The Effect of Increasing Cost of Capital on the Profitability of Real Estate Development in Benin City, Nigeria

Abstract

The cost of capital in the country has displayed steep increase in recent times as interest rates have continued torise. This in turn has affected the profitability of real estate development. The huge capital commitment in realestate development often times drive developers to exploiting other sources of capital, apart from equity, whichwill incur a cost that has to be financed by part of the profit from such investment, thereby affecting theprofitability of the development to the developer. This research examined the effect of increasing cost of capitalon the profitability of real estate developments in Benin City, Nigeria. In carrying out investigation,questionnaires were administered to selected real estate developers who developed for income generatingpurposes, as well as structured interview with the officials of Central Bank of Nigeria. Data collected wereanalyzed using the simple percentage analysis to determine the relative strength of responses drawn and theannual repayment model to determine cash flow from real estate development. It was revealed that cost of capitalcreated negative rate of returns which implied that the increasing cost of capital reduces the profit level of realestate development in Benin City property market. The study therefore concluded that the increasing cost ofcapital in Nigeria affects the profitability of real estate development negatively. However, the FederalGovernment of Nigeria was advised to revitalize the National Housing Fund Scheme in order to boost investors’opportunity of accessing loans and manage interest rates as a way of stimulating the economy to starve offinflation.Keywords: Real Estate Development Cost of Capital, Profitability, Annual Repayment Model, Benin City,Nigeria.