MITIGATING RISK IN REAL ESTATE INVESTMENT

ESV Adebola Adebule

Real estate investment in Nigeria, particularly in Lagos State, offers immense opportunities but equally exposes investors to significant risks. The dynamic urban environment of Lagos—with its rapid population growth, fluctuating market trends, and evolving regulatory frameworks—demands a structured approach to risk management. The collapse of several unapproved buildings in areas like Ikoyi and Lekki, the oversupply of luxury apartments in some districts, and the persistent land title disputes across the state underscore the need for investors to approach property ventures strategically. Feasibility and viability reports serve as the twin pillars of informed decision-making, providing a systematic framework for identifying, analyzing, and mitigating investment risks before capital is committed. By understanding the difference between feasibility (can the project be done?) and viability (should it be done?), investors can avoid costly mistakes and ensure project sustainability.

Core Concepts and Distinction between Feasibility and Viability
Feasibility focuses on the technical, legal, operational, and market possibility of a project, while viability assesses its financial, economic, and long-term sustainability. Feasibility

answers “Can the project be done?” Whereas viability answers “Should the project be done?”. The table below summarizes their distinctions.
Primary Question​Can the project be done?​Should​the​project​be
done?


Focus​Technical, legal, operational, and market possibility

Financial, economic, and long-term sustainability



Scope​Broader​assessment:​site, zoning, design, timeline

Narrower focus: detailed financial analysis and return projections



Risk Mitigation​Identifies implementation risks (e.g., zoning, technical flaws)

Identifies financial and market risks (e.g., poor ROI, downturns)

Timing​Conducted first​Follows positive feasibility or concurrently with design
Illustration (Lagos Context): In the recent Eko Atlantic City projects, detailed feasibility studies ensured the reclamation site’s engineering soundness and environmental safety before construction. However, some smaller developments in Lekki Phase II failed to conduct proper viability analyses, leading to projects that became financially unviable due to oversupply and high service charges.

1. The Scope of Real Estate Investment Risk

• Market Risk: Changes in demand, pricing, or competition. Example: The post-COVID property boom in Lekki led to a glut of short-let apartments, reducing occupancy and yields.
• Technical/Execution Risk: Inability to build due to site constraints, engineering issues, or unforeseen construction difficulties. Example: Flooding in Lekki – Epe axis increased foundation costs for developers without adequate site studies.
• Legal/Regulatory Risk: Failure to obtain necessary permits, non-compliance with zoning/environmental laws. Example: The demolition of illegal structures along the Lekki drainage channels and coastal road corridor in 2024.
• Financial/Economic Risk: Insufficient returns, cost overruns, or issues with securing financing leading to project failure or insolvency. Example: Rising interest rates in 2023– 2024 forced some Lekki investors to scale down projects.
  

1. Feasibility Report as the First Line of Defense
   The feasibility report serves as an investor’s first shield against project failure. It filters-out projects that are technically or legally impossible, preventing capital loss.
2. Market Feasibility (Demand Analysis) –This pillar assesses whether there is sufficient demand for the proposed product entailing;

• Target Demographics: Identifying the likely buyers or renters (income levels, household sizes, preferences).
• Competitive Analysis: Reviewing existing and planned competitive supply in the area. What are their prices, absorption rates, and features?
• Demand Forecasting: Projecting future absorption rates based on local economic and demographic trends.
• Highest and Best Use: Confirming that the proposed project represents the Highest and Best Use of the site—the legally permissible, physically possible, financially feasible, and maximally productive use.
  In Surulere and Ikeja GRA, feasibility studies showed rising demand for smaller, affordable units, guiding developers toward profitable designs.

1. Site and Legal Feasibility – This evaluates the site’s suitability for the proposed development considering;

• Site Analysis: Examining topography, soil quality, existing infrastructure (utilities, roads), and environmental factors (hazards, remediation needs).
• Zoning and Entitlements: Confirming that local zoning regulations permit the intended project type, density (Floor Area Ratio, lot coverage), and height. This flags potential entitlement/rezoning hurdles.
• Accessibility: Analyzing access to transport, services, and surrounding amenities, which heavily impacts market appeal.
  In the Lekki – Epe enclave, developers faced unexpected piling costs due to swampy soil. Furthermore, Zoning and approvals in new city plans caught uninformed developers off- guard.

1. Financial Feasibility (Viability Analysis) – This is the core assessment of whether the project will generate an adequate return for the risk taken. It relies on a pro-forma financial model comprising;
   

• Cost Estimation: Detailed breakdown of all expenses:
  ➢ Acquisition Costs: Land purchase price.
  ➢ Hard Costs: Direct physical construction (materials, labor).
  ➢ Soft Costs: Indirect costs (architect/engineer fees, permits, insurance, marketing, financing charges, legal fees).
• Revenue Projection: Forecasting sales prices or rental rates based on the market analysis.
  ➢ Profitability Metrics: Calculating key investment measures:
  ➢ Net Present Value (NPV): The present value of expected future cash flows minus the initial investment. A positive NPV suggests financial feasibility.
  ➢ Internal Rate of Return (IRR): The discount rate at which the NPV equals zero; it must exceed the required rate of return (hurdle rate) to be pursued.
  ➢ Cash Flow Analysis: Modeling the timing of money in and out over the project’s lifecycle.
  A developer in Sangotedo discovered returns below threshold and redesigned for smaller, affordable units.

1. Risk Analysis and Sensitivity Testing – A critical part of a detailed study is stress- testing the financial model which involves;

• Sensitivity Analysis: Testing how the primary profitability metrics (like IRR or NPV) change when one key variable is altered (e.g., a 10% increase in construction costs, a 5% drop in final sales price, or a delay in lease-up).
• Contingency Planning: Developing back up plans for identified risks.
  The 2023 rise in cement and steel prices exposed developers who didn’t run cost- sensitivity scenarios.

1. Viability Report as the Financial Stress Test
   The viability study asks the critical question: ‘Will it be worth it?’ It measures profitability and sustainability under varying conditions. A project is viable if NPV is positive, IRR exceeds hurdle rate, and cash flow remains stable. Example: A fund evaluating mid-income housing in Ajah revised its design after rising financing costs to restore viability.
   
   Conclusion
   Mitigating risk in Nigerian real estate, especially in Lagos, requires a disciplined, data- driven approach. Feasibility and viability analyses are the foundation of sustainable investing. By conducting detailed studies—market, legal, technical, and financial— investors can preempt losses and ensure economically sound projects. The best defense remains rigorous due diligence backed by professional estate surveyors and valuers.

ESV Adebola Adebule (MNIVS, RSV, MBA, MSC) Bola Adebule and Company.
08025820364, Bolaadebuleandco@gmail.com