Three Major Reasons Why Real Estate in Lagos Is Overpriced

There are three major reasons why real estate in Lagos is overpriced: the cost of finance, the cost of construction, and the cost of documentation. Let’s go through them one by one:

1. The Cost of Finance

What we don’t realise is that real estate is primarily a finance business before it is a construction business.

• Interest Rates and Loan Availability: When developers or buyers finance land purchases through loans, high-interest rates increase the cost of borrowing. This added cost can lead to higher land prices as sellers try to cover the higher financing costs. Limited availability of affordable financing options can constrain the number of potential buyers, increasing competition for available funds and potentially driving up land prices.

• Risk Premiums:  Higher risk premiums due to economic instability or high default rates can make financing more expensive, contributing to increased land prices as developers seek to offset these costs. This means that before a developer considers purchasing land, involving an architect, or initiating any aspect of the project, they must first secure the necessary funding and assess the associated risks.

2. The Cost of Construction

• Potential Development Costs: The cost of construction influences land prices indirectly. Land in areas with lower construction costs may be priced higher because developers anticipate higher profit margins from subsequent property development. Conversely, land in areas where construction is more expensive may see lower demand, potentially reducing land prices.

• Infrastructure Development: The cost of developing infrastructure (roads, electricity, water, sewage) in undeveloped areas can significantly impact land prices. Land that already has the necessary infrastructure in place is more valuable and, therefore, priced higher.

• Building Regulations and Standards: Land in areas with stringent building codes and regulations may have higher prices due to the increased cost of ensuring compliance during construction. Developers factor in these potential costs when determining how much they are willing to pay for land.

3. The Cost of Documentation

• Legal and Regulatory Fees: The cost of obtaining necessary documentation and legal clearance for land transactions can be substantial. These costs, including legal fees, stamp duty, registration fees, and survey costs, are typically factored into the land price. Complexities in land ownership and the need for thorough due diligence to ensure clear title can also add to the documentation costs, driving up the price of land.

• Government Policies and Taxes: Government policies, such as property taxes and land use charges, directly affect the cost of owning land. Higher taxes and fees imposed by the government are passed on to buyers in the form of higher land prices. Policies aimed at land regularisation and titling can also impact prices by making previously unregistered land more valuable once properly documented.

Combined Impact on Land Prices:

• Market Dynamics: The interplay of these factors creates a complex market environment. High construction costs and extensive documentation requirements may limit the supply of developable land, driving up prices. Conversely, accessible financing can increase demand, further pushing up prices.

• Location-Specific Effects: Prime areas in Lagos, such as Ikoyi, Victoria Island, and Lekki, see a more pronounced effect of these factors due to higher demand, better infrastructure, and stricter regulatory requirements. This results in significantly higher land prices compared to less developed or peripheral areas.
• Speculative Investments: The perception of future value and potential for high returns on investment can lead to speculative buying, which inflates land prices irrespective of current development costs or financing conditions.

Conclusion

The prices of land in Lagos are shaped by a combination of financing costs, construction expenses, and documentation requirements. These factors contribute to the overall cost of land development and are passed on to buyers in the form of higher land prices. Understanding these influences is crucial for investors, developers, and buyers navigating the real estate market in Lagos.