How much should the government, state or federal agencies regulate emerging industries? The knee-jerk reaction of most entrepreneurs, fearful of having their companies squeezed by compliance costs, is “not at all.” But in some industries, like commercial real estate, that is probably not the best response. A better alternative would be to allow thoughtful leaders who understand the benefits of regulation to proceed slowly toward establishing the right laws to prevent harm. A good analogy is the car industry. Regulation came after the innovation as a means to provide greater road safety from accidents for drivers and pedestrians alike.
Around the world, governments of emerging economies are beginning to establish controls in industries with significant potential for growth, real estate among them. For instance, in the UAE, a real estate bill was announced for the formation of a Real Estate Regulatory Authority (RERA) that will be responsible for overseeing transactions and providing clarity on who will govern real estate projects. In addition, there is an ongoing discussion on creating a federal authority for real estate regulation. At present, only state-level authorities exist within the Emirates, such as the Real Estate Regulatory Agency in Dubai which is part of the Land Department. Through RERA, the department sets legislations to regulate the relationship between all contracting parties and organises the exchange process of properties. The department also provides other services in planning, organising and evaluating operations related to real estate licenses. They also handle the organisation and development of real estate activities and monitor projects from a financial and technical perspective to protect investors.
Comparing Dubai to Nigeria, we come across a sector that is largely unregulated, leaving consumers with little recourse to fall back on in case a developer defaults on promises. However, with regulations coming into force, the creation of state-level RERAs in Nigeria will allow consumers to benefit from standardisation and protection, thus allowing for transparent functioning and growth in the sector.
The RERA model has been present in other countries in different forms. In the US, regulations exist at various levels, although there is no single regulatory body. Instead, there is a series of organisations that regulate different aspects of the industry. A good example is the HUD which has created rules under the Real Estate Settlement Procedures Act and protects consumer interests with respect to residential properties.
Regulations are, however, not uniform from country to country. This leads to challenges, especially when dealing with international investors seeking opportunities in countries such as Nigeria. For instance, the Land Use Act of 1978 stipulates that all land comprised in the territory of each State in the Federation are vested in the Governor of that State and such land shall be held in trust and administered for the use and common benefit of all Nigerians. This means that all freehold interest – which means that you do not own the building and the land it stands on outright, in perpetuity – rests with the Government. Nigerian citizens or investors are entitled only to long lease terms on properties from the government and cannot outright own the land. This policy also requires an individual or corporate to pay mandatory ground rent. To address the limitation passed by this Act, investors have determined a work-around solution for this challenge by focusing on the length of the lease term. When seeking to purchase a property (which in turn can offset the value of the property), buyers can either seek to extend the length of the lease on their own or ask potential sellers to do so, or negotiate lower prices depending on the lease term.
Another regulation with unique peculiarities is the rent control scheme (2008) such as the one recently implemented in Lagos. Rent control is a residual matter under the 1999 Constitution. As a result, most of the States in Nigeria own their individual rent control laws which for the most part have similar provisions as the Rent Control Law of Lagos State. In Lagos State, the Rent Control & Recovery of Residential Premises Law, 1997 (Lagos Rent Control Law) is intended to mandatorily regulate the rentals that can be charged for residential apartments in certain areas of the state.
The law prescribes the standard rent for each type of residential accommodation in different locations of the State with the caveat that the standard rent shall only be subject to upward review of no more than 20% every three years or at such other duration as the Governor of Lagos State may prescribe. At the time of the enactment of this law, residents could not be charged rental value in excess of N250,000. The Lagos Rent Control Law makes it unlawful for the landlord, his agent or the tenant to demand or pay rent in excess of the standard rent. It is also unlawful for a landlord to demand or receive the prescribed standard rent for a period in excess of six months from an incoming/new tenant. Equally unlawful is the action of a sitting tenant offering to and paying the standard rent in excess of a period of three months in respect of any type of residential accommodation to which the Lagos Rent Control Law applies. Certain challenges exist with this law, particularly the practical enforcement both for the tenant and the landlord’s benefits. As a result, enforcement and transparency is quite limited. This in turn makes it difficult for investors to incorporate in their analysis.
In general, countries with an existing regulatory framework in the real estate sector are better able to attract investors. Not only does it allow a transparent and effective functioning of the sector, it gives the authorities financial and administrative independence to aid in regulations which reassures investors. The rise of regulations is expected to benefit the Nigerian real estate sector once the state-level RERAs are in place and the necessary processes have been laid out. Eventually, by integrating the necessary information via an online medium, regulations help further develop not only the real estate sector, but also support related segments of the market such as banks, insurance companies, and law firms in their dealings with the sector. This exchange of public and private information can help build a seamless platform for the sector as a whole, benefiting customers, agents, developers, investors and the public at large.