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EDITORIAL BOARD
Editor - in – Chief
Editor
Associate Editor
Production Editor
Business Manager
Editorial Secretary
Legal Adviser
Review Editor
-----------
Dr. G. K. Afolabi
Dr. S. A. Adebola
Mr. S. A. Owolabi
Mr. D. O. lyanda
Dr. J. O. Aluko
Mr. G. N. Okezie
Mrs. O. Oyebolu
Mr. V. O. Erukainure
Mrs. Louisa James
Mrs. O. Nwazue
EDITORIAL ADVISERS
Professor A. Soyibo, University of Ibadan, Ibadan
Professor O. Ojo, Obafemi Awolowo University, Ile-Ife
Professor J. A. Ayoade, University of Ibadan, Ibadan
Professor P. E. Oribador, Obafemi Awolowo, University, Ile-Ife.
Mr. Layi Afolabi, Wema Bank Pic, Wema Building, Lagos.
Professor I. F. Megbolugbe, John Hopkins University, U.S.A
CONTRIBUTING EDITORS
Dr. Rasaq Adefulu, Olabisi Onabanjo University, Ago-Iwoye.
Dr. Olusegun Oladipo, University of Ibadan, Ibadan
Dr. Ayandiji D. Aina, Babcock University, Ilishan-Remo.
EDITORIAL CONSULTANT
Professor J. A. Kayode Makinde, Vice Chancellor, Babcock University
EDITORIAL
FOREVER BJMASS
POLITICS AND THE ECONOMY
Corruption and Fraud are two twin-vocabularies that are used interchangeably to
mean practically the same thing. Conventional thinking on the scope and
delimitation of this vice goes beyond financial or economic matters. Rather, it
requires broadening the scope to include certain social and psychological
offences which have grave consequences on the nation's socio-economic life.
The multifaceted predisposing factors to this cankerworm, that are examined in
this Journal therefore inform the advisability of a multidimensional approach in
solving the problem.
Is the concept of environmental accounting new, or are new dimensions
evolving? What about exchange rates are they politically determined, or we are
playing politics of exchange rates?
Find out from the article on Exchange Rates and Political Agenda.
Events in the Banking Industry continue to generate discussions. What are the
challenges facing the key players in this sector? The article on Bank
Consolidation provides a vital clue.
These and other issues of contemporary value occupy the center stage in this
stimulating edition of your favourite Journal, BJMASS. The views expressed in
our editions remain those of the authors exclusively, and do not necessarily
approximate those of the Babcock University Administration.
The Board of BJMASS wishes you compliments of the season.
Gabriel K. Afolabi, Ph.D
Editor-in- Chief
Babcock Journal of
Management and Social Sciences
Volume 5. Number 2 January, 2007 Special Edition
SECTION A
Education and Leadership Styles in Management
1.
The Quest for Productive Students' Management in Nigerian University System: Implications for
Democrative Governance - A. Tayo..………………………………………………...........................1
2.
Education - Human Development Nexus: The Nigerian Experience
- L. O. Oderinde & M. A. Adebuyi..................….............................................................................12
3.
Leadership Styles and Dynamics: A Holistic Approach - J. O. Egbuyi.............................................32
SECTION B
Development in the Capital Market
4.
Portfolio Management in the Nigerian Banking Industry: A Case Study of Guaranty Trust Bank Pic.
–Adeoti & A. O. Salami.…................................................................................................................51
5.
The Determinants of Liguidity of the Nigerian Equity Market - I. Bamidele....................................65
6.
Real Estate Backed Securitization as a Veritable Tool for Market Development: An Assessment of
the UPDC Model -J.A.Bamiduro & Aro-Gordon .........................................………………….….83
SECTION C
Legal Issues in Crime/Punishment, Audit Committees and Globalization
7.
Crimes and Punishment: The Issue of Death Penalty in Nigeria
-E. A. Sokefun……...........................................................................................................................101
8.
Globalisation and Challenges in the Status of Women: The Experience of Nigerian
Women. -Y.Aluko & AAdenuga.….................................................................................................115
9.
Audit Committee In Nigeria Companies: A Need for urgent legislative Revisit
-I. R. Akintoye…..............................................................................................................................131
10.
Globalization and the Background Conditions for Regional Economic Integration in Sub-Saharan
Africa - Razaq A. Adefutu……………...........................................................................................137
SECTION D
Issues in Environment Accounting and Firms Failure
11.
Empiricism and Predictability of Firms Failure Predictor in Nigeria from 1985 to 2000
- J. Egwakhe….................................................................................................................................151
12.
A Survey of Environmental and Organizational Factor Affecting Transfer Pricing in Nigerian
Manufacturing Industry. - S. Fatokun..............................................................................................166
13.
Environmental Accounting and National Development -S. B. Adeyemi & S. A. Owolabi.............190
14.
Factor Militating Against Budget Performance in the Public Service- J. J. Adefila........................213
SECTION E
Internet Service, International Politics and Change Agents of Management
15.
Change Management and Change Agents: Classifications, Responsibilities and Critical Success
Factors – I. k. Muo,…………...........................................................................................................226
16.
Internet Availability and Utilization in Academic Libraries in the South-West Nigeria
–Yocob Haliso........................................................................................................………..............246
17.
International Politics of Economic Reforms: Issues in Public Policy in the Banking Sector in
Nigeria - Agbo U. Johnson..….........................................................................................................262
iv
CALL FOR PAPERS (Latest July, 2007)
c/o The Editor, BJMASS
Faculty of Management and Social Sciences
Babcock University, Ilishan-Remo,
P. M. B. 21244, Ikej'a, Lagos, Nigeria.
v
REAL ESTATE-BACKED SECURITIZATION
AS A VERITABLE TOOL FOR CAPITAL
MARKET DEVELOPMENT: AN
ASSESSMENT OF THE UPDC MODEL
By: Dr. J. A. Bamiduro
and
Stephen O. AroGordon
The question in real estate is finance. The increasing globalization and new
development in information and communication technology (ICT) have made old,
traditional approaches in real estate finance grossly inadequate. Creative
financing methods have become pressing in the face of growing urbanization
bringing the need for commensurate increase in property stock, especially in
emerging markets like Nigeria. Real Estate securitization (RESECU) - the issuing
of marketable real estate-backed securities as an alternative to borrowing from a
bank - has emerged from these global phenomena of globalization, new ICT, and
increased urbanization. This study examines RESECU as a new business model
to rescue investors and property developers from the failure of traditional real
estate financial system. Illustrating with the case of arguably Nigeria's foremost
property developer, UPDC (UACN Property Development Company Pic), the
study suggests that RESECU, in its diverse forms could be a veritable tool for
developing the capital market. The creation of a strong viable and efficient real
estate capital market has perhaps become very critical, if emerging economies
hope to achieve the much-publicized Millennium Development Goals (MDGs)
Background Information
According to Bush (2003 p.20), "no nation can expect to develop its vast
human and natural resources without a viable, strong and efficient capital
market". Nowhere else is the challenge of capital market development more
glaring than in the African nations. 50% of Africans currently live in poverty
while urbanization is increasing rapidly at an annual rate of 5%, leading to
inadequate urban housing and limited access to basic service. Only 37.2% of
*Bamiduro, is of the Department of Business Administration, University of
llorin, while AroGordon is of Gusau Business School, Gusau, Nigeria.
83
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BJMASS VOL 5. NO 2 JANUARY, 2007
urban housing are connected to potable water resources, with 12.7% connected to
sewage system (Charles, 2000). 70% of urban populations are slum dwellers,
without adequate sanitation, water, power, and transport or health service. "The
Guardian" (2005) indicates that the informal sector provides the means of
livelihood for 78% of the urban labour force. Also in less than two decades, more
than 50% of the population will be living in African cities with severe housing
and social infrastructural implications.
Shelter (real estate) is the second most important human need after food
(Jakande, 2004). The task of housing the population for residential, commercial
and other purposes is an investment opportunity as it is an economic challenge.
The problem in real estate is finance largely because property development is
capital-intensive requiring relatively long-term repayment maturities.
Regrettably, traditional financial system has tended to rely more on the money
market segment of the financial markets, where key players like banks and
mortgage institutions are particularly sensitive to unstable monetary policies.
Adverse changes in such indicators as interest rate and exchange rate could have
immediate impact on liquidity and credit performance. Therefore the challenge of
financing urban and housing development is no less severe in Nigeria, Africa's
most populous nation with about 140 million people. "The Punch" (2004)
recently quoted available statistics from Central Bank of Nigeria and Federal
Office of Statistics indicating that Federal Government's cumulative commitment
of N14.2 billion (1994-1998) to housing was a meager 0.28% of industry's
requirement. The banking industry's loan/deposit ratio has shown consistent
declining trend form 71.4% in 1997 to 43.7% in 2000. The point is that the
banking industry faces enormous problems of their own, with their bad loan
portfolio and the tough regulatory environment, while public financing of real
estate development has worsened with heavy debt burden in the face of
increasing social/governance responsibilities.
So, where is the hope for housing and urban development with the
apparent failure of commercial banking? This question, coupled with increasing
globalization of financial market, provide the context for the' evaluation of
property-backed securitization as an emergent financial instrument.
By
repackaging real estate holdings, loans, or debts into marketable securities, thus
replacing institution-based intermediation with,, market based intermediation,
securitization has emerged as an important | funding for housing and urban
development efficiently, and in the process, help to deepen the capital market by
attracting investible funds hitherto out of , the reach of deposit-seeking traditional
lenders. Statement of Research Problem:
This study is intended to answer the following three critical questions:
BJMASS VOL 5. NO 2 JANUARY, 2007
85
Given the failure of the "old world" estate finance system as exemplified
by the widely reported credit shortages, fluctuating interest rates, illiquid
real estate market, the banking crises, finance houses' crises, PMI's
distresses and deficit public financing, isn't there a need to formulate a
viable alternative model to solve the obviously structurally defective
housing finance system?
Given its high potential of being the final solution to the crisis in housing and
urban development finance system especially in Africa, isn't there a need
for deeper understanding of Real Estate Securitization (RESECU) as one
of the most important financial instruments of our time?
Given that Nigeria has only one viable real estate stock over the past six years
despite the remarkable economic benefits of the securities market,
shouldn't all stakeholders in property investment market begin to address
the low level of awareness of RESECU as a tool for capital market
development?
Justification for the Study
The emergence of real estate securitization in Nigeria represents an
important innovation in the way capital is raised to finance acquisition and
improvement of housing and urban infrastructure. The task of sheltering Nigeria's
140 million people under acceptable living standards poses a major challenge for
policy-design and national development. Therefore, as Hanson (1972, p. 17) once
remarked a in similar context, a study of the creative means by which total
volume of real estate stock touching the lives of everyone, could be increased is
at once a practical necessity and a moral obligation. The major potential benefits
of this project are outlined below:(i)
Real estate development where everyone participates. The Constitution
of the Federal Republic of Nigeria (1999) seeks for example, a national economic
prosperity that is citizenry driven. Real estate securitization is a business model
that depends on widest participation of the citizens in wealth creation thus
helping to promote the fundamental economic objectives of the nation. Real
estate securitization is thus, perhaps, a new dimension of fundamental human
right; the right to decent living,
(ii)
As Nwakwo (1985, p. 119) pointed out, the Nigeria capital market has
remained an emerging market with limited products available for trading.
Development and introduction of real estate securities could deepen the market
by Nl trillion annually, thus helping to solve the problem of "scarcity of securities
in terms of quantity and regularity"
(iii)
Not much is known about real estate securitization at the moment, this
study could promote the much needed awareness by stakeholders, including
governments at all tiers, legislators and regulators, real estate developers and
construction companies, estate managers, valuers, stockbrokers and investment
advisers, financiers and mortgage bankers,
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BJMASS VOL 5. NO 2 JANUARY, 2007
foreign and local investors desiring creative real estate financial instrument
in a changing world.
(iv)
Finally, the project utilizes techniques of fundamental security analysis,
which should be a useful guide to real estate investors generally, thereby
optimizing investors' returns and perhaps reducing risk from other investment
outlets.
Research Objectives:This study is aimed at the following three major objectives:To appraise the economic value of real estate-backed securitization as an
emergent financial instrument for developing the capital market.
To demonstrate the critical role of real estate-backed securitization in
capital market development using the UPDC model,
Finally, to draw conclusions based on the research findings.
Scope of the Study
This is a general appraisal of the real estate equity sector of the Nigerian
Stock Exchange (NSE). The study did not concern itself with the technicalities of
securitization, the listing requirements on the stock exchange, and such other
trading/floor activity issues. Rather, the study investigates the basic economic
ingredients of real estate securitization using the case study approach. The case
appraisal concentrated on published financial and stock market data for the
research. A product sample and stock market indices/ratios were used to test the
hypotheses. More quantitative volatility and sensitivity test are beyond the scope
of this project. Stock market data emphasized primary (annual) market trends
only; secondary (daily) fluctuations are excluded.
Review of Literature
Nigeria's Real Estate Industry
From mid-to late-1990s, real estate was largely inactive, following the
lull that pervaded the entire business landscape because of the failed political
transition programmes after the June 12th, 1993 electoral crises. By the time the
military handed over to civilian administration in May 1999, interest rate had hit
the roof (lending rate at 30% and MRR at 20.7%) with adverse effect on cost of
funds. Real estate business was affected by the fact that with the limited business
prosperity, prospective buyers/tenants could not take up vacant properties in
some locations while other clients were in difficulty fulfilling their payment
obligations.
Since 2000, the real estate large-scale housing sector has improved
steadily with increased private-sector participation coupled with government's
renewed interest in the sector through the newly created Federal Ministry of
Housing and Urban Development (FMHUD). Among the leading private-sector
developers are UACN Property Development
BJMASS VOL 5. NO 2 JANUARY, 2007
87
Company Plc (UPDC), Good Homes Limited, HFP Engineering Company
Limited, Skyview Estate Limited, Union Homes Saving & Loans Limited, Aso
Savings & Loans Limited, etc. These firms have real estate schemes concentrated
mostly in Lagos and Abuja.
There has also been increasing professionalization of housing delivery
system through the establishment of REDAN (Real Estate Developments
Association of Nigeria), BUMPAN (Building Materials Producers Association of
Nigeria) and MBAN (Mortgage Bankers Association of Nigeria). Real Estate
Securitization Concept
Securitization has been defined, either from strategic or operational
viewpoints. Perhaps the simplest strategic definition of Securitization is "the
issuing of tradable securities as an alternative to borrowing from a bank "
(Bakare, 2000, p.234). It could also be seen as business investment that is
represented by securities rather than direct sole ownership (Appraisal Institute,
2002, p.323) or, the substitution of market-oriented intermediation for institutionbased intermediation (Sanusi, 1996). Based on Kothari (2004), operational
definitions such as "assignment of receivable" or "packaged cashflows" have
been the dimension of discourse among some international authors who dwelt
more on the technicalities and sophisticated applications of Securitization rather
than its overall economic value. The biases notwithstanding, there is a consensus
about its newness and its motivations by a global world of computers and
telecommunication. There is also operational unanimity in the view that
Securitization essentially bypasses traditional intermediaries and link borrowers
directly to lenders/investors, thus avoiding the intermediating role of bank and
the attendant cost. Securitization thus reduces agency costs and provides cheaper
funding (Schwarcz, 2004)
Corporate Finance literature seems to place greater emphasis on "debt
Securitization" than equity or other forms of Securitization. The Nigeria authors
particularly tend to emphasize debt Securitization perhaps because of the wellpublicized concern about Nigeria's debt burden. (Bala, 2004). Securitization was
also conceived as the conversion of illiquid individual loans or debt instruments
into liquid marketable securities using credit enhancers (Obaseki, 2004). The bias
towards debt Securitization notwithstanding, the point must be made that central
idea is to package cash flows (building assets) and split them into marketable
securities (Kothari, 2003). Tradable proprietary or credit financial papers or
certificates collectively known as "Securities" are the objects or output of any
Securitization process.
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BJMASS VOL 5. NO 2 JANUARY, 2007
Real Estate Securitized Companies (RESCOMS)
RESCOM is the model for this study. RESCOM is a real estate equity,
which is publicly traded in the capital market (Appraisal Institute, 2002, p.233).
A RESCOM must be registered or incorporated under the Companies Act in force
at the time of registration. RESCOMs can raise large sums of capital, provided
the sponsors of the proposed company can persuade the public that its prospects
are well founded. The prospects of raising large amounts of capital is enhanced
by the easy transferability of shares on the stock exchange. Based on business
organization theory and practice, the key advantages of a RESCOM are its
indefinite life span, the "limited liability" of members, and its superior ability to
attract funds through issuance of various types of securities (Bamiduro, 2000).
The RESECU framework is diagrammatically presented in Fig. 1 below. As
illustrated, the strategic value of RESECU is based on three premises:
Corporate strategic analyses would reveal the opportunities and challenge of the
"Old Economy", being pressurized by global developments and multidimensional real estate needs in the face of limited capital;
Given its economic value, RESECU would emerge to deepen the Capital Market
in the "New Economy" with new securities and secondary trading
thereon, creating more investment flow to enhance the overall economy;
A dynamic global environment will continue to exert pressures on the economy,
create more opportunities, which would fuel further RESECU in a
recurring cycle.
Fig. 1 The Real Estate Securitization (RESECU) Framework
New Economy (Increased Capital)
Capital Market Development
New Securities & Secondary Trading
Real Estate Securitization (RESECU)
Corporate Strategic Analyses
Multi-Dimensional Real Estate Business
New Information and Communication Technology Globalization
& Liberalization Population & Urbanization Growth
Old Economy (Limited Capital)
Source: Security And Exchange Commission (1998)
BJMASS VOL 5. NO 2 JANUARY, 2007
89
Research Hypotheses:
Our analysis is based on three hypotheses formulated to appraise the
economic value of RESECU. The hypotheses are as follow:
Hypotheses I: "Real Estate-backed Securitization provides capital market
window through which investors can enjoy liquidity and sustainable superior
return on investment".
Hypotheses II: "The total rate of return (economic value) of real estate-backed
securities tends to be more sensitive to major change in the macro-economic
environment than the overall capital market".
Hypotheses III:
"Real estate securitized company will produce cheaper
products than its unlisted competitors".
Data Specification:
Earnings Per Share (EPS): This is the model organization's annual profit (after
taxes) divided by the number of shares of common outstanding.
Stock Price Share: The closing price in Naira of the Organization's stock on the
Nigerian Stock Exchange (NSE) on the indicated trading day. The stock
price per share used in this study has been extracted from the NSE's
Daily official list of the trading days in question.
Price-Earning Ratio (P/ER): This is the ratio of (b)/(a) above; that is the
Stock price share divided by its EPS.
Aggregate Market Capitalization: This is the sum of the values of each listed
company's stock calculated by multiplying the number of their respective
outstanding share by their respective current price per share. It is a
measure of the level of capital market development in an economy.
Dividend Yield: This, simply, is dividend per share as a proportion of the stock
price per share, that is Dividend yield = Dt-1//Pt-1 where, Dtt-1= last
dividend paid on the stock Pt-1= the price of the stock at the end of the
year
Capital Gains Yield: This is defined as, = Pt+1 P1
P1
Where, Pt+1 = Price of the stock at the end of the year, and
Pt = Price of the stock at the beginning of the year
(g)
Total Rate of Return: This measures the effective Economic Value of
the investment that is, its total percentage return, given as:
=
Dividend Yield + capital Gains Yield
Data Collection Sources:
General data on Nigeria's macro-economic trends have been
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BJMASS VOL 5. NO 2 JANUARY, 2007
collected mainly from the publications of the Federal Office of Statistics, the
Central Bank of Nigeria, the Securities and Exchange Commission, and the
Nigerian Stock Exchange. These sources were supplemented with press news
reports. Specific data on UPDC were extracted from the Company's published
annual reports and accounts, its sales bulletin, Securities and Exchange
Commission and the Nigerian Stock Exchange. The data collected from
published sources were complemented with the co-author's personal observation
as a chartered surveyor and a former management staff member of UAC Nigeria
Plc, the UPDC promoters. Methods of Data Analysis
We used the case study method and formulated the three hypotheses to
help guide the appraisal. In analyzing and interpreting the data, the approach is
descriptive, focused mainly on bringing out the essential observational settings
and trends. The study thus, essentially makes use of published data and present
them in various figures and statistical tables on capital market analysis. Data
Presentation And Analysis:
The core data on financial and stock market performance are presented in
Tables 1 and Table 2 below. Table 1 presents the consolidated Balance Sheet and
Income Statement for the five years each ended 31st December. The
organization's real estate holdings at market prices grew form N8.41 billion in
1999 to N24.71 billion in 2003, an almost 200% increase. Net income leapt to
almost Nl billion in 2003, from Nl 5 million in 1999, a whopping 500% increase.
Stock market indices in 2003 showed overall improvement over those of 1999:
The stock price from N1.60 to N6.60, EPS from 15 kobo to 90 kobo, P/ER from
10.93 to 7.33: dividend per share from 14 kobo to 45 kobo, and dividend yield
from 8.54% to 6.82%. Figures 1 and 2 graphically shows the rising trends of EPS
and Stock prices during the period. Figure 1. reflects the steady increase in EPS
all through the period
BJMASS VOL 5. NO 2 JANUARY, 2007
91
Table 1:
UPDC Five-Year Financial Summary (1999-2003) (N'Billion)
2003 2002 2001 2000 1999
CAPITAL EMPLOYED
Share Capital
0.50
0.50
0.50
0.50
0.50
Share Premium
4.32
4.32
4.32
4.32
4.32
Capital Reserve
7.97
8.39
1.44
1.50
1.45
Revenue Reserve
0.46
0.82
0.43
0.21
0.03
13.25 14.03 6.53
6.53
6.30
BALANCE SHEET
Fixed assets
15.34 14.29 7.27
6.83
9.69
Long-term Investment
1.40
1.26
Current Assets
1.68
0.75
0.59
0.56
0.25
Net Assets
(5.17) (2.217) (1.17) (0.86) (0.91)
13.25 14.03 6.69
6.53
6.30
PROFIT AND LOSS ACCOUNT
Turnover
2.99
1.74
1.72
1.41
0.70
Profit Before Tax
1.04
0.85
0.07
0.58
0.19
Taxation
(0.14) (0.11) (0.13) (0.09) (0.04)
Profit after Tax
0.09
0.74
0.57
0.49
0.15
Dividend
(0.45) (0.35) (0.35) (0.30) (0.14)
0.45
0.39
0.22
0.19
0.01
Sources: The Nigerian Stock Exchange Factbook 2004 and UPDC Published
Statements: 1999-2003
Table 2; UPDC - The Stock's Performance (1999-2003)
STOCK MARKET INDICES
Stock Price per share (3 1st December) N
Earnings per share (EPS) (Kobo)
Price-Eamina Ratio P/ER
Dividend Per Share (Kobo)
Dividend yield%
2003
6.60
90
7.33
45
6.82
2002
4.00
74
5.40
35
8.75
2001
4.62
57
8.10
35
7.56
2000
1.52
49
3.10
40
26.31
1999__
1.60___
15____
10.39__
14____
8.54
Sources: The Nigerian Stock Exchange Fact Book 2004 and UPDC Published
Statements: 1999-2003
Figure 1:
UPDC EPS (1999-2003)
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BJMASS VOL 5. NO 2 JANUARY, 2007
Sources: The Nigerian Stock Exchange Factbook 2004 & UPDC Publisher
Statements: 1999-20003
Figure 2: UPDC Annual Stock Price Movement (1999-2003)
Source: The Nigerian Stock Exchange fact book2004
Figure 2 shows a rising "w" shaped stock price line reflecting a mild
depression in 2000 and a fairly more serious one in 2002. However, the overall
trend pointed upwards.
Table 3: Annual Aggregate Market Capitalization & UPDC Stock price
Growth Rates (2000 2003)
Year
2003
2002
2001
2000
Average
Aggregate Market Capitalization Growth Rate%
UPDC Stock Price Growth Rate %
77.50
15.29
38.44
59.59
47.70
65.00
-13.42
203.95
07.32
62.05
Source: Stock price Growth % Computed from Table 2 Table 3 shows the growth
rate of the model stock price relative to the aggregate capital Market's. Table 4
shows the earnings perspective of the model's growth rate relative to the
aggregate market average.
Table 4: UPDC Earnings Average Growth Rate and the Aggregate Market
Average (2000 - 2003)
Investors
UPDC Earrings Growth Rate%
UPDC Earrings Average Growth Rate %
Aggregate Market Earrings Average Growth Rate %
2003
21.62
73.61
19.55
2002
29.82
73.61
19.55
2001
16.33
73.61
19.55
2000
226.67
73.61
19.55
Source: Computed from Table 2
Table 5 shows below how fast since 1999, the model stock's earning: per
share has grown relative to capital gained as at 31st December 2003. EPS
BJMASS VOL 5. NO 2 JANUARY, 2007
93
grew 6 times, while the price appreciated 4 times.
Table 5: UPDC Cumulative Earnings Growth Rate and Capital Gained as at
31st
December 2003
Indices
Stock price as at last trading day in December
EPS
1999
1.64
15k
2003
6.60
90k
Growth Rate (Times)
4x
6x
Source: Computed from Table 4.2
Table 6:UPDC-Chartered Bank Plc Comparative Dividends per Share
(2000-2003)
Organization
2000 2001 2002 2003
UPDC
40k
25k
35k
45k
Chartered Bank Plc
5k
5k
17k
17k
Sources: Table 2 andwww.charteredbankplus.com
Average
39k
11k
UPDC - Chartered Bank Plc comparative dividends are presented in
Table 6. The model organization's dividend per share over the period averaged 39
kobo. compared to chartered Bank's 11 kobo. The rising trend in trading of the
model stock on the exchange is reflected in Table 7. Table 8 presents the average
economic value of the model stock in the context of selected indicators in the
Nigeria's macro-economic environment. With a negative total rate of return of
4.67%, 2002 was the worst part of a period that yielded an impressive average
economic return of 74.39% per annum. Table 9 analyses UPDC Model Product in
the light of its select competitors.
Table 7: UPDC Volume of Stock Traded on the Exchange on the Last
Trading Day in December (1999-2003)
Year
2003
2002
2001
2000
1999
Quantity Traded (‘000)
3.210.5
618.8
192.9
67.7
6.5
Sources: The Nigeria Stock Exchange Daily Official Lists (1999-2003)
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BJMASS VOL 5. NO 2 JANUARY, 2007
Table 8: UPDC's Total Rate of Return and Selected Macro-economic
Indicators (2000-2003)
Year
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Dividend
Capital
Total Rate Minimum Rediscount Inflation GDP Growth
Yield % Gains yield % of Return
Rate%(MRR)
Rate%
Rate%
2003
6.82
65.00
71.82
15.00
14.00
4.00
2002
8.75
-13.32
-4.67
18.00
12.90
3.30
2001
7.50
203.95
211.45
15.50
18.90
4.20
2000
26.31
-7.32
18.99
14.00
6.90
2.08
Average 12.34
62.05
74.39
15.62
13.17
3.64
yields
Sources: The Nigerian Stock Exchange Fact Book (2004); Central Bank of
Nigeria (2000-2003); Nigerian Investment Promotion Commission (2003) &
Computations from Table 2
Table 9: UPDC Model Product Competitive Prices As at 13th December
2004
S/No
1
REAL ESTATE
DEVELOPER
UPDC Plc.
2
Legacy Realties
Limited
3
Sky view Estate
Limited
BRAND LOCATION
Pinnock 3rd Roundabout
Beach
Lekki, nearer
Phase 2 Central Business
District
Ocean Opp. Chevron
Bay
Hqtrs, Lekki
Estate
further from CBD
Estate
3rd Roundabout
Royale Lekki, Lagos
UNIQUE
FEATURES
Per UPDC
standard
Described in 3.10
PRODUCT
PRICE
N10,000/m2
(25% Down
payment)
Less Beach
Front
10,000/m2
(35% Down
payment)
N15,000/mz
Electronic Card
Entrance Gate Pass
No Beach Front
Source. "The Guardian" Top Homes 2004
UPDC's Brand is more competitively priced than its closest rival on account
of better location and lower down-payment requirement.
Research Questions
Research Questions 1
"Real Estate-backed Securitization Provides Capital Market window
Through Which investors can enjoy Liquidity and Sustainable Superior
Return on Investment".
Results
The model's patterns of liquidity and superior investment return in the
capital market were demonstrated as follows:
The average economic value was 74.39% per annum, far above the average
levels of key macro-economic indicators, MRR (15.62%), inflation rate (13.17%)
and maximum lending rate of 30% (Table 8). The adverse macro-economic
situation in 2002 did not, on the whole affect the stock's long-term economic
value.
Its earnings growth rate of 73.61 % per annum was by far better than the
BJMASS VOL 5. NO 2 JANUARY, 2007
95
aggregate market's 19.55%, while the stock value appreciated faster on the
average (62.05%) than the aggregate market capitalization (47.70%) during the
period (Tables 3 and 4).
Between 1999 and 2003, the model stock EPS had grown 6 times
combined with the stock price appreciation of 4 times, are characteristics of value
stocks (Table 5)
Low dividend yield of 6.82% as at 31st December 2003 (below the
average of 12.34%) and low P/ER of 7.33 as of the same date (slightly above the
average of 6.97) are indicative of attractive near risk - free investments (Table 2)
Table 7 confirmed that the quantity of the stock traded has been
increasing steadily since inception, reflective of the liquidity offered by the
model stock through the capital market. Moreover, the stock generated more
annual dividends (39 kobo on the average) than a rival stock in the banking subsector of the market (Table 6)
Research Questions II
"The Total rate of Return (Economic value) of real estate-backed
securities tend to be more sensitive to major changes in the macro-economic
environment than the overall capital market"
Results:
The macro-economic problems in the year 2002 threw the model stock's
economic values into negative 4.67% and the stock price dipped by 13.4% from
N462 in 2001 to N4.00 on the last trading day in December 2002: (Table 8 &
Figure 4). Comparatively, while the model stock price growth rate for 2002 was
negative 13.42% (a decrease), the aggregate market still recorded positive growth
rate of 15.29%, but this was the lowest market growth rate of the period (Table 3)
Research Questions III
"A Real Estate Securitized Company will produce cheaper Products than
its unlisted competitors". Result:
Table 9 already clearly showed the model brands site-and-services
scheme was the cheapest of the three competitive brands as at 13th December
2004. The closest rival required a higher down payment for comparatively lower
quality site than the model product.
DISCUSSION OF FINDINGS;
(a)
From its initial "value-added" of less than N2 billion in 1998, the model
real estate stock developed the Nigerian capital market by N 8.2 billion
as at 31st December 2003. This growth is attributable to the sustained
EPS growth rate, which in 2003 was 6 times the level in 1999 while the
stock price appreciated 4 times. Earnings, receivables
96
BJMASS VOL 5. NO 2 JANUARY, 2007
or cash flows are fundamental to securitization, and real estate, this study
reveals, is a veritable source of steady flow of cash flow, which could be
securitized to develop the nation's capital market, thus helping to boost
the economic activities and contributing effectively to GDP.
(b)
The model stock price movement showed a remarkable dip in 2002 when
it decreased by 13.42% and yielded a negative economic rate of return of
4.67%. In that year (2002), the entire capital market also recorded its
lowest market capitalization growth rate of 15.29% since 1999 (Table 3.)
This shows the greater sensitivity of real estate-backed securities to
macro-economic changes as the market responded to the following
peculiarities of the year,
(i)
Sharp increase in MRR to 18% up from an average of 15% of the
previous years;
(ii)
Real GDP growth rate reversed by 21.4% to 3.3%, down from 4.2% of
the previous year, 2001
(iii)
The National Budget was not approved by the Parliament throughout
2002; disbursement were therefore delayed, impacting adversely on the
availability of funds within the economy, which resulted in the real estate
sector recording a lull in the first three quarters of the year.
The apparent ultra-sensitivity of real estate securities to macro-economic
environment reinforces the belief that RESECU is both a veritable barometer of
the state of the economy and a tool for economic development through the capital
market.
(c)
The study revealed that, despite occasional impacts of the macroeconomic environment change on the model stock performance, the
stock generally performed better than the market average. The average
stock price growth rate was 62.05% per annum compared with the
industry's yearly average of 47.7% (Table 3); the stock's average
growth rate of 73.61 % against the industry average of 19.55%; and the
overall economic rate of return at a yearly average 74.39% during the
period, far above market interest and inflation rates. This means that the
model stock was a value-addition to the capital market, in real terms and
further reinforces its efficacy as a tool for capital market development.
(d)
The relatively low average dividend yield of about 12% and low P/ER of
less than 7 are indicative of real estate stock rating as value stocks and
attractive investments. This means that, given more RESECU awareness
and sustained marketing efforts, there is a high potential for real estate
equities market growing well beyond its present N8.2 billion
capitalization in a short while.
BJMASS VOL 5. NO 2 JANUARY, 2007
(e)
97
The study further discovered that the model stock's average yearly
dividend paid-out was 3.5 times better than a comparable stock in the
banking sub-sector. Chartered Bank Plc, a rated Bank and one of top six
Banks in Agusto & Co 2004 rating of Banks in Nigeria (Table 6). This
might have enhanced the stock's liquidity to the investing public,
considering the tremendous growth in trading volume from 6,500 on the
last trading day in December 1999 to over 3.2million on a similar day in
December 2003. (Table 7). As a matter of fact, the model stock was one
of the Nigerian stock Exchange's top 20 most active stocks by turnover
volume with 288.4 million shares in 2003, ahead of such stocks like
Nigerian Breweries Plc, WAPCO Plc, Wema Bank Plc, and even UACN,
(The NSE, 2004):-This then supports the belief that RESECU is able to
provide the liquidity, which today's investor desires.
(f)
The study found that the model organization offered the cheapest price
among the selected competitive brands of site and services schemes that
are unsecuritized. This is an important result, which has implications for
supply and demand for housing. If securitized real estate offers cheaper
units, this would enhance households' purchasing power, thus increasing
effective demand that would encourage more real estate development.
This will in' turn, spur more investment, through securitization. At the
end of the day,' RESECU would make housing and urban infrastructure
more affordable.
CONCLUSION:
i.
We have observed that Real Estate Securitization/RESECU) is an
emerging economic instrument by which sizeable illiquid, less- or nonperforming real estate holdings and mortgage debts are substituted with,
or converted/repackaged to tradable or marketable securities like stocks,
bonds, etc. these real estate -backed securities come in various forms, but
they are collectively termed real estate securities (RESECU);
ii.
RESECU is driven by three interrelated global phenomena namely. The
failure of traditional finance system to fund the real estate requirements
of a rapidly increasing urban population: if money market emerged from
the failure of trade-by-barter, then real estate-backed securitization
emerged from the failure of the money market. The increased challenges
of macro-economic development arising from new information and
communication technologies (1CT) and Paucity of securities in domestic
capital market in the face of growing globalization and liberalization of
financial markets.
iii.
There have been recent positive signals in Nigeria's macro-economic
environment, the real estate industry and Nigerian, stock Exchange
98
iv.
v.
vi.
vii.
BJMASS VOL 5. NO 2 JANUARY, 2007
attractive to RESECU as a tool for capital market development.
The efficacy of RESECU as a tool for capital market development is well
illustrated by the UPDC model. The historic birth of UPDC in 1997 and
its pioneering N2billion securitization a year later made it an ideal model
for this study, more so that UPDC has remained the most active
RESECU in the Nigeria Capital Market to date.
UPDC has helped to develop Nigeria Capital Market by consistently
meeting local and foreign investors' desire for competitive liquidity, high
economic rate of return, fast-track EPS and P/ER growth rates and
widening investors capital participation by 54%.
The UPDC stock was particularly sensitive to major macro-economic
development, especially those in 2002, thus reinforcing the thesis, that
RESECU could at once be a stimulus for capital market development and
a barometer for gauging the overall state of the national economy.
Finally, RESECU, illustrated by the UPDC case, showed high prospects
for offering cheaper housing and infrastructural facilities than its
unsecuritized competitors. This has implications for increasing customer
purchasing power and effective demand for real estate products, which in
turn, could spur cycles of recurring RESECUs for capital market
development.
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Schwarcz, S. L, (2004): Structure Finance: A Guide to the Principles of Asset
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APPENDIX
A Summary of the Best Known Real Estate Securities on the Nigeria Stock
Exchange, (1978-2000)
S/No
1.
Year
1978
2.
1987
3.
1987
4.
1992
5.
1996
6.
7.
1998
2000
Bond/stock
N20m-7%
Revenue Bond
N30m 16.5% Revenue
Bond 1999
N30m 17.5%
1990/1999 floating rate
bond
N50 million 18% loan
stock 1993/1998-+
Issuer
Old Bendel State
Government
Oyo State
Government
Lagos State
Government
N100m 18.5% Floating
Rate Revenue Bond 2004
N 1.896 Billion common stock
N500 million Revenue bond
Lagos Island L.
Government
UPDC Plc
Edo State
Government
Nigerian Merchant
Bank Plc
Purpose
To Finance
Housing project
To develop Adamasingba
shopping complex
To part-Finance the development
of the first phase of Lekki
Residential scheme
To complete multi-storey Head
Office Complex at Victoria
Island. Lagos
To complete Sura shopping
center, Lagos
To expand real estate capital base
To Part Finance Ogba Riverside
Housing Estate
Sources: SEC (1998) The NSE (2004), Kurfi (2000), Kaduma (1996)