Currencies in conduits

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According to the Merriam-Webster dictionary, a conduit is defined as a natural or artificial channel through which something is conveyed. In relation to Real Estate, it is usually described as a pipe, tube or trough for protection of electric wires or cables. Conduits protect the occupiers from direct contact with wiring and cabling whilst also protecting the wires and cables from being tampered with by unqualified persons.

In the last few months, we have discovered shocking uses for conduits as channels for the flow of illicit monies. Our security agencies have discovered stock piles of currencies lodged in buildings scattered across the country. False walls, conduits, sewage treatments tanks, basements, farms, forests, and cemeteries are competing with bank vaults for secret storage of, in this scenario, illicit and illegitimate monies.

Money laundering and resultant effect on real estate market values

Market valuation of real estate in Nigeria is a true paradox when comparing to values of real estate globally. It conflicts with the accepted drivers of real estate growth which are amongst others, infrastructure & amenities, contribution to GDP, inclusive housing finance, mortgage re-financing, REITS, REICOs, sound zoning and planning laws, effective land registration system, effective administration of justice and access to affordable housing which drives up demand.

Real estate growth in developed economies which have developed effective systems for observing and measuring real estate growth through transactional market and data intelligence boasts of 6-8% ROI especially as inflationary rates are below 3%. I  attended a foreign property investment forum in London and the “sheer excitement” amongst prospective property investors of 6% growth rates left me deflated and bewildered i.e “6% pere? The Lagos real estate market boasts of yearly average growth rates of 16-20% pa with no true basis or drivers for such growth. Real estate contributes nominally if at all to the country’s GDP. There is a huge deficit of housing stock and where such housing stock exist, demand is highly ineffective. 80% of legitimate income earners are fenced off the buying market buttressing the report from Nigerian Deposit Insurance Company which revealed that 90% of total deposits in Nigerian Banks are owned by 2% of Nigerians.

So who is buying up real estate in Nigeria particularly in Lagos & Abuja? Your guess is as good as mine. Illicit monies circling around the financial system is laundered into real estate. Please picture an image of a high speed Samsung Washing Machine laundering your clothes, that’s how the monies spin through the swanky edifices and buildings seen around our high-brow locations. So a disclaimer before I continue, there are pockets of developments financed by legitimate monies at very uncompetitive lending terms, foreign direct investment in retail and office developments or perhaps capital or profits from legitimate business invested in real estate developments. Majority of developments of this nature are somewhat competitively priced and are easily snapped up by corporates, the upper-middle class whose income can accommodate our double digit mortgage rates and/or whose employers can finance such purchases at low lending rates.

Back to illicit monies-this is generated illegitimately from capital projects and transactions in the public and private sectors. In the public sector it is diversion of public funds by those in position of authority or beneficiaries of such funds given the responsibility and obligation to execute social projects and thereafter breach such obligations with little or no consequence usually in connivance with public sector officials.

The said funds find conduits, channels, fluidity in real estate where they are “invested” with little or no requirement for immediate financial returns. It is a safe haven, A Panama or Mauritius until the need for such returns are required particularly when tenure of office expires or should I say when the gravy train comes to a final stop.

So the cancerous effect of corruption-funded real estate growth is such that it drives up the value of real estate in unconventional ways namely vendor A who sells real estate to purchaser A at such an astronomical value has whet the appetite of Vendor B of similar real estate holdings who would anticipate such inflows. Vendor B would rather wait it out till he locates his beautiful bride, purchaser B. The actions of vendor A/B and thought process of purchaser B ring fences legitimate income earners from accessing the market. Resultantly there is a large supply of “luxury” without the corresponding demand. The 2016 Vacancy Factor Index released by Financial Derivatives Ltd and RAC’s Housing Price Index for Ikoyi and Victoria Island are at a 72% high with no major variation or deviation till date. Paradoxically Lagos as a commercial and trade West African hub should ordinarily attract high investor interests from other jurisdictions similarly to London, New York, Johannesburg etc. However the real drivers for real estate growth as I earlier mentioned simply do not exist and savvy investors realise this growth is corruption driven and highly unsustainable. This also accounts for the lack of foreign direct investment into residential real estate market unlike sectors such Telecommunications, Oil and Gas, Financial Services despite the 17million housing deficit figures.

A possible solution to stem the flow of illicit monies into real estate is a Property Transaction Register. This is not the same as the Lands Register found in State Land Registries. The requirement for registration is not mandatory and many owners of real estate bye pass registration with changes in ownership conducted in the absence of registration. Identities of purchasers of real estate should be disclosed in the same way income must be commensurate to purchasing power. Since the proverbial manna no longer falls from heaven, one can only fund real estate purchases from earnings, inheritance or institutional financing. This property registration should be structured as a seamless technology driven process without the usual bureaucratic red tape. It should be mandatory but with incentives for registering such transactions to drive participation and inclusiveness. More so promoters of institutional purchasers such as companies, NGOs and other corporate bodies should also be revealed. Primarily it can provide state governments with transactional data on real estate trading with reliance on such data to develop policies to boost the markets. For purposes of stemming money laundering in real estate it can assist investigations when trying to identify suspicious flow of illicit monies and those in control of companies owing real estate assets.

It would be welcoming if real estate stakeholders can generate more solutions and ideas to curb the flow of illicit funds into real estate in order to create a sustainable, data-driven and investor-friendly real estate market. Real estate must be exchanged for real value. Our conduits should contain wiring and cables not currency.

 

Omorinsola Ipaye

Omorinsola Ipaye is a Real Estate Professional, Legal Advisor and Good Governance Advocate and can be reached on morinsola.ipaye@kparkwoodproperties.com

 

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Source: Business Day Online