2003, p. 36).
Kahn and Wilson (1995, p. 46) use the term “schizophrenic” to describe mezzanine-financing
providers due to their indecision on whether they are debt or equity providers – on the one
hand these types of financiers are concerned with the ability of the borrower to repay their
higher yielding interest payments, while on the other hand, such financiers also want to share
in any upside of the property investment.
In addition, mezzanine financing allows borrowers some flexibility with regards to the mix of
debt and equity encapsulated in mezzanine-financing instruments. This aspect helps
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developers and/or borrowers to fill the gaps between the amount of term debt they can raise
and the amount of equity that can be profitably invested in a particular development
(Husband, 2002, p. 8).
Furthermore, mezzanine-financing instruments provide a current yield, and therefore their
returns are less dependent on high valuation exits. For that reason, mezzanine-financing
investors can benefit from a steady income yield derived from the coupons on mezzanine
loans as well as substantial possible returns from the equity allocations (Husband, 2002, p. 8).
Due to the risk intrinsic in this type of security, mezzanine financing is normally rewarded,
not only with quarterly interest payments, but also by issuing the financier with a warrant or
equity position in the property (Kahn & Wilson, 1995, p. 46)
However, the acceptance of mezzanine financing as a financing mechanism does lead to an
increase in financing costs because of the higher risk-bearing factor. Thus, the borrower
needs to pay a higher coupon rate for this type of financing. As a result, the overall debt
service coverage ratios decrease and the loan-to-value ratios increase (Watkins, Hartzell, &
Egerter, 2003, p. 36).
Nonetheless, with mezzanine financing there is no unique system. Each deal is constructed
according to its own terms and conditions. Due to the nature of mezzanine financing, it can
be structured as either debt or equity, or as a combination of the two – all depending on how
much capital the owner requires and how much control the owner is willing to cede to his/her
mezzanine-financing partner. “Second trust debt” and “junior debt” are both names
associated with debt mezzanine financing. On the other hand, “preferred equity” and “gap
equity” are names used to refer to mezzanine financing structured as equity-type financing
(Watkins, Hartzell, & Egerter, 2003, p. 37).
In the case of debt mezzanine financing, the financing mechanism usually requires one of the
following forms of collateral:
a) Second deed of trust – This form of collateral allows the mezzanine-financing
provider to foreclose on the property should the lender defaults on his or her
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payments. However, since this encroaches on the first mortgage provider‟s
territory, they usually do not allow such a form of security;
b) Assignment of partnership interest – in this form of security, the mezzanine-
financing provider effectively has step-in rights. Should the borrower default in
his or her payments, the mezzanine-financing provider in effect becomes the new
equity partner and assumes the obligations of the first mortgage lender;
c) Cash flow note – “the lender receives all cash flow from the property in exchange
for the mezzanine loan proceeds” as well as a certain percentage of the proceeds
should the property be sold (Watkins, Hartzell, & Egerter, 2003, p. 37).
Gap equity refers to mezzanine financing when the financier (mezzanine) takes on equity
risks. In such situations, the equity owner and mezzanine-financing provider enters into a
joint venture agreement in order to stipulate the terms of the financing. In return for taking
on additional risks, the mezzanine-financing provider is allowed more control over the
property, and at the same time, earn a greater return on his or her investment (Watkins,
Hartzell, & Egerter, 2003, p. 37).
In situations where a lender adopts mezzanine financing as a form of preferred equity, the
mezzanine-financing provider and borrower would in most cases enter into a joint venture
agreement in order to realize the transaction. Such a joint venture agreement would give the
mezzanine-financing provider greater control over the operations of the property because of
its equity share, as well as stipulates other terms such as the level of participation and
buyback conditions. Very important, a joint venture agreement could allow the mezzanine
partner to take over the property in case of default by the borrower, and thus, enable the
mezzanine-financing provider to prevent the first mortgage from foreclosing and
consequently taking control of the property (Watkins, Hartzell, & Egerter, 2003, p. 37).
In the case of a joint venture, in many cases the parties involved form an “inter-creditor
agreement”. This agreement allows for official communication between the first mortgage
provider and the mezzanine-financing supplier. Although this type of agreement is very
difficult to obtain due to the reluctance of first mortgage providers to enter such an
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agreement, there are specific circumstances when the first mortgage provider will consider
entering such an arrangement. For mezzanine-financing providers they typically negotiate an
inter-creditor agreement to include the following should the owner default on his or her
payments to the first mortgage provider:
a) The mezzanine-financing provider wants to be assured by the first mortgage
provider that the property will still be managed in a professional manner;
b) The mezzanine-financing provider wants to ensure that they have the rights to step
in and take over the debt payments of the owner. As a result, the mezzanine
financier prevents the first mortgage provider from foreclosing and consequently
taking over the property;
c) The mezzanine-financing provider has the right to foreclose on the property
should the lender defaults on the mezzanine-financing payments. In general, this
option is extremely difficult to obtain because it implies that the first mortgage
provider has to waive its right to foreclose on the property.
In the end, agreements are extremely difficult to negotiate and obtain, but should they be
signed, these types of agreements can be a great benefit to the mezzanine-financing provider
(Watkins, Hartzell, & Egerter, 2003, p. 38).
In general, most mezzanine financing stretches over two to three year periods after which, the
borrower could possibly extend the financing but he or she would probably incur higher
financing costs in order to ensure the mezzanine financiers maintain the same Internal Rate of
Return (IRR) on their initial investment. Normally, mezzanine financing is removed when
the borrower pays back the principle amount, related interest, and fees associated with the
mezzanine-financing deal. This either happens when the property is sold and enough cash is
generated to pay off the first mortgage as well as the mezzanine-financing loans or when the
property is refinanced by means of a new first mortgage that encapsulates both the original
first mortgage and the mezzanine-financing amount. The latter usually occurs when the
property increased sufficiently in value and consequent cash flows to make a new and bigger
first mortgage attractive to lenders and borrowers (Watkins, Hartzell, & Egerter, 2003, p. 38).
Alternatively, the property only generates sufficient cash flow that allows for the sole
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servicing of the first mortgage interest payments but not that of the mezzanine financing. In
such situations, the terms and conditions of the agreement will in most cases stipulate what
entitlements, such as equity, the mezzanine-financing provider has to the property (Watkins,
Hartzell, & Egerter, 2003, p. 38).
Lastly, in situations where insufficient cash flow is generated to even service the debt of the
first mortgage, the mezzanine financier will probably assume the role of an equity partner.
Again, the terms and conditions of the agreement will stipulate the entitlements of both the
first mortgage provider as well as that of the mezzanine-financing provider. In certain
scenarios, a possible future upswing in cash flows could even lead to the mezzanine financier
to supply short-term cash flow to service the first mortgage debt in an attempt to prevent
foreclosure (Watkins, Hartzell, & Egerter, 2003, p. 38).
However, as pointed out by an article published in the Irish Times, during the construction
boom of the mid 2000s, developers were willing to pay a premium in order to obtain
financing. At the end of that decade, due to the global financial slowdown, developers are
less convinced of their financial returns on new developments. Consequently, financing
mechanisms with higher interest rates, such as mezzanine financing, are called into doubt due
to the increased strain they put on the future returns of a development. For that reason, the
demand for this form of financing, as argued by that article, is slowing down (“Demand for
Mezzanine Financing Drying Up”, 2007, p. 14).
2.4.4 Joint Ventures:
In the 1990s in the USA, joint ventures became a popular mechanism in real estate
development because it is viewed as an effective way to share some of the risks associated
with real estate investments (Behrens, 1990, p.64). In his paper, Joint Venturing in Real
Estate, Richard Behrens lists three reasons why a joint venture is of particular interests to real
estate developers.
First, “nonrecourse debt” enables developers to distance themselves from associated debt. As
a result, investors do not have to take on personal liability for the debt that is required in
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order to finance the real estate development. On the down side, banks and other institutional
lenders have lately required a percentage share of the profit as well as participation in the real
estate transactions due to the investors‟ lack of personal liability (Behrens, 1990, p.64).
Second, because of leverage (the ability of a relatively small capital down payment to control
a much large investment), investors make use of joint ventures to secure such capital down
payments. In order to explain this characteristic, Behrens (1990, p. 64) uses the example of a
USD10 down payment that can control a USD50 investment. The remaining USD40 is
financed by means of a debt mechanism. In return, investors are able to service the USD40
of debt and generate some return for its equity partners.
Third, Behrens states the fact that wealth is created in real estate over long periods of time.
Thus, investors need to be committed for a long term in order to generate good returns
(Behrens, 1990, p. 64). Due to the relative long investment periods, investors cannot put all
their investments into one development. As a result, they use joint ventures as a mechanism
to distribute their investments and consequently, achieve diversification of their investment
portfolio.
In addition, a joint venture is viewed as an effective tool for an organization to obtain access
to a variety of expertise – something that is critical for the successful completion of a large-
scale real estate development. A joint venture can also be used by developers to liaison with
other developers with slightly different development knowledge. An example of such is a
national retail developer linking with an office block developer. In return, both partners to
the transaction gain access to one another‟s skills and expertise – something that can increase
the overall efficiency and success of the development (Ratcliffe, Stubbs, & Keeping, 2009, p.
447).
Also, a joint venture could give a developer‟s project access to a prime anchor tenant, and as
a result, ensure the anchor tenant‟s long-term commitment to the development (Behrens,
1990, p. 64). Not only does the commitment of a major anchor tenant enhances the chances
of success of the overall development, but also their presence guarantees a steady stream of
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rental income should the anchor tenant sign a long-term lease with the developer.
Furthermore, the presence of an anchor tenant increases the chances of other smaller retailers
and outlets committing to the development.
In many cases, a joint venture is formed to allow the developer access to capital. In such an
instance, Behrens stresses that the developer needs to understand the lenders‟ expectations
with regards to the following four items:
1) The collateral and guarantees that are used to secure the loan,
2) Any other sources of funding the developer is using to secure the development,
3) Timing with regards to principal and interest payments, and
4) The lender‟s entitlement towards any residual profits (1990, p. 64).
These four items need to be clearly stipulated in a written agreement between all parties
involved. At the same time, such agreements should include exit clauses and make
provisions for when one of the parties involved wishes to terminate the agreement. Such a
provision and arrangement can deter costly dispute settlements, an outcome that can be
onerous to all parties involved (Behrens, 1990, p. 64). Iblher and Lucius (2003) also noted
that joint ventures require close collaboration and trust between all the parties involved. As a
result, they recommend that the developer and client should know one another due to the
intricacies associated with a joint venture. A familiarity with one another not only helps to
reduce disputes resulting from conflicting objectives but more importantly, it helps to instil
trust amongst other invested parties such as anchor tenants and lenders.
Although Behrens (1990) stated that there is a large variety of joint venture agreements, he
analysed four types of joint ventures relating to a real estate developments:
1) Landowners – contribution of land in the form of equity toward the development
project. In this instance, a landowner contributes his or her land in the form of equity.
The land then becomes part of the overall development, and as a result, the joint
venture can then use this land as collateral in order to obtain debt financing for the
overall development. In return, the landowner receives a percentage stake in the
development – usually equivalent to the value of his or her land as a percentage of the
overall development‟s capital outlay. An additional advantage of such an equity
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contribution is that it does not put a cash strain on the developer. In return for land as
equity, the investor usually only gets a share of the development, and thus, the
developer does not have to pay cash for obtaining the asset;
2) Cash equity – investors provide cash in return of an equity share of the development
project. Such cash injections can be critical to help secure debt financing by
facilitating the lender to service its debt obligations. Furthermore, such cash equity
investors alleviate the pressure put on cash flow management in that it not only
provides cash to service loan and mortgage obligations, but also it could possibly give
the developer access to a source of funding should the project experience overruns;
3) Developer – the developer contributes essential skills and services that can be judged
as critical to the project‟s long-term success. Such skills and know-how are essential
to help increase the success of the overall development. Knowledgeable developers
can greatly reduce the costs of a project by applying their skills and expertise in order
to stay within budgets and timelines. Equally important, such skills and expertise are
essential to help identify downstream problems. Therefore, it gives the parties
involved adequate time to find timely solutions to potential problems; and
4) Lenders – in return for providing financing for a development, lenders may require a
percentage equity partnership in the overall development. Developers might pursue
such an option in order to secure more favourable lending terms with such types of
debt providers. By having an equity stake in the project, lenders end up having more
input in the management of the project, and thus, they have the right to intervene
when they are dissatisfied with the way the project is executed (Behrens, 1990, p. 64).
In the end, the type of joint venture agreement entered into is a reflection of the various role
players as well as their objectives. It is up to the parties involved to negotiate and finalize a
deal that is beneficial to all.
2.5 Conclusion
The real estate industry, with specific emphasis on retail commercial developments, has
experienced a metamorphosis over the last thirty years. Financing mechanisms such as
REITs have enabled the everyday person to invest and benefit from larger scale
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developments compared to what was previously possible. In addition, as highlighted by the
literature above, a wide variety of financing mechanisms for retail commercial developments
exist. It is up to the developer to tap into those resources in order to obtain the correct
mixture of equity and debt that would satisfy the requirements and objectives of all parties
involved.
In Nigeria, the numbers of debt and equity providers that can finance retail commercial
developments are presently rather limited. This aspect places huge constraints on developers
of such projects because the limited availability of such financiers and consequent financing
mechanisms does not allow the developers much leverage during the negotiation process with
the respective debt and equity providers. This research report critically analyzes the
feasibility of the various financing mechanisms available to developers of retail commercial
developments in Nigeria.
The findings of the research were compared to the theoretical frameworks as were revealed
by the literature review above. In addition, the author is of the opinion that the research also
makes known recommendations that could assist financiers, investors, and developers to
further enhance their ability to finance retail commercial developments in Nigeria by
analyzing the current stumbling blocks and difficulties in the operating climate experienced
by retail commercial developers in Nigeria.
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3 RESEARCH METHODOLOGY
3.1 Research approach and strategy
The purpose of this research document was to analyse and compare the various mechanisms
used, sought and supplied by current and future developers, financiers, and investors of retail
commercial real estate properties in Nigeria. Data was collected from actual developers,
financiers and investors of current and future planned retail commercial developments in
Nigeria in order to establish what mechanisms they use to obtain adequate financing. Due to
the nature of the research, the data was of a qualitative nature. Informal and semi-structured
interviews were used to gather information on issues as they relate to obtaining and securing
financing for retail commercial developments in Nigeria. Interviewed developers, financiers
and investors were also asked what they feel are the greatest obstacles to obtaining financing
of such retail developments and what they propose should be changed in an attempt to
smooth the process.
3.2 Research design, data collection methods and research
instruments
3.2.1 Conversations and Semi-Structured Interviews
Due to the lack of published information on the subject of financing of retail commercial
developments in Nigeria, the researcher was forced to rely on a network of informal and
semi-structured discussions and interviews with developers and financiers of such
developments in Nigeria. Leedy and Ormrod (2010, p. 139) refer to such interviewees as
“key informants”.
A guiding questionnaire was developed to guide the interview of key informants during the
research process. (A copy, with selective answers, is attached as Appendix 1.) The structure
of the interview was as informal as possible in an attempt to put the participants at ease and
encourage honest responses.
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During the course of the research, six individuals were interviewed. Firstly, Mr. M.C.
Ejekam, the General Manager of Actis Nigeria, a private equity fund which mainly sources
funding from Europe and the USA. Secondly, Mr. P. Pantham, Senior Advisor to Persianas
Properties, the current owners of the Palms Shopping Centre in Lagos, Nigeria as well as the
developers for two additional retail commercial properties in the cities of Enugu and Ilorin.
Thirdly, Mr. K. Masha, CEO of Doreo Partners, a venture capital fund seeking investments in
the retail and agricultural sectors in Nigeria. Fourthly, Mr. D. Bruwer, Novare‟s Head of
Investments for Africa, a South African investment fund. Novare manages the investments
of various South African and African pension funds and is also the equity provider and
developer for a large retail commercial development in Abuja. Fifthly, Mr. J. Halliday,
Business Development Manager for Shoprite working in Nigeria, DRC, Ghana, and Namibia.
Lastly was a senior official from a large mortgage finance provider in Nigeria who wished to
remain anonymous.
The general areas of the interview included the following:
Section 1: Background information on the interviewee
The purpose of this section was to establish the nature of the interviewee‟s interest in retail
commercial developments in Nigeria. Such background information was essential to detect
and compensate for biases that are associated with each area of expertise.
Section 2: Current sources of financing and associated problem areas
Questions were structured around finding out the exact sources developers, financiers and
investors use to provide funds for retail commercial developers. In addition, interviewees
were asked the current shortcomings of the various sources and what can be done to address
those limitations.
Section 3: Financing mechanisms used and the associated limitations
This section was designed to establish what types of financing mechanisms developers,
financiers and investors of retail commercial developments utilize in Nigeria. Furthermore,
interviewees were asked the shortcomings of each mechanism and what, in their opinion,
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could be done to address or overcome those limitations.
Section 4: Operational environment in Nigeria
The interviewees were asked the most restrictive factors that limit their ability to operate in
the Nigerian economy. Lastly, the interviewees were asked what could be done to overcome
those shortcomings and limitations.
3.3 Data analysis methods
Data was of a qualitative nature. Therefore, information revealed from the various
interviewees was compared to the theoretical models as revealed by the literature review.
3.4 Limitations of the study
Since the study is based on Nigeria, the results are limited to that country and may not be
transferrable or applicable to other similar countries.
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4 RESEARCH FINDINGS, ANALYSIS AND DISCUSSION
4.1 Research Findings
The investment climate in Nigeria is a very challenging environment. As a result,
developers, financiers and investors of retail commercial developments need to have a clear
understanding of the local conditions and restrictions in order to increase the potential
success of their development. This research report focussed on three areas with regards to the
financing of retail commercial developments in Nigeria.
The first area focussed on the sources of financing used to finance retail commercial
developments. Due to the high cost of domestic denominated debt (Naira based), developers,
financiers and investors are forced to also rely on foreign currency denominated funding
sources to lower the overall interest charges of the development. This dependency on foreign
exchange exposes the borrowers and lenders to foreign exchange fluctuations. In addition,
local laws and legislation preclude domestic pension funds from investing significant
amounts of their funds in retail commercial developments; therefore limiting those as a large
source of funding. Furthermore, limited knowledge and knowhow, combined with stringent
terms and conditions from domestic banks in terms of retail commercial developments leads
to very high interest charges on any form of borrowed funds. Also, the low levels of liquidity
of the domestic stock market hinder the use of that institution as a method to raise funds in
the immediate future. Lastly, the perceived risk perception from foreign individuals and
institutions with regards to Nigerian investments in general, act as a major limitation to
access to such funds as a source of finance.
Secondly, the research analyzed the various financing mechanisms used by developers,
financiers and investors to obtain finance for retail commercial developments. High interest
charges associated with short and long-term debt financing, as well as a regulatory void to
help facilitate long-term debt financing act as major deterrents to developers in utilizing these
financing mechanisms. Furthermore, the high levels of perceived risks associated with any
investment in Nigeria leads to substantial increases in risk premiums. For that reason,
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developers need to ensure that they use reputable developers, professionals, lawyers,
contractors, etc. to design, plan and execute retail commercial developments in Nigeria in
order to help ease the fears of investors and financiers.
Lastly, the research looked at the operating climate in Nigeria and how it affects the
developments of retail commercial developments. High construction costs were seen as the
biggest obstacle developers face. For that reason, such developers need to ensure that they do
everything in their power to lower the overall project costs, and at the same time, maintain a
high level of quality. Furthermore, high financing costs, a lack of local expertise, and a lack
of potential buyers are all mentioned as major limitations to retail commercial developments
in Nigeria. In the end, a clear understanding of the local environment is essential in order to
convince financiers and investors to provide financing for retail commercial developments.
Only once the developer can convince these shareholders that he or she has measures in place
to address the shortcomings of the local investment climate, will they be willing to finance
his or her development at a reasonable risk premium.
4.2 Research Analysis and Discussion
4.2.1 Sources of financing and their limitations
4.2.1.1 Operating Cash Flows:
The limited ability of most developers, financiers or investors to use operating cash flow as a
source of funding was a common theme amongst most individuals that were interviewed.
Interviewees noted that, in general, developers and/or financiers of retail commercial
developments in Nigeria do not possess the working capital resources to finance such
developments by means of this funding source – the balance sheets of these companies
simply cannot support this option (Masha, CEO, Doreo Partners, 2010 & Pantham, Senior
Advisor, Persianas, 2010). This observation is strongly supported by the literature review
(Redman, Tanner & Manakyan, 2002, p. 182).
Furthermore, Mr. Halliday noted that most domestic and multinational companies are forced
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to sign US Dollar denominated lease contracts in Nigeria. Therefore, while their cost of
rental on existing developments, as well as a large portion of their working and capital
equipment is denominated in US Dollar or other foreign currencies such as the Rand (South
Africa), the domestic earnings of these companies are in Naira. As a result, any devaluation
of the Naira will dilute the operating income of these companies, and as a result, make it
more difficult to utilize operating cash flow as a source of finance (Business Development
Manager, Shoprite, 2010).
4.2.1.2 Insurance companies and Pension funds (Domestic):
During the 1960 and 70‟s, according to Mr. Masha, insurance companies and pension funds
were the typical sources of financing for many major developments in Nigeria. However,
primarily due to changes in the political landscape, these organizations were no longer able to
act as sources of funding. Today, there are legislative policies that prohibit these institutions
from investing substantial amounts of their resources in commercial developments (Masha,
CEO, Doreo Partners, 2010). As a result, even though it is common practise for a pension
fund to invest in retail commercial development in countries such as South Africa, this option
is prohibited in Nigeria. Therefore, the inability of domestic pension funds to invest in retail
commercial developments in Nigeria, as regulated by the “Pension Reform Act of 2004”
(“National Pension Commission, 2007), means that developers need to source the funding
from alternative entities – increasing the level of difficulty in obtaining such financing
(Halliday, Business Development Manager, Shoprite, 2010).
4.2.1.3 Insurance companies and Pension funds (Foreign):
The lack of investment knowledge on Nigeria and the African continent in general, has made
it very difficult at times for foreign pension funds to convince their investors to invest in
retail commercial developments in Nigeria. Novare, a South African pension fund
administrator, is to date, one of the sole foreign pension funds that were able to convince their
investors to earmark funds for such developments in Nigeria. As a result, the fund has
commenced with the construction of its first retail commercial development in Abuja –
namely Grand Towers. Mr. D. Bruwer believes that the potential success of this development
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will help to lay the way for other such future investments by his fund in Nigeria. However,
the level of scepticism that surrounds Nigerian investments will for years to come continue to
hinder major investments by other foreign pension funds and insurance companies (Bruwer,
Head of Investments for Africa, Novare, 2010).
Furthermore, the limited availability of foreign currencies in Nigeria, such as US Dollars,
fuels the fear that it can be difficult to repatriate potential profits, as well as the initial
investment amount at a later stage when the pension fund or insurance company wants to
repatriate their investments and returns. As a result, pension funds and insurance companies
are weary of sending investments to the Nigerian market due to the perception that they
might find it difficult to recall those investments and returns at a later stage (Halliday,
Business Development Manager, Shoprite, 2010).
Also, the Nigerian market is relatively “untested waters” to foreign pension funds and
insurance companies. In addition, these companies are very unfamiliar with emerging and
frontier markets. Moreover, most developers have a limited track record and are not familiar
with working with institutionally managed investments. As a result, these pension funds and
insurance companies are very reluctant to invest their funds in Nigeria (Ejekam, General
Manager, Actis, 2010). The literature review noted that insurance companies and pension
funds are rather risk-adverse – further increasing their reluctance to enter such “untested
water” as what is found in Nigeria (Ratcliffe, Stubbs, & Keeping, 2009, p. 431).
4.2.1.4 Banks:
Very high interest rates charged by banks on loans were uniformly listed as the biggest
stumbling block that limits banks‟ ability to act as a significant source of finance for retail
commercial developments in Nigeria (Pantham, Senior Advisor, Persianas, 2010).
Furthermore, “stringent terms and conditions for loan facilities” were also stated as a
limitation to banks acting as a source of financing (Anonymous, Senior Official, Nigerian
Mortgage Provider, 2010). Ratcliffe, Stubbs, & Keeping (2009, p. 432) noted that banks are
always seeking ways and means to limit their risk exposure resulting in such terms and
conditions. Thus, this observation is supported by the literature.
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Moreover, since the mortgage industry in Nigeria is relatively new, banks possess a relatively
limited knowledge and experience of property development and investment. Additionally, the
negative perception of the last two years where many speculative investors borrowed bank
money to invest in equity investments with negative erosion of total market cap after 2008,
has led to an increase in restrictions on how banks can provide funding to potential projects
(Halliday, Business Development Manager, Shoprite, 2010).
4.2.1.5 Domestic Stock Market (Nigerian Stock Exchange):
As was stated in the literature review, the Nigerian Stock Exchange suffers from extremely
low levels of liquidity (Pantham, Senior Advisor, Persianas, 2010). This low liquidity,
combined with limited experience (Bruwer, Head of Investments for Africa, Novare, 2010),
makes it extremely difficult to use the domestic stock market as a mechanism to raise
funding. However, Mr. Masha believes that the Nigerian Stock Market can be a potential
source of future funding; especially when legislative changes are implemented to make the
use of REITs more viable (Masha, CEO, Doreo Partners, 2010).
4.2.1.6 Government:
Even though the government of Nigeria does not actually provide funding for retail
commercial developments, it can assist by providing debt guarantees to commercial banks
(Masha, CEO, Doreo Partners, 2010). However, due to the severe shortage of housing, the
government is more focussed on residential developments than commercial investments
(Bruwer, Head of Investments for Africa, Novare, 2010). A local mortgage institution
representative used the terms “no visionary or sincere leadership” to describe the current
government‟s commitment toward retail commercial developments (Anonymous, Senior
Official, Nigerian Mortgage Provider, 2010). Therefore, the government has the potential to
assist in making funds easily available to be used for retail commercial developments.
However, the political will and drive first need to be cultured.
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4.2.1.7 Venture Capital:
Venture capital is a funding source that gained popularity in the 1970s. However, in the
wake of the global financial crisis of the late 2000s, it is currently very difficult to raise
venture capital in the open market, especially since most venture capital funds are raised
abroad. Furthermore, as noted in the literature review, the return expectations of venture
capital investors are very high, and due to the intricacies involved in retail commercial
developments, venture capital investors are very reluctant to invest in this sector (Masha,
CEO, Doreo Partners, 2010). Additionally, venture capital firms have already earmarked
certain focus areas, and retail commercial investments do not necessarily form part of those
areas (Bruwer, Head of Investments for Africa, Novare, 2010).
4.2.1.8 Private Equity Capital:
Due to the fact that private equity capital is mainly raised abroad (Pantham, Senior Advisor,
Persianas, 2010), private equity funds are finding it very difficult to raise capital in the
current financial market (Masha, CEO, Doreo Partners, 2010). This difficulty in raising
funds, combined with high return expectations, make private equity capital a challenging
fund raising mechanism. However, since certain funds have already invested in Nigeria,
specifically in the oil sector, the concept of private equity capital is not unique to the country.
Also, as the manufacturing sector started to collapse, in the wake of cheaper Chinese imports,
certain funds started to invest in real estate projects in Nigeria (Pantham, Senior Advisor,
Persianas, 2010).
At present, Nigeria has two private equity funds that are actively seeking investments in real
estate developments – Actis and ARM (Bruwer, Head of Investments for Africa, Novare,
2010). The current legal framework, domestic security, country risk factors, and high return
expectations are amongst the factors to act as deterrents for other similar funds to invest in
this sector (Pantham, Senior Advisor, Persianas, 2010).
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4.2.2 Challenges of Various Financing Mechanisms
4.2.2.1 Short-term debt (Three years and less):
Most importantly, the repayment terms of short-term debt is too short for cash flows
generated from retail commercial developments to cover the debt repayments. Furthermore,
the associated interest rates of short-term debt are too high, especially when considering the
rental the tenants of retail commercial developments can afford to pay (Halliday, Business
Development Manager, Shoprite, 2010). Equally importantly, out of an investor‟s point of
view, the use of short-term debt to cover long-term investments is a “miss-match”, something
that can be detrimental to the investment in the long run (Ejekam, General Manager, Actis,
2010). However, due to the current difficulty in obtaining long-term debt, many developers
are forced to utilize short-term debt during the construction period of the project and then
refinance the overall development by using long-term debt financing mechanisms (Pantham,
Senior Advisor, Persianas, 2010).
Furthermore, “stringent loan requirements” such as additional securities requested by the
lender, besides the actual development as collateral, as well as high equity contributions are
amongst the reasons mentioned by the mortgage bank representative as to why short-term
debt is a very difficult financing mechanism in Nigeria to obtain to finance retail commercial
developments (Anonymous, Senior Official, Nigerian Mortgage Provider, 2010).
4.2.2.2 Long-term debt (More than three years):
The use of long-term debt is currently hampered by the fact that at present the Central Bank
of Nigeria (CBN) does not have a legislative framework in place that encourages the use of
such debt as a financing mechanism. As a result, developers find the repayment terms too
short – something that was emphasized in the literature review. Furthermore, there is a
limited delay in the commencement of repayment schedules. Consequently, borrowers are
required to commence with repayment terms long before the actual project starts to generate a
cash flow. All of this result in an increase in pressure on the development‟s cash flows
(Bruwer, Head of Investments for Africa, Novare, 2010).
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Also, as a result of the high costs of debt combined with high equity requirements from the
banks in order to minimize their risk exposure, developers settle for a higher equity
contribution. Mr. Halliday warns that such action leads to lower debt/equity ratios, and as a
result, dilutes the equity investors‟ interest in the developments (Halliday, Business
Development Manager, Shoprite, 2010).
Additionally, in order for developers to make long-term debt financially viable, developers
agree on a balloon payment at the end of the five or seven year loan period. This, on the
other hand, requires that the developer needs to exit at a very high price in order to be able to
service such sizable debt obligation. Such a high price requirement limits the pool of
potential buyers (Halliday, Business Development Manager, Shoprite, 2010).
In addition, long turnaround times with regards to approvals for loan applications, high
hidden costs such as due diligence, guarantees, and the costs to open an account are among
the most common problems cited in relation to long-term debt (Bruwer, Head of Investments
for Africa, Novare, 2010). Moreover, as in the case of short-term debt, stringent loan
requirements e.g. insistence on large equity contributions and additional securities apart from
the title of subject property were noted by an interviewee as a burden on developers when
trying to secure long-term debt (Anonymous, Senior Official, Nigerian Mortgage Provider,
2010).
At present, many retail commercial developments in Nigeria can only access long-term debt
once they used short-term debt to finish the construction phase of the project. As a result of
this lower risk exposure to banks, they are then willing to enter into an agreement with the
developer to provide long-term debt. That debt is then used to release the developer‟s short-
term debt obligations. Furthermore, the lower risk factor combined with a mixture of foreign
and domestically denominated loan structures, pave the way for more favourable debt terms
and conditions to the developer (Pantham, Senior Advisor, Persianas, 2010).
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4.2.2.3 Real Estate Investment Trusts (REITs):
Even though all interviewees agreed that the future of REITs holds “great potential” as a
viable financing mechanism in the foreseeable future, the lack of proven organized listed
funds on the NSE is an indication of the reluctance of the market to currently utilize this
financing mechanism (Bruwer, Head of Investments for Africa, Novare, 2010). The current
shortage of REITs on the NSE is due to a variety of reasons.
Firstly, as highlighted in the literature review above, the quality of invested properties by a
REIT has a huge impact on the overall status of that REIT. Nigeria‟s limited availability of
existing properties to invest in REITs therefore makes it very difficult for REITs to gain a
foothold in the Nigerian economy (Halliday, Business Development Manager, Shoprite,
2010).
Secondly, local tax legislation needs to be altered in order to prevent double taxation. At
present, REITs are exposed to both corporate and individual taxation. However, a proposal is
currently in congress to amend the tax law to eliminate this shortcoming but no specific dates
for approval were set at the time this report was written (Ejekam, General Manager, Actis,
2010). As indicated in the literature review, REITs usually receive a special tax status.
However, the current domestic legislation prevents such a benefit.
Thirdly, very low levels of liquidity on the NSE, combined with a strong affiliation with the
status of the general stock market in the country, have also made promoters of REITs
reluctant to actively pursue the listing of REITs in the present Nigeria market (Halliday,
Business Development Manager, Shoprite, 2010).
Lastly, there is a very limited knowledge in the domestic market with regards to REITs. As a
result, investors first need to be educated on the workings and benefits of REITs before they
can be used as a credible financing mechanism (Bruwer, Head of Investments for Africa,
Novare, 2010). The literature focuses on the ability of REITs to lower the risk exposure of
REIT investors due to diversification. However, the current lack of various REITs
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investments in Nigeria makes such an option nonviable.
4.2.2.4 Convertible & Participating Mortgages:
Currently the debt providers in Nigeria, which are mainly banks, want security with regards
to the long-term cash flow from the investment. As a result, these institutions are more
interested in sureties from the project sponsors than that of the actual development. In
addition, developers are required to provide additional securities such as assets besides that of
the actual development being funded. For this reason, mortgage institutions are reluctant to
issue convertible or participating mortgages and would rather focus on other financing
mechanisms (Halliday, Business Development Manager, Shoprite, 2010).
Furthermore, as noted by Mr. Pantham, local institutions are not currently equipped to deal
with this “advance form” of mechanism for financing. They simply lack the institutional
knowledge and knowhow to manage such an instrument of financing (Pantham, Senior
Advisor, Persianas, 2010).
Lastly, convertible and participating mortgages potentially convert debt into equity. As a
result, shareholders are most often reluctant to dilute their interest. As noted in the Literature
review, the very nature of Nigerian investors generally makes them reluctant to dilute their
equity share. Furthermore, because interest payments are a tax-deductible expense,
shareholders might not want to do away with this facility, pending on the financial health of
the development. Consequently, this financing mechanism could potentially lead to tension
between the partners, especially when they have conflicting views and objectives (Ejekam,
General Manager, Actis, 2010).
4.2.2.5 Mezzanine Financing:
Since the cost of debt financing in Nigeria is already very high, compared to most other
countries, the premium that is required by mezzanine finance providers (as noted in the
literature review), makes the use of this financing mechanism prohibitive (Halliday, Business
Development Manager, Shoprite, 2010). Furthermore, should a developer seek mezzanine
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financing, he or she needs to makes provision for adequate cash to allow for the exit of the
mezzanine finance provider after the initial investment period – usually three years. As a
result, the developer needs to find alternative sources of cash or sell additional equity in the
development at that point in time (Pantham, Senior Advisor, Persianas, 2010). Selling equity
in the project could dilute the shares of the equity partners, something that could potentially
lead to conflict.
Moreover, the current legislation in Nigeria requires mezzanine finance providers to receive
at least two percent of equity in the investment in order for the mechanism to qualify as
mezzanine financing (Bruwer, Head of Investments for Africa, Novare, 2010). As a result,
shareholders need to seriously consider whether they will be willing to dilute their
shareholding when contemplating the use of this financing mechanism.
4.2.2.6 Joint Ventures (JV):
As noted by the general manager of Actis, there are lots of JVs in the Nigerian market
(Ejekam, General Manager, Actis, 2010). Yet, finding the right JV partner, as emphasized in
the literature review, that has sufficient cash, equity, and/or professional expertise, as well as
an individual or institution that understands the process of creating retail property
developments, can be very difficult (Halliday, Business Development Manager, Shoprite,
2010).
Also, agreeing on the valuation of the land or professional services, as a percentage of equity
in the project, can be a very tedious and difficult process (Pantham, Senior Advisor,
Persianas, 2010). In addition, a too high valuation of the equity contribution will lead to a
dilution of the other shareholders‟ interest, and as a result, lower their expected returns
(Halliday, Business Development Manager, Shoprite, 2010). All of this increases the
difficulty in negotiating and concluding a shareholders‟ agreement (Bruwer, Head of
Investments for Africa, Novare, 2010).
Lastly, as in most businesses, often a misalignment of shareholders‟ views and objectives
evolves due to a lack of early stage planning and discussions. In many situations, one partner
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wants to exit after three to four years, while the other wants to leave a legacy for his or her
children. This could lead to potential conflict. It is therefore critical to have proper
shareholders‟ agreement with adequate provisions for exit clauses by any of the partners
(Ejekam, General Manager, Actis, 2010).
4.2.2.7 Equity (Land/Cash/Professional Services):
In most situations, the contribution of land, cash and/or professional services in return for
equity will lead to the formation of a Joint Venture (JV). Therefore, the areas of difficulty
are exactly the same as outlined above (Pantham, Senior Advisor, Persianas, 2010). The
literature review noted that such JV agreements can be very difficult to negotiate, but a
successful agreement can prevent timely and costly dispute settlements at a later stage.
However, finding land with a “clean” title, high cost of due diligence (Bruwer, Head of
Investments for Africa, Novare, 2010), as well as a lack of infrastructure and access to market
information in determining the value of the land (Anonymous, Senior Official, Nigerian
Mortgage Provider, 2010), and zoning changes (Pantham, Senior Advisor, Persianas, 2010)
are all reasons that make the valuation process of land equity contributions more difficult.
Nonetheless, there are various landowners available that can contribute property in return for
an equity stake in the development, but not the same can be said about cash and professional
services. The ability of cash financiers to invest in a wide variety of other projects, especially
in the oil sector in Nigeria, with a potential higher return than that of retail commercial
developments, makes such financiers reluctant to contribute cash in return for shares in retail
commercial developments (Halliday, Business Development Manager, Shoprite, 2010).
Moreover, the dearth of experienced professional consultants that can contribute credible
expertise to a retail commercial development makes it difficult to find such equity
contributors. Furthermore, the lack of such skills makes it very challenging to value the
overall contribution, and the subsequent equity share (Ejekam, General Manager, Actis,
20100). As a result, Nigeria needs more experienced consultants in order to facilitate this
process (Bruwer, Head of Investments for Africa, Novare, 2010).
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4.2.3 Factors That Impact the Operating Climate in Nigeria and Potential
Solutions
4.2.3.1 High Building Cost:
High construction costs were cited as one of the main problems developers of retail
commercial developments face in Nigeria. This high building cost increases the overall
capital requirement to complete such developments. In the end, developers find it
challenging to lock in sufficient financial resources to cover such construction costs.
At present, the importation of certain building materials, such as cement, is banned in
Nigeria. As a result, the local suppliers have an oligopoly, probably leading to an inflated
price of the end product. For that reason, the Government of Nigeria can assist by scrapping
the importation ban on building materials, and as a result, force the local suppliers to compete
with imported products (Pantham, Senior Advisor, Persianas, 2010).
Furthermore, by culturing a local manufacturing climate, with credible quality control
institutions and regulations can help to make the country less dependent on expensive
imported products. As a result, developers can then buy with confidence more locally
produced products that will hopefully lead to lower prices of such goods (Pantham, Senior
Advisor, Persianas, 2010).
At the developer‟s level, Mr. Ejekam stated the need to negotiate aggressively with the
contractors on the price and final deliverables (Ejekam, General Manager, Actis, 2010). At
the same time, Mr. Bruwer believes that during the current economic slowdown, contractors
are desperate for work. As a result, developers should use this opportunity to force the
contractors to lower their profit margins in order to win construction tenders (Bruwer, Head
of Investments for Africa, Novare, 2010).
Furthermore, developers can circumvent the mark up contractors place on products used in
the construction phase by offering to procure the goods themselves. This could help to
reduce the overall costs of the construction project, but would require close collaboration
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between the developer and contractor (Ejekam, General Manager, Actis, 2010).
Additionally, developers could strive for economies of scale in the long term. By sourcing
products on a larger scale, the overall costs of individual projects can be reduced (Bruwer,
Head of Investments for Africa, Novare, 2010).
Lastly, developers can place pressure on tenants of retail commercial developments to lower
their specifications in order to reduce the overall costs (Ejekam, General Manager, Actis,
2010).
4.2.3.2 High Financing Costs:
The high cost of providing financing was also often cited as a critical factor that makes the
development of retail commercial developments difficult. This high cost is a reflection of the
perceived risk financiers of such developments needs to be compensated for. As a result,
developers of retail commercial developments need to do everything in their power to
manage and lower this perceived risk.
For a start, developers can involve large and credible developers and contractors to help
negotiate better terms with the financiers. The presence of an internationally renowned and
reputable construction company, for example, can help to ease the fear of financiers on the
viability of a specific project. Also, sourcing from reputable suppliers, with guaranteed
quality standards, lowers risks to financiers resulting in a lower risk premium charged by
these institutions (Bruwer, Head of Investments for Africa, Novare, 2010).
Furthermore, the high financing cost is a result of the current negative investment perception
of banks in Nigeria. This led to an increase in the interbank lending rate that is then passed
on to borrowers. For that reason, there is a strong need to improve the regulatory oversight of
banks in Nigeria to help ease the fear and distrust that currently exists in the domestic
banking sector (Halliday, Business Development Manager, Shoprite, 2010).
Furthermore, Mr. Halliday believes that the government can help to reduce the risk
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perception in Nigeria to investors and financiers by improving infrastructure and lifting the
importation bans. An improvement of infrastructure will lower the financial outlay required
by developers to provide such for their developments - thus lower costs. Also, the lifting of
the importation bans will help to attract more international tenants such as Mr. Price and
furniture outlets leading to a larger supply of credible tenants. Both of these
recommendations will result in a reduced risk of the overall project (Halliday, Business
Development Manager, Shoprite, 2010).
Moreover, the total lack of a secondary mortgage market means that it is very difficult to
obtain refinancing. This refinancing option would lower the interest charges since the risks
are reduced once the development is completed. The International Finance Corporation
(IFC) is currently looking into creating mechanisms in how to assist to create such a second
mortgage mechanism in Nigeria (Anonymous, Senior Official, Nigerian Mortgage Provider,
2010).
4.2.3.3 Relatively Low Initial Returns on Retail Commercial
Developments:
Due to the high building and financing costs, and other factors to be discussed below, the
initial return on investment in retail commercial developments in Nigeria is “relatively low”.
This phenomenon is not unique to Nigeria, since developers usually only see the returns on
their investment upon exiting the development - usually between years three to five.
However, by decreasing the initial building and financing costs it would help to increase the
initial returns, especially in the short term (Halliday, Business Development Manager,
Shoprite, 2010).
4.2.3.4 Lack of Local Expertise:
Due to the fact that most retail commercial developments are “green field projects”, the need
for the right combination of expertise is essential to ensure the overall success of the project
(Masha, CEO, Doreo Partners, 2010). One potential way to overcome this problem is to
invest in a local company, what is exactly what Actis has done in Nigeria. By doing this, the
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company not only helped to ensure the right blend of international and local expertise, but
also they are contributing toward building local expertise in the country (Ejekam, General
Manager, Actis, 2010).
However, the development of local expertise will take a significant amount of time.
Furthermore, Nigeria currently does not have sufficient systems in place to ensure quality
standards are met and maintained (Bruwer, Head of Investments for Africa, Novare, 2010).
Therefore, at present, the need for a combination of international and domestic expertise will
be essential to bridge the interim period while local skills and expertise are developed.
4.2.3.5 Importation Bans and Restrictions:
The current ban on certain products from importation into Nigeria limits the potential range
of tenants that can sign lease agreements to occupy space in the shopping mall. The Nigerian
legislation does not allow the importation of textiles, for example, and therefore no large
clothing outlet can commit to a lease agreement unless they are willing to only source from
local suppliers. For that reason, there is a lot of pressure on the current government to do
away with these importation bans and open up the market. Should these importation bans be
removed, developers can either increase the size of their developments, and/or be more
selective in who they grant space in their retail commercial developments (Pantham, Senior
Advisor, Persianas, 2010).
4.2.3.6 Difficulty in Obtaining Financing:
The difficulty developers face in obtaining financing for retail commercial developments is a
“huge problem”. Furthermore, this makes it even more difficult for smaller developers to
enter the market because investors and financier are reluctant to invest in their respective
smaller projects. However, a change in the current economic climate could lead to an
increase in funds to finance retail commercial developments (Bruwer, Head of Investments
for Africa, Novare, 2010). This is already noticed over the past twelve months as investor
and financiers are starting to show an interest in certain developments that were shelved in
the late 2000s.
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Nonetheless, developers can make use of guarantees and/or sureties from the anchor tenants
to help lower risk to investors and financiers. Mr. Halliday believes that this will become the
standard and norm for most large-scale retail commercial developments in Nigeria (Halliday,
Business Development Manager, Shoprite, 2010). On the other hand, certain developers
already see the current requests from financiers as “unrealistic” in their demand for
guarantees from other investors and developers (Bruwer, Head of Investments for Africa,
Novare, 2010).
Moreover, Mr. Pantham is adamant that the Nigerian market needs to give greater access to
international investors. This will help to increase the source of foreign funds. However,
foreign funds will only substantially increase if they have confidence in the stability of the
Nigerian economy as an area of investment (Pantham, Senior Advisor, Persianas, 2010).
Should this happen, developers can then gain access to a blend of US Dollar/Naira loans that
could lead to lower interest payments (Ejekam, General Manager, Actis, 2010).
4.2.3.7 Lack of Potential Buyers for the End Product:
The lack of potential buyers for the final product, should the shareholders wish to exit, is a
concern for most parties involved in retail commercial developments (Bruwer, Head of
Investments for Africa, Novare, 2010). However, a variety of options are available that could
potentially help to increase the presence of buyers for the final product.
At present, shareholders can use the domestic stock market to raise finance for the sale of
their shareholdings. This can either be done via an IPO (Masha, CEO, Doreo Partners, 2010)
or by listing or selling to a REIT (Ejekam, General Manager, Actis, 20100). However,
Nigeria would first need to develop a listed property sector as a credible area of investment
(Halliday, Business Development Manager, Shoprite, 2010). The low levels of liquidity of
the domestic stock market, especially when compared to other international stock markets,
make the use of the Nigerian Stock Market, as a source of funds, less attractive. On the other
hand, shareholders can utilize international IPOs, but that market has less of an understanding
of the domestic conditions, and as a result, will be more inclined to finance such an
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investment (Masha, CEO, Doreo Partners, 2010).
Additionally, the government can change local legislation to allow domestic pension funds to
directly invest in property developments on a larger scale. In other words, these pension
funds can purchase greater shares in a completed development, and as a result, allow the
shareholders to exit should they wish to do so (Halliday, Business Development Manager,
Shoprite, 2010).
However, a mind shift is necessary from investors in retail commercial developments. They
need to recognise the real estate as an industry and not just as “another trade” (Pantham,
Senior Advisor, Persianas, 2010). In other words, the sector needs to be developed to be big
enough in order to attract various international investments (Masha, CEO, Doreo Partners,
2010).
At the end of the day, investors are looking for a stable income. Therefore, when wanting to
attract potential investors to sell a development to, the sellers need to put measures in place
that focuses on “de-risking” the deal. Once potential buyers feel that they are not taking on
excessive amounts of risk, they will be less inclined to buy shares or take full ownership of
such retail commercial developments (Ejekam, General Manager, Actis, 2010).
4.2.3.8 Lack of Infrastructure:
The general lack of infrastructure, with regards to water supply, electricity, sewerage,
effluent, road networks, security, etc. is a major contributor toward increasing the overall
project cost. Developers of retail commercial developments need to factor such infrastructure
requirements into the project‟s development cost (Pantham, Senior Advisor, Persianas, 2010).
For that reason, more pressure must be placed on both the federal and local government to
improve and provide such infrastructure, especially with regards to roads and electricity
supply (Halliday, Business Development Manager, Shoprite, 2010).
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4.2.3.9 Uncertain Investment Climate:
In Nigeria, the overall economic and political policies are very uncertain, especially when
compared to other developing countries. This makes future planning very difficult and
uncertain. Furthermore, a frequent shift in the areas of policy focus also creates additional
uncertainty – something that makes investors reluctant to invest in the country (Masha, CEO,
Doreo Partners, 2010). Moreover, political instability makes investors and financiers scared
and reluctant to come to Nigeria. Therefore, the Government of Nigeria not only needs to
have clear medium to long-term goals and focus areas, but they should also do everything in
their power to guarantee the political stability of the country. Only once they are able to
prove to investors and financiers, will those institutions increase their willingness to invest in
Nigeria (Bruwer, Head of Investments for Africa, Novare, 2010).
However, companies and investors need to recognise that there are procedures and risks.
Shoprite, for example, only invested in Nigeria in 2004, while they entered other African
countries, such as Zambia, in the early 1990s. Opportunities do exist and should be
capitalized on. Government should develop mechanisms to help support new entrants. At
the same time, companies such as Shoprite can help to cushion potential risks to investors and
financiers by providing guarantees from its parent company (Masha, CEO, Doreo Partners,
2010).
Additionally, foreign investors and financiers are exposed to currency risks when investing in
Nigeria. In most situations, foreign investments are converted into Naira when the initial
investment is made. Domestic earnings and interest payments are made in Naira and only
once the developer decides to exit the market does the initial investment get converted to a
foreign currency again. Therefore, government policies should focus on keeping the Naira
exchange rate stable in order to ease the fear of currency risks to investors and financiers
(Bruwer, Head of Investments for Africa, Novare, 2010).
4.2.3.10 High Land Costs:
Although the price of land is a mere reflection of the forces of supply and demand in the
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market (Pantham, Senior Advisor, Persianas, 2010), the government can assist by improving
infrastructure and providing incentives to developers to develop land outside the traditional
city centres (Anonymous, Senior Official, Nigerian Mortgage Provider, 2010). Such land
will potentially be offered at lower costs, subsequently leading to lower land costs.
Furthermore, developers of retail commercial developments can structure deals in such a way
that the landowner gets compensated later based on the success of the proposed retail
development (Ejekam, General Manager, Actis, 2010). This will help to alleviate the risk
factor to potential investors and financiers, as well as lower the initial cash requirements of
the initial project. In the end, the cost of the land needs to be accurately factored into the
investment model in order to not skew the financial projections (Bruwer, Head of
Investments for Africa, Novare, 2010).
In addition, professional bodies such as the Nigeria Institute of Estate Surveyors and Valuers
(NIESV) should be encouraged to automate land information and pricing from time to time
(Anonymous, Senior Official, Nigerian Mortgage Provider, 2010). This action will help to
increase the transparency of land prices, resulting in a lower risk perception by investors and
financiers.
4.2.3.11 No Private Land Ownership (Only long-term leases):
The issue of private land ownership is not going to change in Nigeria in the near future
(Pantham, Senior Advisor, Persianas, 2010). As a result, the emphasis needs to be placed on
educating investors and financiers on how the system works in order to lower their risk
perception associated with this aspect of land ownership in Nigeria.
However, developers of retail commercial developments in Nigeria need to ensure that the
property is properly registered with the various authorities (Ejekam, General Manager, Actis,
2010). The local government can also assist by improving the accuracy of the land
registration and transfer records process (Halliday, Business Development Manager,
Shoprite, 2010).
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4.2.3.12 Bureaucratic Procedures:
A lack of transparency on what the various systems and procedures are leads to an increase in
a risk perception by investors and financiers (Pantham, Senior Advisor, Persianas, 2010).
However, developers and promoters of retail commercial developments in Nigeria can help
by educating investors on how the various bureaucratic systems work (Bruwer, Head of
Investments for Africa, Novare, 2010).
Furthermore, the use of a reputable legal team can also help to reduce potential and perceive
risks. At the end of the day, if the developer understands the systems and procedures, he or
she can use that understanding as a competitive advantage over other competitors competing
for financing for similar developments (Bruwer, Head of Investments for Africa, Novare,
2010).
4.3 Research Limitations
This research is limited to the development of retail commercial projects in Nigeria. The
author and interviewees have a limited knowledge of other investment opportunities that exist
in the country.
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5 RESEARCH CONCLUSIONS
There are various sources of funds to finance retail commercial developments in Nigeria.
However, local legislation that limits the involvement of domestic pension funds in retail
developments, combined with a lack of understanding from similar foreign pension funds,
limit the ability and willingness of these institutions to provide funding for retail commercial
developments.
Furthermore, bank debt is regarded as very expensive while the lack of liquidity in the
domestic stock market is hindering the appetite of developers to utilize those sources of
funding. Also, the government is currently more focussed on residential developments, and
as a result, does not have effective policies in place to promote retail commercial
developments. At the same time, the return requirements of venture and private equity firms
make them also a less attractive source of funding.
Developers of retail commercial developments in Nigeria have a fairly wide variety of
financing mechanisms to choose from. However, as in most circumstances, each mechanism
has its shortcomings. Short-term debt is very expensive and does not allow enough time for
the project to start generating cash before the debt needs to be repaid. However, some
developers are currently relying on short-term debt during the construction phase and then
apply for refinancing when the project is near completion in order to release the short-term
loans. Nevertheless, long-term debt in Nigeria is also expensive and requires a mixture of
foreign and domestic loans leading to exchange rate risk exposure. Furthermore, it is mainly
offered with repayment terms of up to seven years – not always sufficient time to generate
enough cash to repay the total debt.
The low levels of liquidity on the domestic stock market, combined with a lack of a property
sector in that stock market, make the immediate future of REITs less appetizing. Moreover,
due to the complexities of convertible and participation mortgages, developers are generally
reluctant to make use of those mechanisms. At the same time, those types of mortgages, as
well as mezzanine financing are regarded as very expensive, all leading to a dilution of the
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equity share of other shareholders – something that can lead to disagreement among the
various parties involved.
Moreover, the operating climate in Nigeria is regarded as very challenging. A variety of
factors make the development of retail commercial developments very difficult. Most
importantly, high construction cost increases the capital requirements of such developments,
and as a result, developers need to do everything in their power to limit such costs.
Additionally, the high-risk perception of investors and finance providers in Nigeria leads to
high financing costs. Again, the emphasis is on developer to manage the risk-perception of
investors and financiers. What is more, a lack of local expertise requires the use of expensive
overseas resources. In addition, import bans and restrictions limit the range of potential
tenants that can lease space in the final retail commercial development. A lack of potential
buyers for the end product also increases the difficulty in obtaining financing, while a lack of
infrastructure leads to additional capital requirements for the developer.
In the end, retail commercial developments in Nigeria are not for the faint hearted. It requires
developers with an understanding of the local environment. At present, most retail
commercial investments are of a pioneering nature due to a lack of market data and other
comparable developments in the country. As a result, financiers and investors require a
significant risk premium in order to be compensated for the very nature of these projects.
Therefore, developers can lower such risk perceptions by ensuring that they make use of
credible and internationally renowned architects, project managers, quantity surveyors,
contractors and suppliers. This will not only lower the risk of failure of the final product, but
also ensure the financiers and investors that quality standards will be maintained throughout
the development.
As can be seen from the success of the Palms Shopping Centre in VI, Lagos, there is a
definite demand from consumers for more retail shopping centres. This has spurred banks
over the last year or so to show more of an interest in retail commercial developments in
Nigeria. It is now up to the developers to convince the financing and investing institutions
that their developments carry a low risk premium that will translate into more favourable
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financing mechanisms.
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6 FUTURE RESEARCH DIRECTIONS
The direct and indirect impact on retail commercial developments of the current importation
bans and restrictions in Nigeria need to be researched in order to help guide the Nigerian
government in its decision to do away or ease with such restrictions. At present, no credible
data exists that can be used as a tool to help convince the Government of Nigeria to eliminate
those barriers to trade.
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7 REFERENCES AND BIBLIOGRAPHY
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8 APPENDIX
8.1 Appendix 1 – Interview Questions with Selective Answers
Nature of Your Business/Organization and Origins of Its Funding:
Question 1
Please provide the following details:
Name: ....…………………………………………………………………………………..........
Position: ...…………………………………………………………………………................
Organization: ..…………………………………………………………………………….....
Question 2
Please state the nature of your business:
Interviewee
Dev
elop
ers
– C
urr
ent
or
futu
re
Ven
ture
Cap
ital
Eq
uit
y
Cap
ital
Pen
sion
Fu
nd
Ban
k
Oth
er
Ejekam X
Pantham X
Masha X
Bruwer X X
Halliday X
Anonymous X X
Question 3
Where is your primary business/organization based?
Interviewee
Nig
eria
Sou
th
Afr
ica
Eu
rop
e
US
A
Oth
er
Ejekam X X
Pantham X
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Interviewee
Nig
eria
Sou
th
Afr
ica
Eu
rop
e
US
A
Oth
er
Masha X Sub-Saharan
Africa
Bruwer X X
Halliday X
Anonymous X
Question 4
Where does your primary funding originate?
Interviewee
Nig
eria
Sou
th
Afr
ica
Eu
rop
e
US
A
Oth
er
N/A
Ejekam X X
Pantham X
Masha X X
Bruwer X
Halliday X
Anonymous X
Question 5
In what currency is the majority of your financing your organization provide/source?
Interviewee
Nair
a
Ran
d
US
D
Eu
ro
Oth
er
N/A
Ejekam X
Pantham X
Masha X X
Bruwer X
Halliday X
Anonymous X
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Question 6
What/Who are your primary providers of financing?
Interviewee
Op
erati
ng C
ash
Flo
w
Insu
ran
ce C
om
pan
ies
& P
ensi
on
Fu
nd
s
(Dom
esti
c)
Insu
ran
ce C
om
pan
ies
& P
ensi
on
Fu
nd
s
(Fore
ign
)
Ban
ks
Sto
ck M
ark
et (
Nig
eria
n
Sto
ck E
xch
an
ge)
Gover
nm
ent
Ven
ture
Cap
ital
Pri
vate
Eq
uit
y C
ap
ital
Oth
er (
Ple
ase
Sp
ecif
y)
Ejekam X X Sovereign
Wealth
Funds
Pantham X
Masha X
Bruwer X X X X
Halliday X X SA Stock
Market
Anonymous X X X Customer
deposits
Restrictive Factors Impeding the Supply from These Sources/Providers
Question 7
In your opinion, what are the most restrictive factors in Nigeria that impede the use of
__________________ as a source of financing?
Operating Cash Flows:
………………………..............…………………………………………………………................……………......
Insurance Companies and Pension Funds (Domestic):
………………………..............…………………………………………………………................……………......
Insurance Companies and Pension Funds (Foreign):
………………………..............…………………………………………………………................……………......
Banks:
………………………..............…………………………………………………………................……………......
Domestic Stock Market (Nigerian Stock Exchange):
………………………..............…………………………………………………………................……………......
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Government:
………………………………………………………………………………………………......
Venture Capital:
……………………………………………………………………………………………..........
Private Equity Capital:
………………………………………………………………………………………………......
Other (Please Specify):
………………………………………………………………………………………………......
Types of Financing Mechanisms Currently and Potentially Utilized In Nigeria:
Question 8
What are the types of financing mechanisms your organization would utilize or consider to
finance retail commercial developments in Nigeria?
(Please select all that you would consider financially viable)
Interviewee
Sh
ort
-ter
m d
ebt
Lon
g-t
erm
deb
t
Rea
l E
state
In
ves
tmen
t
Tru
sts
(RE
ITs)
Con
ver
tib
le M
ortg
ages
Part
icip
ati
ng
Mort
gages
Mez
zan
ine
Fin
an
cin
g
Join
t V
entu
re
Eq
uit
y (
Lan
d)
Eq
uit
y (
Cash
)
Eq
uit
y (
Pro
fess
ion
al
Ser
vic
es)
Oth
er
Ejekam X X X X X X
Pantham X X
Masha X X
Bruwer X X X X X
Halliday X X X X
Anonymous X X X X X X
Question 9
In your opinion, what are the most restrictive factors in Nigeria that impede __________?
Short-term debt financing:
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………………………..............…………………………………………………………................……………......
Long-term debt financing:
………………………..............…………………………………………………………................……………......
Real Estate Investment Trusts (REITs):
………………………..............…………………………………………………………................……………......
Convertible Mortgages & Participating mortgages:
………………………..............…………………………………………………………................……………......
Mezzanine Financing:
………………………..............…………………………………………………………................……………......
Joint Ventures:
………………………..............…………………………………………………………................……………......
Equity (Land):
………………………..............…………………………………………………………................……………......
Equity (Cash):
………………………..............…………………………………………………………................……………......
Equity (Professional Services):
………………………..............…………………………………………………………................……………......
Other (Please Specify):
………………………..............…………………………………………………………................……………......
Operational Environment in Nigeria:
Question 10
In your opinion, what could be done by developers/financiers/land owners/construction
companies/government/etc to address the following that constrain the advancement of
retail commercial developments in Nigeria?
No private land ownership (Only long-term leases):
………………………..............…………………………………………………………................……………......
High land costs:
………………………..............…………………………………………………………................……………......
Bureaucratic procedures:
…………………………………………………………………………………………………..
Lack of local expertise:
………………………………………………………………………………………………......
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High building costs:
…………………………………………………………………………………………………..
Difficulty in obtaining financing:
…………………………………………………………………………………………………..
High financing costs:
…………………………………………………………………………………………………..
Lack of Potential Buyers for End Product:
…………………………………………………………………………………………………..
Other (Please specify):
…………………………………………………………………………………………………..
Question 11
Any additional comments you would like to share with the researcher:
………………………………………………………………………………………………......
…………………………………………………………………………………………………..
…………………………………………………………………………………………………..
………………………………………………………………………………………………......
………………………………………………………………………………………………......
…………………………………………………………………………………………………..
…………………………………………………………………………………………………..
…………………………………………………………………………………………………..
………………………………………………………………………………………………......
…………………………………………………………………………………………………..
The End