RENTAL FORECASTING IN ABUJA REAL ESTATE MARKET.

BY

Godswill A. Essien 1
B.Sc. (Land Econs.); M.Sc. (Env. Mgt.); ANIVS; RSV; MNES Joseph A. Yacim2
HND, PGD (Est Man); M.Sc (in view)

1
Department of Estate Management
2
Federal Polytechnic Nasarawa. Nasarawa State, Department of Estate Management
Nigeria. Federal Polytechnic Nasarawa State,
Nigeria.
.

Authors’ e-mail: godswillessein@hotmail.com; josephyacim@yahoo.com;

Abstract

This paper seeks to look into the problems of adequate rental forecasting of real estate
in Abuja, Nigeria. It examines among other things general transactions of real estate in
Abuja, the mode of rental determination by valuers, the reasons why the expected rental
return does not correspond with the actual rental return in most cases and the likes. The
simple random sampling technique was employed by the researcher in the
administration of questionnaire and for data analysis the percentage tables was used. It
was discovered that the reasons for inadequate rental forecasting by valuers stemmed
from poor use of modern appraisal techniques, lack of good judgment and experience,
lack of market data to imperfection of the real estate market. Based on these, the
researcher recommends the use of modern appraisal techniques, provision of good
property data bank with current appraisal manual and mandatory attendance at the
Nigerian Institution of Estate Surveyors and Valuers Compulsory Professional
Development programme among others.

Keywords: Forecasting, Appraisal, Prediction and Rental value.

Introduction
Due to the imperfect nature of real estate market, which made transactions to be done
in the secre, it is very difficult to have a fixed value for real estate. The inability of
valuers to predict or interpret accurately the value of property has therefore been
described as a product of real estate market imperfection (Millington, 1985). Millington

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(1979) identified some of the features that made transaction in real estate to be unique:
uniqueness of each parcel, immobility, the large size and bulk of typical real estate; and
the very long or permanent life of improvement to the land. With these myriads of
features, real estate market is fraught with so many problems in Nigeria. Apart from the
absence of data for transaction as earlier said, there are some salient factors which
surveyors usually grappled with in the course of duty to their clients. These include
among other things, the problem of inadequate forecasting of rental income accruable
to their clients, lack of market for these estate even where the amount has been
ascertained and lack of accurate data.

Valuers in the course of duty used different techniques to determine value for real
estate. While some of these techniques are alright, others are not, especially when
considered in the light of the volatile nature of the Nigerian economy. The traditional
techniques of determination of value are somewhat misleading as they do not reflect
the actual realities on ground. The choice of the all risk free yield and the implied way of
incorporating rental growth into the valuation are problem. The modern techniques
seem to have a little edge over the conventional techniques as it has less error and the
rental growth is seen in explicit terms. That is not to say that the forces of demand and
supply do not play vital role in influencing the value of real estate in Abuja. They do and
valuers too put into consideration their interplay. This paper has examined the problems
of accurate rental forecasting of real estate in Abuja.

Statement of Problem
Real estate market in Nigeria is bedevilled with so many problems. Apart from the
absence of data for transactions, there are some factors which valuers usually grappled
with such as the physical state of the property, uniqueness, size and age of holding etc.
The Abuja real estate market is one in which accurate rental forecast has become a very
serious problem in recent times. The landlords would want a particular amount to be
fixed as rent. Their argument is based on inflation rate, high cost of building materials

2
and interest rate charged by banks where the funds are borrowed. However, in practice,
these amounts are not easily realisable after completion of the property, thereby
making the real estate to stay for a very long time in the market without tenants for the
property. In another similar way, the property owner may want to sell and the valuation
is beautifully prepared for sale. However, at the end, buyers would not agree with the
sales value thereby making the valuation report prepared to look sub-standard. The
clients who are already not too impressed with our valuation (Ogunba, Ajayi, Aluko,
2005 and Ojo, 2006) are depending on the judgement of the valuer in fixing price may
become disappointed. How do we overcome these problems of rental forecasting to
enable the clients get the projected rental from their real estate? Solutions to these
problems would among other things form the bedrock of this paper.

Aim and Objectives

The aim of this work is to provide a framework for rental forecasting in Abuja real estate
market. To achieve the above aim, the specific objectives are to:
1. Present the current state of rental forecasting.
2. Identify the current practice of rental forecasting in Abuja and,
3. Identify the inadequacies of the current rental forecasting in Abuja.

Overview of Abuja Real Estate Market

Real estate resources have come to stay as one of the best forms of investment. Abuja
real estate market is one of the fastest growing markets because of the seeming fact of
Abuja as the ‘seat of power’. This made the pressure on real estate resources to be
extremely high. Apart from acquisition of real estate resources for the purpose of
owner-occupation, many are engaged in acquisition or development for the purpose of
making monetary returns. These have made the real estate professionals to be engaged
in valuation with the aim of giving advice to their clients on amount to take as rent or
where it is for outright disposal, the amount to take as sales price. While some will give
good predictions with a minimum error, others will give a value that although, in the

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short run the client will be happy with, but the end result will be frustration. This
research work is centred on the commercial as well as residential properties within the
capital city of Abuja. This is so because a good number of valuers are engage in the
appraisal and management of these properties in the capital city.

The Nigeria real estate market is like other real estate market of other countries that are
not perfect. Very many appraisal experts are still using the widely criticised conventional
methods of valuation which though is alright in itself (Ogunba, et al, 2005), but due to
the volatile nature of the Nigerian economy cannot give accurate value that will reflect
the changing economic situation of the country. The modern appraisal methods are
preferred as the problem of inaccurate forecast of rental is reduced to barest minimum.

Review of Literature
Market research and analysis are essential pre-requisite in forecasting for the execution
of any sound investment appraisal. Forecasting is essentially a future projection of
events based on the analysis of collected and collated information. It involves delving
into the past, examining the present and projecting to the future. It can be classified
into short-run, middle-run and long-run depending on the nature of information being
sought (Granger, 1989). The views of Messner, Babcock and Findlay (1981) in relation to
forecasting are such that “In forecasting, the analyst deals with the extension of historic
trends and/or assumes that the past will continue in the future. The observed
relationship is assumed, would extend beyond the range of data inputs. Projections are
quite useful, but if the results are to be viewed critically, the trend and appropriate
guess could also be made. The presumption is that all factors influencing that which is
being projected will continue to act upon the projection in the same way and in the
same magnitude as in the case of the subject of study which is rental forecast.

According to Sivitanides (1997) Landlords' perceptions of market strength may not be

affected only by demand-side variables but also by supply-side variables, such as

4
competitions. Under such assumptions, rapid increases of competitions in the present
may also generate expectations of high levels of competitions in the immediate future.
While viewing the market trend, landlords may want to adjust rental rates immediately
so as to have the vacancies fill faster. Very many landlords will not want their properties
to say in the market for a very long time without tenants.

Do and Grudnitski (1992) carried out a study to predict rentals for residential properties
using both Multiple Regression Analysis (MRA) and Artificial Neural Network (ANN)
based on the eight inputs: age in years, number of bedrooms, number of bathrooms,
square footage of living area, number of garage stalls, number of fireplaces, number of
stories and lot size. Their MRA model consisted of some variables which were used to
explain housing price variables for property. The ANN model which was used consists of
an input layer of eight neurons, a hidden layer of three neurons and an output layer of
one neuron representing the estimated value of the property. The results of that study
show that the ANN is nearly twice as accurate as the MRA model in estimating
residential property values. It is the view of the authors that these methods appear to
be a better approach in determining real estate prices in our contemporary time.

During the 1980s, double-digit vacancy rates caused significant decreases in office space
rents, which prompted a number of empirical studies to be done on the rent adjustment
mechanism in the office space market (Hekman 1985; Rosen, 1984; Shilling, Sirmans and
Corgel, 1987; Wheaton and Torto, 1988, 1994). Most of these studies discovered that
rental changes in the commercial real estate market are triggered by excess demand or
excess supply, as measured by the deviation of the prevailing vacancy rate from a
"natural" or "structural" vacancy rate. But managers of investment are not perfect
forecasters. While managers who are right most of the time presumably do very well,
“right most of the time” does not mean merely the percentage of the time a manager is
right. For example, a Tucson, Arizona, weather forecaster who always predicts “no rain”
may be right 90% of the time, but this “stopped clock” strategy does not require any

5
forecasting ability (Bodie, Kane and Marcus, 1998). From the foregoing, it is very clear
that a valuer is not bound to always forecast the right amount for real estate. This is one
of the banes of the real estate market as there are times the landlord or the valuer may
predict an amount that may prove to be right at one time, at another time this
prediction may turn out to be wrong depending on the market forces (indices). The
views of Cornwall (2006) tend to agree with the above authors when it stated that
“accurate revenue forecasting is one of the single most important steps an entrepreneur
takes in planning for a new venture. Yet, it was discovered that most entrepreneurs do
not spend enough time determining how much revenue will come in the front doors.
Although underestimating expenses is a common mistake in planning, missing the mark
on revenues can be catastrophic”. Real estate development is essentially vulnerable to
broad based social, economic and financial changes. Changes in consumer preferences;
inevitable time-lags between the conception of the project and its completion, changes
in interests’ rates etc. are difficult to predict over long periods of time and once a
development has been started it is difficult to change. In addition, the main variables
(such as land price, building and ancillary costs and professional fees) that influence
development are all sensitive to change. No developer of project can be sure of market
conditions that will prevail as at the time when the development would be completed
(Bello and Ojo, 2005). Ogbuefi (2002) said “Forecasting can be subjective (discretionary)
or quantitative (statistically). It could at best be described as both an art and a science”.
From the various findings of the authors above, it can be seen that though valuers
carryout their appraisal with utmost precession in order to predict the cost of the real
estate development as well as the possible return that the client should expect from the
contemplated project, their predictions on real estate prices may in most cases turn out
not to reflect the true revenue that may accrue to the client. The clients who are at the
receiving end are in most cases dissatisfied with our work, hence the need for valuers to
be very careful in their choice of methods.

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Methodology and Case Study
In a bid to gather information for this study, the researchers administered questionnaire
to practicing estate surveying firms in Abuja. A total of 60 questionnaires were
distributed randomly to the estate practitioners out of which, 44 were completed and
returned representing about 73%. Personal oral interview was also carried out by the
researcher including reconnaissance survey to know the extent of voids in Abuja real
estate market. This gave the researchers a clearer view of valuers predictions and what
was actually on ground. Recourse was equally made to journals, textbooks, conference
papers etc. The simple random sampling technique was employed in administration of
questionnaire while percentage frequency distribution tables were used for analysis.

For the purpose of this study, the real estate market of Abuja has been chosen as the
case study. Though the real estate market of Abuja is still in its crawling stage as there is
no accurate information on pricing, valuers act based on the little knowledge they have
on a particular area. In most cases valuers used the widely criticised conventional
methods of valuation to determine value of a property. Only few valuers make use of
the modern techniques of valuation in determining values of real estate in Abuja. In
another case, the landlord will unilaterally assign a particular amount for his property
and where the valuer raised eyebrow on that crude way, the property owner will look
for another who is ready to compromise with him/her. These and many others have
become the bane of adequate rental forecasting for real estate in Abuja.

Abuja is the Federal Capital of Nigeria. It was created in 1976 but officially became the
administrative capital in 1992, during Gen Ibrahim Babangida era. The Federal Capital
Territory was carved out from the then three neighbouring states of Niger, Kwara, and
Plateau States. It is bounded on the north by Kaduna State, on the east by Nasarawa
State, on the south by Kogi State and on the west by Niger State. It locates between

7
latitude 72° 5’ north and 9° 20’ north of the equator and longitude 6° 45’ east and 9° 39’
east of the Greenwich Meridian.
The development of Abuja with its satellite towns was planned to be in four phases.
However, it is only the 1st phase that has been fully developed, with work still going on
in the 2nd phase. Developments of phases three and four are yet to commenced
(Adebayo, 2007)

Data Analysis and Discussion

Real estate developments are always carried out in expectation of future returns.
However, the reliability of any decision instrument used in this regard depends to a
large extent to how the actual differs from the expected rentals, as could be seen in this
section.

An Overview of the Abuja Real Estate Appraisal Practice

The researchers were able to explore means by which practitioners carryout appraisal
work in order to advise their clients on the possible outcomes of their contemplated
project. In practice, 70% predictions do not match the actual expectations. During the
course of this study, the researchers found out that some landlords fix rent arbitrarily.
This represents the views of 24 respondents representing 55%. About 34% of the
respondents said rent is determined by using the direct comparison method, while 11%
of the respondents said they use their discretion in fixing rent and when tenants are not
forth coming they result to adjustments which is not good enough for the practice. Out
of the valuers surveyed, only 80% are involved in appraisal of projects. The remaining
20% have not handled appraisal exercise before. From the responses made so far with
respect to accuracy of their predictions, 40% said their predictions in most cases match
with the actual work on ground, out of this number some employed the modern
techniques while other use the traditional techniques and ones the project cannot pay
back within the required period they ask their clients to discard it. 60% of the
respondents are of the view that their appraisal work do not match with the actual

8
though with marginal error. According to them inflation and high cost of building
materials are factors that limit the efficiency of their predictions. The possibility of
having tenants for the properties was also explored. According to 66% of the
respondents, Abuja is a city that has an exceptional market where demand for real
estate always outweighed supply. The result of this is high rent for real estate. During
the peak of the demolition exercise occasioned by the last regime, rent for real estate at
the periphery skyrocketed considerably. On possibility of getting tenants for the
properties, 34% said in some cases they experience difficulty in getting tenants
especially where rents are charge arbitrarily without recourse to appraisal techniques
thereby breeding void state. There is also the problem of delay in getting buyers for this
real estate in cases where the property owner wants to dispose. The practitioners in
most cases are concerned about their fee without considering the problem emanating
from delay in getting a buyer.

Factors Affecting Accurate Rental Forecasting / Predictions by Valuers.

From the field survey conducted, there are myriads of factors that affect effective
prediction by professionals. In the course of this work, the researchers discovered that
valuers in their predictions take into considerations some salient features such as:
economic indices, demand indices, rental indices and performance indices to mention a
few. The table below gives a vivid description of the factors that affect effective
prediction of rents by professionals.

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Table: 1
Reasons for poor rental forecasting ability of real estate by Valuers.
NO REASONS SA% A% U% SD % D%
1 Lack of market Data 50 27 5 13 5
2 Lack of experience of valuers 4 14 23 45 14
3 Poor skills in use of modern appraisal 31 55 5 5 4
techniques
4 Imperfection of real estate market 27 32 27 9 5
5 Clients undue pressure 23 31 27 14 5
6 Use of conventional methods 23 27 18 18 14
7 Lack of cooperation among valuers 32 23 32 9 4
8 Non familiarity with modern appraisal 27 54 5 14 0
techniques
Source: Researchers’ field survey 2008
SA=strongly agree, A= agree, U=undecided, SD=strongly disagree, D=disagree

From the Table 1 above, 50% of the respondents indicate that lack of market data is one
of the reasons for poor rental forecasting ability of valuers. As regards to the use of
appraisal techniques, 31% of the respondents strongly agree while 55% agreed that a
poor skill in the use of modern appraisal techniques is a factor in valuers poor appraisal
skills. This tends to agree with Baum et al, 1989 which said lack of experience is one of
the reasons for valuers’ inadequate predictions. This also agrees with the views of some
valuers 23% and 27% of the respondents which either strongly agreed and agreed
respectively said the use of traditional appraisal techniques is one of the reasons for
their inadequate forecasting ability. Though, a good number of the respondent 45% did
not agree with the fact that lack of experience is one of the banes of their inadequate
predictions ability. Surprisingly, some clients are given undue pressure on valuers to tilt
their appraisal reports in their favour even though the outcome is such that the project

10
is not viable. During the authors’ interview with an expert in appraisal techniques, it was
discovered that some clients mount undue pressure on valuers to ensure that the
contemplated project is viable even when all indicators points to the fact that the
residential or commercial property will not payback within the stipulated periods.

However, in the course of this research work, it was discovered that some clients when
they are privy to the fact that the project will not be viable, asks the valuer to
discontinue with the appraisal report. Valuers predictions in most cases do not match
with the actual occurrences, though in some cases the margin of error is negligible as
was the case in the recent commercial building project at Wuse II where it was
predicted that the project would cost N200,000,000.00 (two hundred million naira only).
During the actual development on site, the projected amount was slightly increased by
10%. It was a building that could house about 50 tenants with a projected cash inflow
(rentals) of N350, 000.00 per annum for each of the tenants. However, at the end of the
project there was a buyer who was ready to part with N230, 000,000.00 (two hundred
and thirty million naira only). The building was sold. This was not the case with a
shopping mall which was handled by a valuer where it was discovered that the project
will not payback in 15year period which is the highest, the project has to be jettisoned.
Valuers do not cooperate with one another as could be seen from the responses, 32%
and 23% of the respondents either strongly agreed or agreed, that one of the problems
of prediction is the fact that there is no mutual cooperation between them. Some
valuers are too secretive in keeping some vital information which could be of help to
others.

Panacea to the Problems of Rental Forecasting of Real Estate By Valuers.

Though there have been problems with accurate forecasting of values, the panacea lie
in the hands of valuers themselves. Table 2 below highlighted some of the ways by
which these menaces could be addressed.

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Table: 2
Solutions to problem of rental forecasting of real estate by Valuers.
NO Solutions SA % A% U% SD % D%
1 Provision of good data bank 68 23 9 0 0
2 Exposure to practical on appraisal in institutions of 68 27 5 0 0
higher learning
3 Provision of manual by NIESV to guide valuers in their 23 50 14 9 4
predictions.
4 Compulsory attendance at CPD to update knowledge 46 18 18 0 18
5 Increased awareness on the use of modern appraisal 19 81 0 0 0
techniques
6 Improved sharing of ideas among valuers 27 64 9 0 0
7 Incorporation of advance computer studies and 68 32 0 0 0
information mgt. in real estate training at tertiary
institutions.
8 Improved syllabus and curriculum at Tertiary 59 36 5 0 0
institutions
9 Capacity building for academia 40 40 15 5 0
Source: Researchers’ field survey 2008
SA=strongly agree, A= agree, U=undecided, SD=strongly disagree, D=disagree

From the Table 2 above, 68% of the respondents said provision of property data bank
will help valuers to have current information regarding recent transactions and also
exposing students’ of estate management in tertiary institutions to practical will help to
ameliorate these problems. Valuers’ guide in carrying out appraisal work will also help.
This will make valuers’ to know how to approach problems in the course of duty as given
by 23% and 50% of the respondents strongly agreed and agreed with that view.
Overwhelming percentage of 81% advocated the use of modern appraisal techniques in

12
carrying out predictions as this will reflect the changing volatile nature of the Nigerian
economy. Sharing of ideas among professionals will also be of immense benefit. The use
of computer packages that will aid in practice and the review of syllabus in tertiary
institutions will help the new breed of surveyors and valuers to be vast in the use of
these modern facilities that could facilitates the practice of appraisal of projects. The
academia should have constant capacity building workshop to be abreast with current
issues.

During the course of the researchers’ interview, a very crude way by which valuers
managed these problems was discovered. One of these is that where the amount
projected is too high, like in the case of rental and demand predictions the valuer will
immediately reverse to a lower amount which tenants would be able to afford. From
experience, this is found to be working. Conversely, where the amount of rent fixed by
say landlord is low, in case where the landlord’s pressure is unduly high, the valuer will
increase it depending on the level of competition which is orchestrated by the forces of
demand and supply.

Conclusion / Recommendations
The paper dwelt on the problems of rental forecasting in the Abuja real estate market.
The problem of rental forecast is a very serious threat which valuers are grappling with
in Abuja in particular and Nigeria in general. The resultant effect may be that clients may
be disillusioned when appraisals prepared by estate surveyors and valuers do not match
with what operates in reality (Ojo, 2006). There is a great danger if the problem of rental
forecast is not tackled immediately. Though the margin error which in some cases is
inevitable should not be too enormous as to jeopardise the valuers predictions. The
paper highlighted the fact that inaccurate rental forecast stemmed from poor
awareness to the use of modern techniques, which for now is most appropriate due to
the volatile nature of the Nigerian economy others are clients undue influence and lack
of property data bank among others. There is need for further research into the

13
problem of rental forecast of industrial properties, agricultural properties and hotel
premises which this research did not cover to further examine these problems with a
view to tackling them. Practitioners should not settle for mediocrity but should improve
the quality of their work by constant attendance at Continuing Professional
Development; practitioners should also give vital information to colleagues. The use of
modern appraisal techniques should be imbibed to reduce errors in valuers predictions.
Finally, tertiary institutions offering courses leading to the award of diploma or degree
in estate management should increase students’ exposure to practical and computer
application.

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