Can Fractional Real Estate Ownership Solve Nigeria’s Housing Affordability Crisis?

Introduction

Nigeria’s housing deficit has conservatively been estimated as being between 10 to 20 million housing units, with affordability remaining a key challenge for the average citizen.

Traditional homeownership requires large upfront capital investments, making it inaccessible to many. The devaluation of the Naira and reduction in buying power has only made a tough situation much harder!

For the average working person, the dilemma becomes how to maximize the value of his / her earned naira while avoiding value erosion through devaluation. Many people and organizations have explored various means, but a new emerging trend is shared ownership or fractional home investments.

Fractional real estate ownership is a model that allows multiple investors to co-own a single property. In essence the individuals POOL their resources and co-own the property sharing the returns on such investment and potential capital gains.

In this article, we explore the concept, its benefits, challenges, and its potential to transform Nigeria’s real estate sector.

What Is Fractional Real Estate Ownership?

Fractional ownership is a system where several individuals collectively pool resources to acquire a property. Each person, owns a percentage or fraction of the property rather than the whole unit.

This model was originally used for high-value vacation properties, with the co-owners’ acquiring “weeks” when they can use the property exclusively, this is popularly called a timeshare property. But under the emerging fractional programs, you are co-investing in the purchase of a property and what you earn is a share of the income generated from the property rather being able to use it for yourself.

The fractional program is a property investment program rather than a property utilization one.

How It Works:

● A promoter offers a property for sale in a defined location and with a set value, for example a house in Surulere for NGN150m

● The promoter then offers fractional shares of that property to prospective Investors, typically it can be a minimum of ten (10) persons contributing NGN 15m each or one hundred (100) persons contributing NGN 1.5 million each!

● The number of fractions acquired by each investing individual determines his proportional share of Ownership of the property.

● The Promoter then signs a management agreement with each investor committing to a defined rate of return annually derived from rents or use of the property.

● Typically such programs will also define a minimum break even period which means how long it will take you to earn back your investment plus a return.

● In some programs, they include a compulsory buy-back which is a way of guaranteeing an exit for investors.

The Fractional Program when properly managed guarantees capable developers of a quick exit for developed properties; creates a pool of viable properties for retail investors and potentially reduces the high carrying cost of development for developers.

How Can Fractional Ownership Impact the Real Estate Market?

1. Bridge the cost of acquisition for aspiring property investors: Prime and affordable homes in urban centers have become increasingly unaffordable to working professionals. The average cost of a three bed apartment is now a little over ₦50 million ($32,000+) while townhouses and semidetached homes cost an average of N125 Million ($78,000). Annual rental rates for urban centers have also spiked ranging from N2.5million ($1,500) to as high as N15 million ($9,375) per annum for middle income homes.

These are average base rates for conventional leases and essentially means the average working professional cannot easily invest in commercially viable real estate assets. Fractional home acquisition eliminates this challenge and also means professionals can stretch their investment capital over several assets with lowered risk and higher returns

2. Eliminates the constraints of reduced access to commercial credit or Mortgage loans: Nigeria remains a high-Interest rate environment. Presently the approved lending rate for commercial loans are a minimum of 26% per annum and can trend as high as 32%. Mortgage loans are not readily available especially for middle income homes and access is also not easy for the average professional. Pooling resources through a fractional investment program also eliminates this constraint.

3. Accelerated Urbanization: Nigeria has one of the highest youth populations in the world with over 50% of the population being under the age of 21! More interestingly, urbanization rate is on an upward swing with over 50% of Nigerians now living in urban and peri-urban neighborhoods. The use of fractional programs means most of these potential customers can live in standard homes while investor owners earn improved yields.

4. Reduction in number of ghost properties: Real estate is a tested hedge against inflation. Unfortunately, the high cost of acquisition in Nigeria means most homes become inaccessible and where acquired remain vacant. By deploying fractional home plans, developers can achieve quick returns and ensure that developed homes are put to immediate use.

Other Benefits of Fractional Ownership for Investors

Reduced Barriers to entry: Instead of paying for an entire property, investors buy a fractional share, making ownership accessible to middle-income earners.

Guaranteed Passive Income: Fractional home investors earn rental income proportionate to their ownership stake.

Diversification of portfolio: Instead of investing in a single property, investors can diversify across multiple locations by acquisition of fractional units.

Liquidity: Being asset backed, fractional home units can be resold, increasing investor flexibility.

Technology-Driven: Platforms like PropCrowdy, STOW, Piggyvest and Risevest are making real estate investments seamless.

Challenges of Fractional Real Estate Ownership in Nigeria

Regulatory ambiguity: Although Nigerian law recognizes joint ownership of property, the fractionalization of the property ownership, is an innovation. It is critical to preview and study all legal documents attached to a property before investing in it. As a co-owned property, the developer’s management contract is also a very important document to be reviewed.

As a rule of thumb, only invest in new build or properties with clear documentation under development. If you are going to invest off-plan, ensure the developer is a reputable one with proven past success stories.

Liquidity Risks: While fractional shares of investment homes are resalable, secondary markets for fractional real estate are still underdeveloped. This means, having a repurchase clause with the developer is an added insurance worth considering.

Property Management & Residual Values: Managing co-owned properties requires transparent governance to avoid disputes. It is very important to patronize developers who offer management contracts. This will ensure that the property enjoys capital appreciation to protect the value of the investment.

Case Studies & Global Examples

● Kenya’s Fractional Real Estate Boom: Companies like HassConsult have launched fractional ownership models targeting the middle class.

● U.S. REITs & Crowdfunding: Platforms like Fundrise allow fractional ownership of large-scale properties.

● South Africa’s Real Estate Investment Trusts (REITs): These allow partial ownership of high-value properties, offering steady returns.

Conclusion

We believe that fractional home ownership has the potential to bridge Nigeria’s housing gap by making investment in homes more accessible to the average citizen. While challenges exist, increased regulation, technology, and investor awareness could position fractional ownership as a game-changer in Nigeria’s property market.

Would you invest in a fractional real estate model?

Let us know your thoughts