DETERMINANTS OF VACANCY RATE IN COMMERCIAL PROPERTIES IN MINNA, NIGERIA

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DETERMINANTS OF VACANCY RATE IN COMMERCIAL PROPERTIES IN MINNA, NIGERIA

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

The basis for the existence and growth of urban areas is found in the gregarious nature of mankind and also in the cultural, economic and
political advantages that stem from the agglomeration or clustering together of people (Barlowe, 2009). From the standpoint of intensity of
use, rent-paying capacity and land values, the areas occupied by central business districts in urban areas represent some of the most
valuable lands (Lean & Goodall, 2011; Barlowe, 2009 and Harvey, 2010). In cities where the business has retained its attractiveness,
economic strength and viability, the business is almost always found close to the hub of the city’s traffic and transportation system and at
locations both accessible and convenient to large numbers of people. This develops a possibility for high volumes of retail and other
commercial activities, which in turn enhances intensive land use practices, high rents and high land values (Lean & Goodall, 2011; Barlowe,
2009; Harvey, 2010 & Ighalo, 2010). In other words, sites closer to the main business area often offer greatest opportunities for profitable use
and these locations have the highest site values and command the highest rents. Thus, due to the business opportunities available to firms
at the area, there is reasonable bidding and counter-bidding between firms and operators for the choice of locations. This process often
leads in commercial land use patterns in which office and retail spaces are allocated in concordance with the rent-paying capacities of the
various operators. This pattern is rarely stable as new adjustments are always done, including rental adjustments. The primary basis of most
office rental studies as summarized by Sivitanides (2013) is that, rent differences in the commercial property market are engineered by
excess demand or excess supply, as measured by the deviation of the prevailing vacancy rate from a “natural” or “structural” vacancy rate.
In addition, the results of evidence from previous empirical studies suggests that vacancy rate is a crucial determinant of office rental
performance in cities (Hekman, 2013; Shilling et al., 2009; Glascock et al., 2011; Wurtzebach et al., 2011; Sivitanides, 2013; Hui & Yu, 2014;
Boon & Higgins, 2007 & McCartney, 2012). It is on this premise that this study examines the determinants of vacancy rate in commercial
properties in Minna, Nigeria. According to Boon and Higgins (2007), rental value is a vital parameter for measuring real property
performance. It is also a key cost for tenants and an important source of income for the landlord. Major commercial property market
partakers such as investors and developers mostly use rental value as an indicator to ascertain the viability of their real estate development
and investment schemes. Based on this, knowledge of the nature and basic features of vacancy rate provides a better understanding of the
fluctuations of the commercial property market. Also, indices of rental growth are mostly integrated into discounted cash flow analysis for
the evaluation of real property investments (Boon and Higgins, 2007). Thus, Nigeria real estate industry professionals needs better
knowledge of commercial property rental changes as well as vacancy rate which is the key determinants that influence commercial
property rents in the country. However, the property market is one of the major aspects of the investment market. The commercial property
market is an important sector of the property market. Investors in the commercial property market expect return on their investments in
the form of rent (Barlowe, 2009; Hargitay and Yu, 2010; Boon and Higgins, 2007). Also, the commercial property market is characterized by
some fundamental concepts. These concepts provide the premise for the determination of commercial property rental values. Those that
Contributed to the early conceptualization of rent theory believed that rent is a differential caused mainly by distance and cost of
transportation and attributed differences in rent-earning capacity of land to differences in location and transport cost. Archer and Ling
(2013) formed a three market framework, demonstrating the correlation between the space market, the property market and the capital
market. Therefore, in the commercial property market, rental value is a function of demand and supply factors. The composition of the
individual characteristics of these demand and supply factors differs in the context of national, regional and local commercial property
markets.

1.2. STATEMENT OF PROBLEM

Although numerous studies have examined the market for residential real estate, only a handful has looked at the commercial office
market. The lack of attention generally given the vacancy rate variable in the past studies of commercial market is surprising given the high
degree of both theoretical and empirical attention this issue has received in the residential real estate literature. In the residential market,
the vacancy rate has been viewed as pivotal to explaining the price of housing services. This study envisages commercial market in which
the building vacancy rate is the key factor in the determination of rents.

1.3 AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine determinants of vacancy rate in commercial properties in Minna, Nigeria. Other specific objectives
of the study include;

  1. To assess the rental values of commercial properties in Nigeria.
  2. To examine the determinants of vacancy rate in commercial properties.
  3. To examine the impact of vacancy rate on commercial properties in Minna
  4. To examine the income returns from commercial properties in Minna.
  5. To examine the relationship between vacancy rate and commercial properties
  6. To identify the level of rents for commercial properties in the study area.

1.4 RESEARCH QUESTIONS

  1. What are the rental values of commercial properties in Nigeria?
  2. What are the determinants of vacancy rate in commercial properties?
  3. What is the impact of vacancy rate on commercial properties in Minna?
  4. What are the income returns from commercial properties in Minna?
  5. What is the relationship between vacancy rate and commercial properties?
  6. What is the level of rents for commercial properties in the study area?

1.5 RESEARCH HYPOTHESES

Hypothesis 1
H0: There is no significant impact of vacancy rate on commercial properties in Minna
H1: There is a significant impact of vacancy rate on commercial properties in Minna
Hypothesis 2
H0: There is no significant relationship between vacancy rate and commercial properties
H1: There is a significant relationship between vacancy rate and commercial properties

1.6 SIGNIFICANCE OF THE STUDY

The outcome of this study will be of immense value to several interest groups namely, the academia, financial institutions,
investors/investment analysts and public authorities. The work will not only enrich the scanty literature available on this topic but will also
serve as a good reference to scholars who may develop interest to further research on this topic or similar topics. The work will be of great
benefit to the financial institutions, investors and investment analysts hence the content of the study is adequate and sources for a good
viability appraisal to those whose investment objectives are financial and purely for income appreciation. Finally, the research will be
greatly treasured by all levels of government. It will help the government in understanding the dynamics of the commercial market and its
impact on rent. The findings and recommendations in this work will help the government in both policy formulation and execution on
housing.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to determinants of vacancy rate in commercial properties in Minna, Nigeria.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or
information and in the process of data collection (internet, questionnaire and interview)
Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on
the time devoted for the research work.

DETERMINANTS OF VACANCY RATE IN COMMERCIAL PROPERTIES IN MINNA, NIGERIA

DETERMINANTS OF VACANCY RATE IN COMMERCIAL PROPERTIES IN MINNA, NIGERIA