Pre-Letting and Pre-Sale Financing Arrangements: An Assessment of Cost Effectiveness for Real Estate Development in Lagos Metropolis, Nigeria

Real estate development is capital intensive and hence requires a huge capital outlay and the onus of capital provision lies solely on the development firm. However, the largeness of projects usually makes equity insufficient, raising the need for firms to look outward for capital supply. With debt finance as the alternative, associated high cost of capital acquisition made it inaccessible to development firms. The recent attention-shift of real estate development firms towards pre-letting and pre-sale financing arrangements suggests the cost effectiveness of the arrangements over mortgage. However, despite the attention-shift, the cost effectiveness of pre-letting and pre-sale financing arrangements has been given little attention by the researcher. Hence, this study assessed cost effectiveness of pre-letting and pre-sale financing arrangements with a view to providing information that will increase the level of adoption, using selected properties in Lagos Metropolis, Nigeria as a case study. The cost effectiveness of the arrangements was assessed using three case studies analysis. One property in each of year 2018 (pre – COVID19), year 2020 (COVID19 period) and year 2021 (post – COVID19). Property details such as the number of units financed by pre-letting and pre-sale arrangements, units’ type (1-bedroom, 2-bedroom, 3 bedrooms, among others), number of units targeted for pre-letting and/or pre-sale, number of units eventually pre-let and/or pre-sold, duration of property development, annual rent of the pre-let per unit, price of the pre-sale per unit, among others were acquired from the firm’s record. In addition, commercial banks mortgage lending rates was retrieved from Central Bank of Nigeria website for year 2015 to 2021, and was used to capitalise the property rent and/or price.