Financing Retail Commercial Developments In Nigeria ...gsblibrary.uct.ac.za/researchreports/2010/VanZylJ.pdf · 1.1 RESEARCH AREA AND PROBLEM ... On the Lekki Peninsula, ... (Pantham,

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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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Financing Retail Commercial Developments in Nigeria: Options and Challenges

MBA Modular 2009/2010

2

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,


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,


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,


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


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


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,


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


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


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


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


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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http://www.act.is/509,45/persianas-property

Behrens, R. (1990). Joint Venturing in Real Estate. Real Estate Review, 20(1), 64-69.

Benefield, J. D., Anderson, R. I., & Zumpano, L. V. (2009). Review of Financial Economics

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investment trusts (REITs). Review of Financial Economics, 18, 70-79.

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Deeble, K. E. (1999). Financing corporate real estate: A raw materials procurement approach.

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site=ehost-live on July 19, 2010.

Ezeoha, A. E., & Okafor, F. O. (2010). Local corporate ownership and capital structure

decisions in Nigeria: a developing country perspective. Corporate Governance, 10(3),

249-260.

Fine, D. (2010). Assessing Africa‟s business future: An interview with the CEO of Absa.

McKinsey Quarterly, June, 1-5.

Gbajumo, T. (2010). Gruppo Investment Nigeria Limited: Ikeja Mall Captive Power Plant –

Report on Tenders. CEM Consultants Limited.

Hallowes, C., & Manham, O. (2007, November 29). Retrieved July 7, 2010, from

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00&sn=Detail

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Iblher, F., & Lucius, D. I. (2003). Innovative real estate financing in Germany – a financial

desert? Property Management, 21(1), 82-96.

Kahn, R., & Wilson, W. (1995). The Bifurcated Mezzanine Finance Market. Secured Lender,

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Leedy, P.D., Ormrod, J.S., 2010, Practical Research: Planning and Design, Pearson

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http://www.realestateweb.co.za/realestateweb/view/realestateweb/en/page198?oid=4100&sn=Detail

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214&site=ehost-live on July 19, 2010.

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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:

………………………………………………………………………………………………......

Copyright UCT



71

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:

………………………………………………………………………………………………......

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The End

Documents

Financing Retail Commercial Developments In Nigeria ...gsblibrary.uct.ac.za/researchreports/2010/VanZylJ.pdf · 1.1 RESEARCH AREA AND PROBLEM ... On the Lekki Peninsula, ... (Pantham,