Valuation of contaminated land in nigeria
More and more once productive land in Lagos Metropolis and Nigeria on the whole is being rendered vacant, derelict and waste as a result of contamination. Coloured, industrial and heavy metal-laden effluent from our textile, tannery, petrochemical and plant industries are dumped on all parts of the major cities thereby contaminating the land.
It is quite obvious that we are now paying the price of our rapid industrialization with the economic, social and environmental consequences impacting on land use and value.As a result there is excessive requirement and demand for space for residential , industrial and commercial ventures such as Industrial estates, Hotel and Hostel accommodation, Business and Retail park development, Shopping centres and an undefined leisure use, all putting an excessive pressure on available land.
As the problem grows, more important are the costs to address the problem of contamination and the bigger is the challenge to reuse the land. The huge costs of remediation within a short time frame make effective tackling of these problems difficult for the government and individuals.There is need therefore for an accurate valuation technique adopted by Nigerian Estate Surveyors and Valuers.
A qualitative research methodology approach was adopted using telephone interviews of key and active stakeholders of the Estate Surveying industry in Lagos together with case studies and the data emanated from this was analysed. The study established that valuers in Nigeria are not aware, and do not use most valuation techniques and most basically value properties as if it were uncontaminated. The implication is the overall undervaluation and overvaluation of most properties in Nigeria.
Recommendations were proposed for valuers to receive more education and training d. Valuers with a better understanding of health and the resultant financial risk of contamination will be more able to cope and translate environmental reports for their clients.
CHAPTER ONE INTRODUCTION
This chapter deals with the general framework of the study by giving an insight into the main motivation/statement of the problem of this study, the research objectives, the study expectations, the methodology employed and the problems encountered during data collection.
This chapter also contains the outline of the study and the literature review of some of other related studies carried out on land contamination issues in Nigeria and other countries.
The study intends to investigate fully what contaminants are, the causes and its effects on the environment, the human health and value of land in Nigeria. It would then recommend ways of improvement in valuation practices that can lead to environmental sustainability and subsequent sustainable development.
It is firmly believed that on completion of this study, it would provide key guide to policymakers and other stakeholders in Nigeria and other countries to make informed decisions in relation to valuation of contaminated properties.
According to Pereiro, L (2002) ‘Valuation is one of the most interesting frontiers in finance and business today. There is no single ‘best practice’ approach to valuation on which all professionals agree, but the various approaches offer interesting responses to market conditions, and therefore shed more light on where the ‘best practice’ approach of the future is likely to lie.
Valuation plays essential roles in the property market either for loan purposes, sale transactions, and portfolio management or performance measurement Ajibola, M (2010).
The property industry in Nigeria mainly Lagos metropolis has been beleaguered with pressure due to population growth and urbanization challenges, which has in turn, triggers the incessant rise in the need for both residential and commercial spaces.
To meet space requirement for increasing spate of activities from economic growth and oil boom, has resulted in change of focus.
Pereiro(2002) discovered a profound change in the structure of industries and individual companies based on a jump in economic activities thereby pushing firms to approach international standards of competitiveness, a reported growing rate of mergers and acquisitions, joint ventures, large-scale corporate reengineering and divestment, makes property market extremely attractive,.
According to Ajibola,(2010), ‘ Property is now seen as a good investment vehicle which requires proper pricing so as to ensure that the parties involved in any transaction are not economically short-changed’.
According to Cheng et al( ), ‘Investors are becoming increasingly more selective in organizations to which they provide financial support, and clients are increasingly looking for value-added construction solutions, all to reinforce their commitment to sustainability’.
A number of initiatives have been created in the United Kingdom such as environment profiles and sustainable communities to achieve wide-ranging improvements aiming at sustainable construction industry (BRE, 2004; Integer, 2005; ODPM, 2005).
Likewise, Nigeria, however the long-term benefits of the implementation of the appropriate approaches have not been clearly known, and implementation itself is still evolving.
This thesis investigates current valuation techniques in use in Nigeria by examining methods used, and draws up from literature, the specific issues and challenges encountered when applying traditional valuation techniques.
This chapter provides the background, the objectives and the description of the aim of this research.
1.1 BACKGROUND AND MOTIVATION OF THE STUDY
The legacy of past polluting practices as a result of massive industrialization and spurt of economic activities in Lagos metropolis has led to contamination which today presents complex and challenging problems. One which has received growing public attention both internationally and nationally in the last three decades, as the extent of contamination has been known, the average cost of a site clean-up is estimated at between US$29 million and US$35 million, in the UK, dealing with contaminated derelict land alone costs GBP20 billion Kingsbury, (1998).
Olayiwola et al (2006) also stated the importance of cities in societal development is due to their unique role as centers of innovation, adoption, diffusion and growth points.
According to Olayiwola et al (2006) cities therefore propel the growth of societies and are able to attract foreign investment.
Nigeria has experienced one of the most staggering population explosion, and the fastest rate of urbanisation in the world, and this experience is unique in scale, pervasiveness, and in historical background resulting in very dense network of urban centres matchless anywhere else in Africa Alkali(2005).
1.2 NATURE AND EXTENT OF PROBLEMS FOR RESEARCH
According to Gibson & Nwuba (1994) ‘Property assets that is, land and buildings are a key resource for all types of organization, including local authorities and public sectors. They are fundamental to existence of life.
Contaminated land can be problematic for businesses because it can create uncertainty as to the potential clean-up and regulatory liabilities and resultant costs which may have to be met Richard, T (1996).
As economies of the world globalize and capital becomes more mobile, valuation gains momentum in importance for privatization, joint ventures, mergers and acquisitions, restructuring to create value. Yet valuation is much more difficult in these environments because buyers and sellers face greater risks and obstacles than they do in developed markets James & Koller, (2000).
According to Coming Clean, Supra note 7, at 1-2 ‘Most of the nations contaminated land is caught in a vicious cycle of decline as thus:
(a) The landowner is unable to sell the land.
(b)Vacant properties deteriorate and invite arson, illegal dumping, and vandalism.
(c) Unaddressed contamination may spread further eroding the land value, escalating cost of clean up and threatening the economic viability of other adjoining properties.
(d)Potential investors are faced with uncertainty costs and legal liabilities, seek development opportunities elsewhere.
(e) Contaminated land becomes unwanted, legal and regulatory, and financial burdens in the community and the nation.
This is now the case of land contamination in Lagos State. Lagos State is a Mega city, a status conferred on it by the United Nations as a physically smallest but the most populated state in the country, with an estimated population of about 10 million people, which is about 10% of the total population of Nigeria Iwugo, K (2003).
Presently, Lagos Mega city is estimated to have a population of 17 million persons out of a national estimate of 150 million, and projection of 24.4 million people by the year 2015 thereby becoming the third largest city in the world World Bank Report (1996).
According to Ademola & Onishi (2006), ‘No where in West Africa is the rate of urbanization in the last few years as unprecedented as Lagos city, the economic focal point of Nigeria. As the economic nerve-center, it accounts for over 70% of Nigeria’s industrial and commercial establishments that accounts for up to 70% of the country’s manufacturing value-added’.
This rapid population explosion and urbanization in Lagos poses a number of serious issues such as great pressure on the land, shortage of housing, growth of slums and shanty, heavy traffic, urban sprawl, industrial pollution, and failure of the urban community to adopt to changing conditions caused by the incessant influx of migrants to its institutional and social services.
According to Goldberg, (1970) ‘rapid and continued rise in housing and land prices are expected in cities with transport improvement, and rapid economic and population growth’.
He stated that the population increase has a direct impact on the land use and the resultant demand on land. Some of the challenges arising from this are the serious encroachment on conservation zone and impact of industries. There is a massive reclamation works carried out in areas such as Lekki Peninsula, Festac Town, Victoria Island and Ogudu foreshore which destroys fauna and flora. Encroachment has also occurred on areas zoned conservation belt in the master plan by desperate private developers.
Real property was suddenly seen in a new light, no longer as something to leave behind to the children, but as quick money- spinning venture. Similarly to the development world (especially, United States of America and the United Kingdom), property has been seen as money making venture. Hence the industry is undergoing stiff competition from all facets ranging from Estate Agency, Property management, and quantity Surveyors.
The implication is that the Nigerian Estate Surveyors and Valuers are now faced with not only increasing client requirement for valuation, valuation accuracy, but also stiffer competition from related professionals. These double issues calls for valuers to respond with pacesetting levels of accuracy and style in his valuation. Besides, there is a high possibility that the public may abandon the services of the Estate surveyors in favor of the accountants and the engineers who may be able to provide more concise and reliable valuations.
The problem is not limited to Nigeria alone; internationally Accountants, Management Consultants and Investment Managers are competing for Asset management briefs. The current economic environment makes it practically impossible to confine professionals to their areas of specialty.
It is therefore imperative that the Nigerian valuers should sit up, and wake up to the challenges ahead and take valuation seriously.
Equally, Ogunba and Ajayi (1998) our conventional valuation methods are shrouded in mystery and indefensible to the extent that valuers in Lagos are not interpreting their market with anything remotely close to the accuracy of their counterparts in Britain.
Baum, (1998) raised suspicion that: ‘ Property valuation is now a mystery, art or science devoted to the practice of estimating market price subject to a series of often ridiculous assumptions. Property valuers can no longer value properly. None of this would matter if it had no impact on the market. But it does, and we increasingly realize that the property market affects the economy’.
By studying and outlining the various techniques that can be used for valuing contaminated properties and investigating the extent to which they are used in Nigeria, investors and practitioners can gain a better understanding of the risk they face and have a set of tools on which to base a more convincing judgment on investment actions.
1.3 The aim, and Objectives of the study.
The main aim of this study is to determine how valuation techniques are used in the valuation of contaminated land and to establish a best practice approach for Nigeria.
? To determine Stigma attached to contaminated land.
? To determine the valuation techniques used in Nigeria for contaminated land and to determine how risks and uncertainties are incorporated in the valuation process.
? To determine the level of awareness and experience of practitioners regarding valuation approaches to contaminated lands.
The researcher is interested in doing this study because there are many properties including vacant lands that are contaminated in Nigeria. The reseasrcher is going to conduct interviews of key stakeholders in the estate and valuation industry and case studies as data collection methods. The region of lagos metropolis is to be used for the case study of this work and the analysis of interviews and case studies will show how to evaluate contaminted land in Nigeria.
CHAPTER TWO LITERATURE REVIEW
This gives an overview of literature and past research work related to these areas. It gives background information required for the understanding of the entire work.
Relevant literature reports from international and local journals, textbooks, relevant government agencies report (RICS), documents from Environmental protection Agencies and non-governmental and community based organizations, internet websites are used in this study.
There have been numerous suggestions by professionals and academicians all over the world on solutions to the problem of valuation of contaminated land, but no single solution appears to meet all requirements. The basic reasons for carrying out valuation and the procedures involved need to be well discussed and understood.
According to Syms, P and Weber, B (2003) In actuality, neither the literature nor current guidance from professional bodies indicate recognized methods and techniques for the valuation of contaminated land and there is no clear indication of when or to what extent they would be applied if there were any.
According to Kilpatrick, John (2007) ‘Normal appraisal techniques frequently fail and appraisals must rely on more advanced techniques, such as contingent valuation, case studies or statistical analysis’.
What investors, regulators and users of valuation services require are consistency, reliability, clarity and transparency in valuation reporting worldwide A single international standard has to encompass or recognize property laws, tenures, accepted rules of conduct, languages, concepts and ‘best practice’ benchmarks Edge,( 2000).
Property remains one of the biggest investment assets closely followed by shares and bonds Hoesli & Macgregor (2000).
Valuation plays an essential role in the property market either for loan purposes, sale transactions. And portfolio management or performance measurement. Ajibola, M (2010)
According to Ajibola,M (2010) The role of valuation as the basis of transaction figure, should not be compromised, with the establishment and multiplicity of industrial and commercial economic activities, and coupled with prime role property holdings play especially as collateral for the release/production of capital funds. However, since most interactive human activities are fraught with dispute, claims and counter claims, the valuation practice is no exception.
The case of inaccuracy manifested recently in the valuation of the assets of Nigerian telecommunication Limited (NITEL) for privatization/disposal purposes when members of staff of the company, stakeholders and the public openly voiced out their concerns against excessively low valuation estimates the estate surveyors ascribed to the assets of the company. It was based on such complaints that the federal Government under President Olusegun Obasanjo cancelled the whole privatization exercise, and ordered a re-valuation.
While Accountants, stockbrokers and other financial consultants have been progressive in refining their financial analytical techniques to meet and satisfy their changing client’s needs, this cannot be said of estate surveying field which have been slow and lukewarm in their attitude and approach towards accuracy changes in valuation practice. OJO, (2004)
In his paper ‘Showing What You Know’, Weber (2001) states that: ‘Appraisers need to show the reasoning behind their value opinions by discussing important spatial relationships and their likely effect on value. Geographic Information Systems (GIS) can be used to analyze these relationships and to show why a client should select an appraiser who has this level of information’.
Valuers in Nigeria are generally not skilled in the art of determining the extent and degree/nature of contamination that may exist in a given property.
Bond (2000) states that problems faced by valuers of contaminated property is the difficulty and inability of values to identify contamination in a given site, lack of specialized skills to determine the extent of contamination, and the cost of remedying it.
Appraisers should have specialized and basic knowledge of contamination types, nature, its proportion and the effects it is capable of causing. This should be added to the basic curriculum of the appraisers in schools. This is just one reason why knowledge in the area of ground contaminants as it relates to property valuation is important.
The application of these techniques enables properties to be regenerated and returned to an economically feasible, socially suitable and productive use.
One of the most well known areas in the United States for Brownfield development is Pittsburgh Pennsylvania, which successfully transformed numerous former steel mill sites into high-end residential shopping centers and offices. Reclamation of Brownfield can become a major asset to a city and significant part of new urbanism. In many of the most populated areas of the country, it is a necessity that plays a critical role in countering suburban sprawl.
2.1 WHAT IS LAND CONTAMINATION?
A PRESENT FROM THE PAST
There is no universal definition of contaminated land. The term is dealt with differently in different countries.
Contaminated land is a general term to describe sites or wider areas of land where elevated concentration of chemicals or other substance (Contamination), usually resulting from man’s use of the land, may exist. It focuses on contamination resulting from past practice, that is historic or legacy contamination CARINET, (2002).
State of the Environment report (2007) defines Land Contamination as land that has a pollutant above background concentrations causing, or with the potential to cause, adverse impacts to human health, the environment or any environmental value.
Article 3 of the Waste Act defined contaminated land as: ‘All land the physical, chemical or biological characteristics of which have been negatively altered by virtue of the existence of dangerous components of human origin, in concentrations such that they pose a risk to human health or the environment according to the criteria and standards set forth by the government.This definition excludes natural contamination and occurs according to the standards set forth in each case by the government. This definition leads us to conclude that not all actually contaminated land may be legally considered contaminated.
The Planning Regime uses a slightly different definition of contaminated land which is not based sorely on the legal definition set out with Part2. A wider range of contamination and receptors is relevant to planning. The Planning Regime uses the wider term ‘Land affected by Contamination’. This is intended to cover all cases where: ‘ the actual or suspected presence of substances on or under the land which may cause risks to people, human activities and the environment, regardless of whether or not the land meets the statutory definition in Part 2A.
This is the United Kingdom legal concept of land contamination. According to section 78A(2) of Environmental Protection Act, 1995: Contaminated land is ‘Any land which appears to the local authority in whose area it is situated to be in such a condition, by reason of substances in, on or under the land, that-
?Significant harm is being caused or there is a significant possibility of such harm being caused; or
? Pollution of controlled waters is being caused or is likely to be, caused.
The key element of UK definition is the Source-pathway-Receptor pollutant linkage concept. All three elements of the pollutant linkage need to be present for there to be a risk of any magnitude. Without the clear identification of all three elements of the pollutant linkage, land cannot be identified as contaminated land under the regime.
It has since been used as a model for ecological impact, and the right appraiser should be up to date with its changes.
Equally, the use of the word significant in the main definition of contaminated land narrows its scope considerably’’ Denner and Lowe, (1995).
Information from Syms’s feedback in January 2001 reveals that this definition refers to most seriously contaminated land, probably no more than 10% of all contaminated land in England.
One implication of this concept is that not all land containing contaminants therefore is contaminated , and the definition relies upon the concept of harm to human and the environment and it explains as to how significant the harm must be for the land to be defined as ‘contaminated’ thus setting a high threshold before land will fall under the regime. The aim of the UK definition of contaminated land in part 2A is to focus only on problematic land, and to avoid inadvertently catching non-problematic land.
The principle difference between the UK and Planning definitions of contaminated land is that under the planning system, risks have to be assessed based upon the new or intended use of the land, rather than the existing use.
However, the principles underlying both regimes are fundamentally the same namely- the identification and remediation of land that may pose a risk to human health and /or the environment. The Part 2A deals with contamination risk from a site in its current use, but the Planning System requires that the proposed use is considered. Therefore the remediation requirement under the planning system can be wider than under Part 2A.
It should be noted that a contaminated land is also referred to as ‘Brownfield’. United States Environmental Protection Agency (EPA) defines Brownfield as: ‘abandoned, idled or underutilized industrial commercial facilities where expansion or redevelopment is complicated by real or perceived contamination’.
2 .2 WHAT ARE THE CAUSES OF LAND CONTAMINATION?
Land may be affected by contamination as a result of historical land use, principally from industrial processes, waste disposal and accidental spillages.
Table 1 lists some of the most commonly encountered contaminants, the sites where they are likely to occur, and the principal hazards they produce.
CONTAMINANTLIKELY TO OCCURPRINCIPAL HAZARDS
INORGANIC –Toxic metals e.g. cadmium, lead, arsenic copper, nickel, and radionuclide.Metal mines, Iron and steel works, foundries, smelters.Electroplating, Anodizing and galvanizing works. Engineering works.Harmful to health of humans or animals if ingested directly or indirectly.May restrict or prevent the growth of plants.
ORGANIC-combustible or flammable substances like coal and coke dust, methane, Petroleum products, gasoline, pestcides, additives and aggressive substances like sulphates, chlorides, acids and asbestos.Gas works, power stations, railway land, landfill sites, chemical works, refineries, tar distilleries, industrial buildings and waste disposal sites.Underground fires and explosions within or beneath buildings, chemical attach on building materials e.g concrete foundations, contamination of water supplies.Dangerous if inhaled.
BIOLOGICAL-bacteria, viruses, yeast, mould, mycoplasma.Are or were living organisms which can travel through the air.Transmission by people, plants and animals. Biological growth is supported by nutrients and moisture.Triggers allergic reactions from repeated exposure.Infectious diseases are transmitted through the air.Releases disease causing toxins that can damage vital organs.
SOURCE- ICRCL GUIDIANCE NOTE 59/83 SECOND EDITION JULY 1987.
2.3WHY IS CONTAMINATED LAND IMPORTANT?
Contaminated land has caused major concern; critics even viewed the problem as a toxic time bomb in land Pearce, (1992).
According to Oldershaw (2001), where there is contamination, the potential impact on health, the environment and development will depend on:
(a) contaminating substance(s);
(b) The ability to migrate(depending on local geology and hydrogeology) and
(c) The intended use of the land.
He also stated that these problems stems from the fact that there is a historical lack of care over industrial and waste management, inadequate planning or failure to recognize that land might be put to other uses in the future.
There are also fairly substantial economic losses due to the decline in land productivity as a result of contamination and the ensuring impact on world food security.
According to The Environment Agency (2011) Land contamination or the possibility of it is a material planning consideration. This means the planning authority must consider the potential implication of contamination both in preparing development plans and when considering applications for planning permission. The development phase therefore is the most cost-effective time to deal with the problem. Town and country planning system controls dev elopement and the use of land in the wider public interest. Local planning authorities are responsible for ensuring that land contamination is dealt with through the planning system and that remediation takes place where it is required.
According to ( Patchin 1988, Spencer 1993, Syms,1996b) ‘The fact that the property is contaminated requires a valuer to have a thorough understanding of land contamination issues including regulations under relevant environmental laws, the nature of contamination on land, the type of remediation required and the market conditions, etc. As far as valuation is concerned, the main difficulty is the lack of accessible data’.
The appraiser must diligently recognize and report all forms of contamination through an environmental assessment process.
2.4EFFECT OF LAND CONTAMINATION ON VALUE
The primary purpose of valuation is to determine value which is an opinion, an impartial activity that is based on current market evidence, no matter what form or state the property is in Antai, I (2003).
According to Chalmers (1993) ‘Contamination or the risk of contamination can result in diminished utility for a property. The type of impact for this diminished utility may be of a short term nature and will determine the particular valuation technique to be applied.
The value of a property can be defined as the expectation of the remuneration, accruable to that property, to be derived in the future. (Appraisal Institute 2001, Appraisal of Real Estate, 12th Ed.
In the extreme case, the owner may not be able to let or sell the property or use it as security to obtain loan. The land therefore has become a liability to the owner. Furthermore, land contamination may affect the ease of putting the land to the next best use thereby affecting the value on the whole.
Patchin, (1991) noted that the decline in value is often greater than the cost-to-cure. “There is virtually no chance of obtaining mortgage financing for a seriously contaminated property”
According to Wiltshaw, G (1996), ‘Stigma has been identified as a key factor in lowering the value of land which is actually or potentially contaminated’
According to Bond (2000) ‘Stigma is the blighting effect on property value caused by perceived risk and uncertainty- uncertainty which relates to inability to affect a total cure, risk of failure of remediation, risk in changes in legislation, difficulty in obtaining finance, or simply, a fear of the unknown’.
Stigma may have an impact on contaminated land value before; during or after clean up process Roddewig, (1996). Apart from the environmental risks, they also worry about the likely future financial and legal liabilities.
Mundy (1992) describes two major problems that affect such properties as the marketability effects which try to determine the loss of financial returns on the property due to the perceived damage and the income effects, which estimates the present value of this loss from lack of marketability.
It is therefore important to note that a property may be affected by either one or both influences (loss of value due to cost of clean-up and loss of value due to stigma).
Analyzing the impacts of asbestos on a property, Fisher et al uses the formula below to estimate loss in value.
VA= PV of expected NOI + PV of expected NSP-PV of expected remedial cost.
Where PV- Present Value;
VA- Value of a property contaminated with asbestos.
NSP- Net Sales price.
NOI- Net Ordinary Income.
In effect from the given equation, the loss in value is expressed as;
Loss in value = PV of property with asbestos-PV of property without asbestos.
2.5 EFFECT OF LAND CONTAMINATION ON THE ENVIRONMENT
According to Chan (2001) ‘contaminated land is a major environmental problem apart from causing actual or potential threats to human health and the environment, contaminated land also leads to liabilities and financial losses in form of costs to meet legal requirements in relation to clean-up, and long term monitoring expenses’. Moreover, they may be losses due to a drop in market value/rental of the property, longer vacancy periods, high remediation and monitoring costs.
According to Environmental Agency: Guiding Principles for Land Contamination (2010), ‘ Land contamination has the potential to cause considerable harm to ecosystems, humans, property and pollution of controlled waters (including ponds, groundwater, lakes, coastal water and surface watercourses) because of the existence of substances in, on or under the ground’. There is wide loss of fertile soil, pollution of air and water, degradation of farmland, damage to aquatic ecosystems, destruction of wildlife and biodiversity all of which cause serious health problems to humans.
Thus, removing environmental contamination from the land not only removes the contamination from the land, it prevents contamination from entering the food web. State of the Environmental Report (2007).
2.6FACTORS AFFECTING VALUATION
The value of any given property is not arrived at in isolation; it is highly dependent on factors as demand and supply. Valuers should assess trends in these forces while trying to determine the speed, direction, strengths and limits of these trends. Some of these factors known to affect the value of a property with respect to either the demand for or the supply of a property are:
This is one of the most important factors to be considered when carrying out valuation process. The economic prospect and forecast are a vital part of analysis in value determination. The anticipated trend in the economy, the geographical area and many other different aspects of the economy are very important when carrying out valuation assignments. These includes income, inflation, employment, purchasing power and general price levels, interest and bank lending rates, availability of mortgage credit, construction costs, vacant and improved properties.
The value of real estate is one of those areas highly predisposed by social forces. This involves the social structure of the society that can affect the way the societies perceive things. These forces include age distribution, marital status, lifestyle, locations, education, law and changes in society type all could affect value of property. These effects could either be positive or negative depending on what society is tending towards at that point in time.
This refers to the natural and man-made environmental conditions of the area in which the land is located. Climatic conditions, infrastructure, topography and soil, contaminants such as asbestos and radon, natural barriers to more development should all be considered before valuation.
The provision of governmental amenities and services around the administrative areas may affect land use patterns and thus affect the value of properties near them. Proximity to good public social services could affect the value of any given property e.g. security, zoning, public service, communication, conformity to building codes, fire service, fiscal policies in the three tiers of government, rent regulations and restrictions on forms of ownership etc.
2.7 WHY THE VALUATION OF CONTAMINATED LAND IS A COMPLEX PROCESS
According to Javadi A and Bello- Dambatta (2008) ‘Contamination and its management are very complex, risky and uncertain multidisciplinary processes with the high cost overruns and stringent time constraints, that rely on inputs from not only broad range of expertise, but from different groups of stakeholders, making it virtually impossible for any group of experts or stakeholders to effectively manage contaminated land problems on time, and on budget’.
Lapinskas (1998) stated that the legacy of past polluting practices has resulted in contaminated sites, which today present complex and challenging problems. Any solutions will require a multidisciplinary approach combining civil engineering, chemistry, geology, hydrology, toxicology, Geographical Information System, /micro station and environmental science.
According to Antai, I (2003) ‘the entire process of placing a value on a property is a very complex process’. This is because it utilizes inputs and data from a variety of economic, demographic, administrative and engineering sources to come up with concise and reasonable estimates for a given property. This process becomes much more difficult when the land is identified as being contaminated.Moreover, the valuation process can be significantly affected by a number of forces covering a whole range of human and professional interaction. This ranges from social, economic, environmental, and governmental. Therefore understanding the full context of Real Estate Valuation is imperative especially as fast growing changes is taking place in and around the valuation of contaminated property such as the laws, methods and regulations are constantly undergoing changes.
The problem caused by land contamination in relation to the issues concerning the extent of contamination, the way in which the contamination is perceived, the effects to utility of the property, the appropriate standards concerning the contamination type and the remediation process Chalmers et al.,( 1993). This also shows that the valuation process is a complex exercise.
There is always an element of uncertainty when faced with contaminated property. This is because when faced with contaminated land, one never knows what range or class of contamination might be contained in it, the uncertainty of the element type/s that might be causing contamination, i.e. what is it, how much, and how dangerous.
According to Reddy et al (1999) a contaminated land poses unique problems because many are located in heavily populated urban centers, therefore additional attention must be paid to using site characterization and remedial methods that will accommodate the often inflexible nature of urban sites. Specialist knowledge is therefore required because of
?The property market is an imperfect one-supply and demand are always changing and are different in each location, and for each property and information on transactions is often restricted;
?Each Individual property and the interest therein tend to be unique, or at least never exactly the same as others;
?Legislation- The complex and inter-related laws relating to property are forever changing , and only a specialist with full knowledge of them which needs to be constantly updated can successfully interprets them correctly.
The profession has become international in scope, and challenges faced in the future come from increased use of information technology, global clients, market, and the effects of climate change on valuation.
Developed countries such as United Kingdom and United Sates have a long history in using valuation techniques, and a desk study will explore these and relate them to current practice in Nigeria from the perspective of those implementing and delivering it.
3.1 V ALUATION TECHNIQUES AND APPROACHES FOR CONTAMINATED LAND: AN
This chapter compares other developed countries such as United States of America and United Kingdom method of valuation of contaminated land to that employed by Nigerian practitioners and the lessons to be learnt. These countries are chosen because they have a long history of industrialization and that there is need in both countries to re-use Brownfield land on a fairly extensive basis. Moreover, earlier introduction of environmental legislation in those countries made them a perfect reference guide.
Concerns about land contamination issues were reinforced with the introduction of legislation governing the environment for example, the 1986 Superfund Amendment and Reauthorization Act (SARA) in the US, and the 1995 Environmental Act (EA) in the UK. Together, these statutes have brought contaminated land issues to the mind of valuers, and have highlighted the need for them to take contamination and stigma into account in calculations of value.
By identifying and studying other countries valuation techniques, one can analyze how it can be applied to Nigerian situation. This will enable valuers to understand some of the implications involved in the valuation of contaminated land, and to compare British and American research practice with that of Nigeria. This ultimately gives the reader a wider view of current issues and best practice.
There is need therefore for a set of interviews and exploratory case studies focusing on the challenges presented on the ground around Lagos State.
3.2 CONTAMINATED LAND: THE UNITED KINGDOM APPROACH
According to Higgins (1998), the legacy of the industrial development in the United Kingdom has been an issue that has taxed politicians and regulatory bodies significantly over the last 10 to 15 years.
As the first industrialized country in the world, it is estimated that as many as 370,000 sites covering an area of 400,000 hectares are potentially contaminated land. A legacy of the industrial revolution and the mining industry. To date, some 67,000 hectares have been identified with over 34,000 hectares successfully remediate in UK alone.
The Parliamentary Office of Science and Technology in its report Contaminated Land (1993) estimated between 50,000 and 100,000 potentially contaminated sites across the United Kingdom, with estimates of the extent of land ranging between 100,000 and 200,000 hectare.
UK is rapidly becoming a global center. A significant investment in research and development enables them to offer a wide range of cutting-edge, innovative and transferable contaminated land management and remediation across the globe.
This sector is worth ?1 billion annually and comprises 220 companies including specialists and multidisciplinary consultancies and laboratories all complimented by expert legal, financial and insurance firms CLR1.
According to DETR(2001), 60% of new housing to be provided on previously developed land or through conversion of existing buildings and Brownfield land to be reclaimed at a rate of over 1,100 hectares per annum by 2004, reclaiming 5% of current Brownfield land by 2004 and 17% by 2010. Figures released by the DTLR in May 2002 indicate that the target is currently being exceeded with 61% of new housing built on Brownfield site.
According to CLR1, typical prestigious sites and events such as 2000 Manchester Commonwealth Games, the 2014 Glasgow Commonwealth Games, the Millennium Dome and London gateway Port have been or are due to are developed on contaminated land. The ultimate regeneration project is 312 hectare London 2012 Olympic Park, where over 800,000m3 of contaminated land has been treated for reused to provide development platform.
Regulation in the UK is based on ‘Polluter pays principle’. The key strength of the UK contaminated land sector is the ability of its environmental consultants and lawyers to understand diverse regulatory regimes across the globe and how these impact on liability.
There is significant role of legislation, and the highly structured use of statutory control to manage land contamination in both the United Kingdom and the United States to induce responsible attitudes and behavior towards the environment and serves as an effective instrument for environmental protection, planning, pollution, prevention and control.
According to CLR1 ‘Due to the UK’S long industrial heritage, its consultants have been exposed to broad range of contaminating industries and the full scale of contaminants in both man-made and complex natural soil and ground water settings. Equally, the UK financial services sector is skilled in funding of even the most complex contaminated land remediation projects especially in forming successful public private partnerships to deliver regeneration and their insurance companies have provided policies across the globe to provide risk cover for environmental liabilities and projects utilizing a range of specialist products and solutions.
3.3 NEGIGENCE VALUATION OF CONTAMINTED PROPERTY IN THEUNITED KINGDOM
According to (Miles, 2001), due to the complex nature of the valuation of contaminated assets, many practicing valuers in the global world might still not be discharging their professional duty to an adequate degree.
In the United Kingdom, a valuer who is on notice of the possible presence of contamination, doing nothing is a hazardous option, there is an obligation to make the client at least aware of the issue and, where appropriate, the need for further help (RICS, 1999).
Thus provided the valuer advices on the existence of contamination problem and the need for any expert advice, it cannot automatically be said that a duty ‘to follow the trial has been neglected.
3.4 CONTAMINATED LAND: THE UNITED STATES APPROACH
‘ON THE BROWNFIELD’S OF YESTERDAY, WE WILL BUILD THE GREEN INDUSTRIES OF TOMORROW’. PREDIDENT BUSH, APRIL 5, 2001.
The United States of America General Accounting Office estimates that there may be as many as 650,000 underutilized or abandoned properties across the country due to perceived or actual release of hazardous materials.
The sheer enormity of the Brownfield dilemma has drawn it into the national spotlight, provoking the United States conference of mayors to declare the situation as ‘an emergency’, a ‘dead zone’ and as ‘pockets of disinvestment, neglect and missed opportunities that exist within American cities.
According to Browner, C (1998), the current estimate places the cost of cleaning up the nation’s Brownfield at $650 billion. Brownfield’s also represents millions of unreached tax dollars and millions in lost wages.
The valuation practice is regulated by the various states best known as the Appraisal Institute and all the real estate valuers must be state licensed and certified.
The method most widely used for remediation is the “Multiple-for-use approach which requires a high standard of clean up which normally allows land to be used for most purposes.
Reusing land in the United States is a fairly new trend. This is because manufacturing is more recent there and also because the land mass is more extensive, thereby reducing the need to rebuild on previously used land.
Until recently, clean-up in the United States has been to the highest standards helped by superfund.
The land may also remain stigmatized because it was once contaminated even though subsequently cleaned Chalmers, (1993).
As a result, there is a move towards a more realistic approach to decontamination such as the ‘suitable for use’ approach in the United States as well.
The concentration of research in this field on both countries is due to the need to reuse Brownfield land on a comparatively extensive level.
In United States, access to information regarding land, its contamination and its subsequent selling price is publicly available unlike the United Kingdom and Nigeria.
In the United Kingdom, data regarding property transactions are treated as confidential and there is no public access to such information.
3.5 NEGLIGENCE VALUATION OF CONTAMINATED LAND IN THE UNITEDSTATES OF
To reduce liability, the appraiser must understand the impacts that contaminants can have on the property and how their effects on market value should be estimated.
Jackson and Powel (1997) opine that ‘appraisers should keep themselves acquainted with the law and changes in the law so far as his skills are affected.
In the United States of America, the primary legislation of contaminated land is the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) which dates from 1980 and the United States of American Environmental protection agency.
The law states that before a valuation of contaminated land or property can be done, the environmental risk assessment must be carried out. Also, the law requires the valuer to complete an environmental review check list form or a similar property condition questionnaire at the time of a required field inspection leading to the completion of an appraiser report. Without appropriate qualifier, the valuer may be exposed to unnecessary liability.
Commonly sites are rezoned to ‘higher uses’ such as high density housing to give land a higher value so that after deducting clean up costs there is still an incentive for a developer to purchase the land, clean it up, redevelop it and sell it on.
3.6 VALUATION IN NIGERIA AND THE CHALLENGES FACED BY VALUERS
Recently in Nigeria, it is notable that other related professionals such as Accountants, Bankers and Engineers are gradually; not only encroaching into areas traditionally preserved for valuers, but are claiming to be much more competent. The invasion of unqualified estate and land agents, and their activities has a negative effect on property valuation. This is because they do not understand the factors necessary to be considered to determine property values and do not access the property values based on any sound economic analysis. They also charge exorbitant fees as commission for their services and often inflate such values in order to increase their take-home pay regardless of the effect this might have on the general level of property values. The values of lot properties in Nigeria are therefore informally assessed and are not subject to any formal valuation standard. Moreover, Nigerian valuers find it difficult to identify if contamination exists on a land, specialized skills required to determine extent of contamination and cost of remediation, identify the presence, degree and duration of post-remediation stigma is difficult due to limited market sales data.
This constraint is a problem that cuts across the use of all the methods. The structural method of data collection in the country is weak and does not provide sufficient information on which to base valuations. This makes it difficult to make critical analysis and achieve a sound base for valuations using the open market values. Many valuations carried out therefore do not represent the true open market value of the property.
Adair et al (1996) emphasize that data deficiencies often lead valuers to work with secondary and incomplete information. The uniqueness of every property implies that a high level of data availability and analysis is required to facilitate increasingly analytical procedures. The valuation task becomes more difficult, given the severe limitations on the availability of information.
Parker (1998) remarked that if valuations have only slim chance of accuracy, clients are likely to question the necessity of valuations and this renders the professional advice of
Valuers useless. This observation is very different from the United Kingdom and United States.
There is equally lack of a developed property market in Nigeria. Though there is open trading of properties done informally, and knowledge about the property market is scrappy, there are no clear legal basis amd policies on trading on properties. Property owners especially in urban areas aided or unaided by valuation professionals sell and determine their own terms and conditions without recourse to any established formal guideline on property values or valuation principles.
Michael Malison also declared that ‘’some valuers are working themselves out of jobs by clinging to old methods… and if nothing is done soon, surveyors are going to run into sand’’.
The Nigerian Institute of Estate Surveyors and Valuers in one of its editorial comments NIESV (1998) noted that “despite the training in the institution of higher learning in more dynamic methods of valuation which are able to take account of various market conditions, we still insist on traditional methods in practice. We continue to base our practice on comparable evidence without taking into account local and national trends, demographic factors, consumer expenditure and others.
This method becomes more archaic, ineffective and unreliable when considering the various investment vehicles (securitization, unitization) which will dominate finance market in the next millennium.
There is also general lack of dedication to duties and willingness to pull out of employment immediately after registration because of low salary and high rate of unemployment. Working in Banks, development companies and oil companies are better options for most valuers in Nigeria.
3.7 NEGLIGENCE VALUATION OF CONTAMINATED LAND IN NIGERIA
The regulatory bodies in Nigeria include the Constitution of the Federal Republic of Nigeria (1999), National Environmental Standards and Regulations Enforcement Agency (NASCREA) Act 2007, the Land Use Act 2004.
It can be noted that the Nigerian legislation and regulation of contaminated land does not have the same level of governance driving the improvement of contaminated land.
While concerns in the developed countries attach greater significance to environmental risk, remediation and valuation methodologies in contaminated properties and possible negligence that may arise while carrying out valuations, there are indications suggesting that little or no emphasis is made in this regard in Nigeria.
Evidenced from refuse dumps located at Abule Egba, Oke-Afa(Isolo) and Ojodu in Lagos metropolis, Bello,(2005) established that rental values of the properties adjoining these locations have been reduced by as much as 37% in Oke Afa(isolo) for block of flats and 33% in Ojodu for tenement buildings. Similarly, the reduction in capital value of adjoining vacant plots ranges from 20% in Abule Egba to 33% in Ojodu.
Significantly, these findings indicates that while empirical evidence supports the damaging effect of these contaminants on land value, the Nigerian estate surveyors and valuers usually ignored this in their valuations.
There is no recorded case of negligent valuation in this area reported against any practitioner either with the Nigerian Institute of Estate Surveyor and Valuers or with the Estate Surveyors and valuers Registration Board of Nigeria.
For example, there is no specific regulation at this time on the use of, and likely effects of asbestos use locally. No such litigation proceedings have been brought to the courts to the best of our knowledge owing to the prevalent use of asbestos for construction purposes.
This portrays the ignorance of clients of their rights and the fact that negligence valuation has not assumed an alarming proportion. However the case, Nigerian valuers should brace up to the challenges ahead in the best interest of the profession.
3.8 WHAT ACTIONS IS TAKEN ONCE CONTAMINATION IS IDENTIFIED
Once potential sites have been known, they will be recorded and evaluated based on their potential risk, allowing properties to be ranked into an order of high to low priority. Investigation will commence on high priority sites, in-depth site information will be collated and sampling will be required before a decision can be made as to the degree of contamination on site.
Once the nature of contamination is ascertained, how it is perceived or evaluated by relevant section of the public must be understood.
According to Syms P (1996) Perceptions and policies are therefore linked and have the potential to impact on each other, with the resultant implications for valuation and the redevelopment of contaminated land.
According to Guiding Principles for Land Contamination (2010), understanding the risks from contamination is the first stage in the process of effectively managing it. Risk and the need to have an accurate valuation of land, and this risk is an important part of sorting the problem.
These are the three phases of contaminated land investigation and management that may be undertaken once contamination is identified:
Desk Study (Preliminary Risk Assessment)
A key document in any contaminated land assessment which has fast become a statutory requirement (under PPS23) to accompany a planning application for a sensitive development such as housing. This involves the collation of relevant environmental information for the site such as historical mapping, aerial photographs, water quality data, landfill data, coal mining, ground instability and geology.
This involves walking over the land to establish if any contamination is present as well as to establish or confirm the potential pollutant pathways or receptors. A site walkover survey should be made to confirm the information gathered by the desk study.
Site/ ground Investigation
This focuses on important risks with the use of latest non-invasive techniques to raise confidence at minimum cost (e.g. geophysics, soil vapor extraction).
This should always commence with a desk study so that consideration can be given to health, safety and environmental hazards prior to fieldwork commencing.
Site investigation generally involves huge expense, and if the investigation is not well planned, considerable resources may be wasted. Consideration should be given to the type, quantity and quality of the data required before any investigation, sampling and testing takes place.
The combination of these three procedures- preliminary investigation, desk study and site investigation will increase the likelihood of detecting contamination at an early stage, allowing analysis and remediation to occur.
This is clean-up focused on key liabilities and ‘suitability for use’ requirement in order to manage risks at minimum cost.Remediation action usually requires some form of treatment to be carried out to reduce the risks and can also include a change in the proposed use or layout of the development. Such changes are often the most cost effective solution.
This means partnership with independent risk management advisers to provide cost-effective, tailored risk solutions of adequate duration and assign ability for long term peace of mind.
This refers to monitoring and performance review to meet regulatory requirements.
This is very imperative to ensure that the decision either to precede with unchanged development plans or to take remedial action remains justifiable.
It is recognized that Nigerian valuers do not have the necessary requisite skills to determine the existence and extent of contamination, or to estimate the costs involved in remediation. The resultant perceived financial and investment risks must be accounted for in their estimates of value.
3.9 VALUATION TECHNIQUES OF CONTAMINATED LAND IN NIGERIA
There is need to provide a critical evaluation of the procedures currently in use by valuers as related to valuation methodologies in Nigeria. The study does not include wide analysis of valuation methodologies, nor does it attempt to prove which is the best approach to adopt in valuing contaminated lands.
In Nigeria the valuation methodologies are used for pricing properties and the methods ranges from the cost method, the direct comparison method to the income approach.
Sound valuation measures can enhance a firms risk management operations, better preparing and positioning the business for the economic, regulatory uncertainty that lies ahead.
According to Acks, (1995), this is based on the premise that the value of the property is approximated by the investment necessary to replace the property.
The cost of replacement includes land acquisition, the cost of the site and building improvements, and an allowance for the developer’s profit, less accrued depreciation Acks, (1995).
This is mainly used to assess unique types of properties such as hospitals, churches, libraries schools and new projects. This is because it is difficult to find recently sold comparable properties in the local market, and public buildings do not earn income, so the income approach cannot be used either. Generally, the cost approach considers what the land, devoid of any structures, would cost, then the cost of actually building the structures is added and depreciation is subtracted.
Marchitelli (1992) questioned the use of the method, and suggested that the method should be abandoned in the valuation process in most situations because depreciation Which is one of the components used in cost approach is difficult to measure especially when the land is close to environmental hazards.
According to Wilson (1994), since contaminated properties are unique, they have to be valued as other unique properties are- principally using the cost approach which he says Is ‘’probably the least vulnerable to distortions resulting from environmental impairments’’.But Jan deRoos, & Rushmore, S (2010) stipulated that the Cost Approach provides a reliable estimate of value in the case of new properties, but as buildings and other improvements grow older, and begin to deteriorate, the resultant loss in value becomes more difficult to quantify accurately. The danger here is overstating the costs of remediation or attributing excessive value loss from stigma.
In many ways the Income Approach is the most fundamental of the valuation methods. It is the ability of the asset to generate future income. This underlying characteristic ‘Intrinsic’ value of the asset captured by the ability to directly or indirectly generate a positive cash flow. This cash flow when appropriately discounted is the underlying premise of the income method.
According to Connor, P (2009) this is usually given primary emphasis when appraising a commercial real estate used to generate income. Estimates of value through income approach are highly sensitive to changes in revenue, expense and capitalization rates. However, correctly preparing the analysis requires three criteria:
? An understanding on the type of value
? Accurate data
?accurate application of the income approach.
An appraiser ‘should look through the eyes’’ of market participants when selecting an in Income approach Methodology. Although slightly complicated, this method is an essential element to the valuation of any property; it is almost always employed by financial investment professionals when valuing assets.
The potential gross income is computed first by analyzing lease and rental comparable data then subtracting vacancy and expenses, and then capitalizing the net in come. This is done by dividing the net operating income by the capitalization rate.
The Income method while highly analytic is also quite subjective, while care is required for all valuation methods, the subjectivity involved in the Income method can be especially tricky.
SALES COMPARABLE APPROACH
Sales Comparison Method is utilized by carefully analyzing the market of similar properties and comparing these properties to the subject property thus
Value of subject property =Price of comparable and competitive properties +? Adjustments for differences.
According to Jan deRoos, Stephen Rushmore (2010) factors such as the lack of recent sales data, the numerous insupportable adjustments that are necessary, and the general ability to determine the true financial terms and human motivation of comparable-transactions often make the results of this technique questionable.
DISCOUNTED CASH FLOW
This has been viewed as a ‘Modern’ technique and is an alternative approach to Investment Method. It has a long history of use by accountants and financial institutions and for real estate appraisals in the United States.
When using Discounted Cash Flow (DCF), appraisers aim at calculating the present value of a land based on estimation of how much it will be worth after a certain period of time. The logic behind the use of DCF valuation is based on the time value of money.
DCF is the best and most widely used and effective valuation technique. Given that any company on the globe aims at generating a return on investment and free cash flow after operating expenses are deducted.
A fundamental role of DCF in real estate appraisal is its ability to calculate value or worth but requires a series of intricate calculations which would need to be reworked each time one of the variables was altered.
DCF can be calculated as:
DCF= CFI + CF2 + —+ CFn
(1+ r)1(1+r)2 (1+r)n
CF= Cash Flow
R= Discounted rate
‘YOU ARE NEITHER RIGHT NOR WRONG BECAUSE THE CROWD DISAGREES WITH YOU. YOU ARE RIGHT BECAUSE YOU’RE DATA AND REASONING ARE RIGHT’- BENJAMIN GRAHAM.
4.1 RESEARCH METHODOLOGY
This reflects on the methodology utilized to achieve the objective of this research.
The research uses Qualitative approach together with case studies.
The study population comprises Estate Surveying and valuation firms in Lagos metropolis which has over 50% headquarters of such firms according to the directory of the Nigerian institution of Estate Surveyor and Valuers (2002).
Lagos metropolis is the economic nerve-centre of the country and, currently house most of the nations head offices, branches of the Estate Surveying and Valuation companies as well as the financial institutions. The study was conducted out of the fact that the study population is found aggregating about these economic areas where there is high expectancy of a very active property market.
Telephone interview of key stakeholders, municipal directors, managers/partners sampled as representatives of the property industry. These thirteen important people are expected to have greater experience and knowledge of valuation practice and procedure.
4.2 RESEARCH STYLE
The qualitative research approach, data collection instrument, validity, reducing researcher biases and the target population will be used in the paragraphs to follow.
4.3 QUALITATIVE RESEARCH APPROACH
The focus of this study is Qualitative Approach. The data collection methods, the aim of the research outcome have no measurable results.
This approach is based on telephone discussions. The approach looked at the issues concerning the valuation of contaminated land from the government perspective and the interviews were conducted with officials, each focusing on a special area of concern.
Qualitative research is a highly flexible method, it can be used almost anywhere, and is capable of producing data of great depth.
Then results are said to be through theoretical generalization, ‘deep, rich and meaningful’.
Quantitative Approach was not used in this study because the research method, data collection instruments and the method applied to analyze the data were not suitable for the target population and focus of this study.The approach is context free and often conducted in an artificial or laboratory setting. Data collection is by means of structured questionnaires and interviews and the outcomes have measurable results.
4.4 DATA COLLECTION INSTRUMENTS
According to Gay & Airasian(2003), ‘the two main threats to the validity of interview studies are the observer’s bias, and the observer’s effect. They also view an interview as a purposive interaction between two or more persons, with the researcher trying to obtain information from the participant.
The interview method was used as they are far more personal form of research than questionnaires. The researcher works directly with the respondent and has the opportunity to probe and ask follow up questions for clarity.
The researcher tries to gain new insight from the subject’s point of view and to uncover the meaning of their experience.
They are generally easier for the respondents, especially if what are sought are opinions or impressions. The questions are kept brief and simple. The interview varied in length from 20 to 30 minutes per person.
Three top stakeholders of the Estate Surveyors and Valuers made up of thirteen Directors, Managers, and Heads of Departments were asked to participate and all were certified and licensed practitioners. They were approached to get ideas on how contaminated land is valued in Nigeria especially in Lagos Metropolis. Almost all the valuation methods discussed in chapter three were mentioned.
The information obtained during the interview was transcribed in field notes describing land contamination in Lagos as well as to answer questions
4.5 LIMITATIONS AND STRENGTHS OF THE STUDY
Telephone interviews are time consuming and are resource intensive besides having access to the Directors/Managers of some of the ministries and parastatals posed a great challenge due to their busy and tight schedules and the financial implications.
Because the researcher cannot see the respondent to gauge his reactions and response the researcher cannot see or respond to respondent’s non-verbal cues which are often important in interpreting how to respond properly.
Also the interviews needed to be kept relatively short otherwise the respondents will feel imposed upon as opposed to face-to-face interview.
Time frame is also a limitation as there was not enough time to reach most of the qualified respondent in the vast Lagos metropolis.
Researcher bias is also a limiting factor as the personal bias of the researcher should be reserved until the research is completed. The personal bias is that Nigerian valuers are not experienced enough in the valuation of contaminated properties.
The strengths of the study is the genuineness and reliability of the data as it lists all the registered certified appraisers of real estate in Lagos and consequently the results from the data could be generalized for the whole Nigeria.
5.1 BACKGROUND OF RESPONDENTS
The thirteen key stakeholders are the Directors of government ministry, Heads of department local government authority, managers of private practice voluntarily participated in the study. This is the representative sample of the property and estate planning industry in Nigeria with all occupying senior positions in natural or regional firms and municipalities. Not all those who engage in the valuation exercise in Nigeria are Estate Valuers, only those registered/certified by ESVRABON to practice and determine the monetary worth of interest in any property at any part of Nigeria are legally recognized as Estate Surveyors and Valuers are the ones to appear to give professional facts and opinions of value in any law courts in Nigeria. These key stakeholders were used because they are involved in the planning, implementation and decision making process, and have an interest in the scope, conduct and outcome of this study. Their meaningful contributions is a key to the successful outcome of this research
No specific criteria were used to nominate the participants except that they are certified practitioners with between 3 and over 15 years of experience resided in Lagos Metropolis. The issue of working experience was to ensure the respondents would have had memorable amount of valuation experience within the industry.
They include the Directors of ministry of Land and Town planning, Managers of private practicing firm, Head of department local government council and Director of Planning and Environment. The interview lasted approximately 30 minutes per person. Interview questions are given in appendices II, 1II, IV and V.
The responses indicated that 70% of the respondents have 10-25 years working experience with the Government, central, municipal or local in general practice, while 15 % has worked from 6-9years in private practice and the remaining 15% has between 3-5 years experience. This shows that most of the respondents interviewed have had considerable experience as appraisers. It also shows that Nigerian Estate Surveyors and Valuers have not specialized which could affect not only their general performance in the industry but also valuation in particular.
Results show that the experience of respondents as registered and certified appraisers of property in Lagos. 60% of the respondents had over 15 years of experience, while 16% had between 10-15 years and 6-9 years of experience. Only 8% had been practicing for between 3-5 years. (Table 3.1).
6.1 CASE STUDY 1
A property located in Calabar city of Nigeria currently used for the manufacture of chemicals requires valuation. It was originally built in 1994 and closed its operation in 2006.The cost of the building and installation of these improvements was ?35 million in 1994. The site has many expensive high-technological improvements which were very expensive to install and operate. These include:
? Sound security system
? Electrostatic discharge floors
? Central vacuum system
? Hazardous waste disposal system
? Compressed air system
? 12,000sq ft of vibration controlled floor
?42,000 sq ft of clean rooms and
?Temperature and humidity controlled system.
A site investigation revealed that the property was extensively contaminated by metal residues from previous uses such as nickel, copper, zinc which are phototoxic and other chemical wastes like hydrocarbon from the chemical works.
The major health problem would be the result of hydrocarbon vapors entering the utilities of the property.
The groundwater aquifer was contaminated and clean-up was set for 4 years.
The unimpaired value of the property before contamination was ?100 million (100.000, 000)
The impaired value was 65million (65,000,000) including building contamination expenses. The sale closed in June 2008 with the buyer a multinational developer intent on financing the property through corporate bonds.
Loss in value is as a result of stigma. Liabilities for the clean-up and monitoring costs was funded by the owner. The total fall in the value of the property reflecting both the physical and non-physical impacts of contamination is stigma factors.
6.2 CASE STUDY 1A
Another 100 hectares adjoining property to case study1 in Calabar city consists of a vacant land mapped as light industrial with sewer services. It has the same source of contamination as case study 1 but less high technology features was originally appraised at ?1.5 million per hectare before the owner appealed and it was settled at ?750,000 per hectare. The owner declared the site surplus and put it up for sale as impaired at asking price of ?1 million with a major real estate firm handling the sale. This has been the third year, yet no offer has been made for the property in spite of the heavy advertising.
The property owner was responsible for the clean up costs. The site investigation showed the property has the same source of contamination as case study1 but that the value loss as a result of stigma factor has less percentage stigma than case study1. Reason for the divergence in the amount of stigma is that the same principle of substitution prevailed.
The multinational developer buyer was willing to work in property A in its contaminated state because it has high- technological features that had no substitutes while property in case study 1A had none.
6.3CASE STUDY 2
A software manufacturing plant located near Abuja the capital city of Nigeria also has a lot of expensive installation of high- technology improvements such as Computer cabling system, Compressed air system, Fiber optics cable system, Electro-static discharge floors, sound security system, waste disposal system, Central vacuum system and 8,000 sq ft clean floors.
The owner purchased it with the intention of reconstructing an additional 150,000 sq ft building. The plant closed operation in 2004 and was put up for sale in 2005. The site will be leased to a computer company. The site area is 740,245 sq ft and gross building area is 101,665 sq ft. The property was situated on a former foundry which leaked toxic contaminants into the soils and groundwater.
The owner of the property and the nearby local authority are jointly responsible for the clean up and monitoring costs. It was discovered that a small amount of groundwater contamination from the same source reappeared in 2006 which is currently being cleaned-up.
A large construction company signed a purchase agreement for the unimpaired value of ?16.2 million in cash and was later cancelled because of the liabilities associated with the ownership of a contaminated property.
The impaired value of the land is ?12.8 million bought by a multibillion company with the intent to renovate and expand to execute a long term lease.
The discount is also attributed to stigma. If any other clean up or monitoring costs are incurred, the cost will be borne by the Primary Responsible party (PRP) first before the local authority if it fails. The multibillion companies therefore have two giant financial organizations standing for it as far as clean up costs is concerned.
6.4 CASE STUDY ANALYSIS
The principle of substitution plays a significant role in the amount of stigma value loss.
The case study1 and case study1A indicates that properties with high demand and short supplies have fewer stigmas than those with many substitutes.
A vacant land suffers greater stigma loss than enhanced land as illustrated by the two case studies (1 and 1A). This is because, most enhanced properties has no substitute and generate income/value in use in spite of marketability and mortgability problems. This income stream of enhanced property mitigates the impact of stigma loss.
Case Study 2 highlights some of the reasons why buyers would avoid contaminated properties at all costs, except in a few cases where the highest and best use and locality of a given property is the deciding issue.
For both case studies, Neustein, (1992) postulates the use of the formula to obtain the value diminution of a property as:
1-L/ 1+ RISK
Where L is lowered income ratio as a result of dividing the net operating income of the impaired condition by that of the unimpaired condition. This therefore makes the case for the use of the income approach simpler when using Sales Comparison Method.
ANALYS IS OF THE INTERVIEW
DATE 2: 05: 2011
Form the interviews conducted, the general atittude of Nigerian Estate Surveyors and Valuers is to ignore contamination and value as though uncontaminated in their valuations. Even the Government does nothing on such land unless a development plan for the property is drawn up. If such land is substantially contaminated, the council goes into negotiation with the purchaser on remediation action and cost, otherwise, it is sold lower than the market value. This is usually because it is difficult to identfiy, determine the nature and extent of contamination, and the cost to remediate.
Once contamination is suspected on a property, site walkover also called site inspection is carried out to establish evidence of contamination to confirm potential pollutant pathways or receptors.Desk study is the next step which builds on site walkover stage but with a greater degree of research and qualitative risk assessment. An intrusive work is undertaken in site investigation involving soil, water and gas sampling assessment is carried out. Determination of contamination can be a long and complex process before the nature and extent of contamination is known inorder to remediate.
There is grave urban crisis associated with land contamination in Lagos. The environmental implication is very serious and a threat to human health and the natural and built environment which also hampers redevelopment. It is very unsightly, and some lands have been rendered uninhabitable, unmarketable and uncultivable owing to contamination.
Most of the respondents concurred that stigma is a very important implication of contamination on land. It not only affects properties that are potentially contaminated, but also the value of properties that are not contaminated but in close proximity to a source of contamination. Stigmatizing effect can also continue even after clean-up as a result of residual contaminants and uncertainties from introduction of new legislationor ammendment of existing one over legal liability for polluting. The position of lenders, investors, developers and valuers remains unclear.
From the interviews conducted, it can be generalised that Nigerian valuers do not understand and as such do not use the contemporary valuation techniques which were fashioned by the UK countries according to theiur socio-economic climate, and when applied to our highly volatile and unstable economy brings discripancies in the valuations. Some of the ones frequently used by Nigerian valuers are outdated and has so many faults such as:
The Investment Method– provides estimate of capital value that is lower than the market prices thereby requiring constant adjustment to the variables.
The Sales Comparison Method– this is useful for analysing risk and stigma when there is sufficient data available to undertake the valuation.
The Income Method– this is used for commercial and residential properties that is producing future cash flow through lease and letting and which can be very complex and tricky to use.
The Cost Approach– this is used for unique properties that is not sold in the market. It considers what the land would cost, the cost of building the structures deducting depreciation. Difficulty to use because it is difficult to measure depreciation especially when the land is close to environmetal hazard.
The Discounted Cash Flow– A contemporary technique which calculates value or worth. It is an accounting technique that can be used for appraising and comparing between investments. It requires a series of complex calculations which would need to be reworked each time one of the variables was altered.
The main objective of this study was to determine the valuation techniques adopted by the Nigerian Estate Surveyors and Valuers on contaminated land in Nigeria. Based on the findings of this research work, the following conclusions can be drawn;
It is apparent that there is no comprehensive study explaining the various valuation techniques among the property industry. Previous researches covering this study have tended to identify the various valuation techniques, both traditional and convetional approaches, but there is no indepth study on when, or how each technique is applied in the current economic climate.
Each of the valuation techniques has its own unique strengths and weaknesses. Thus they are not perfect substitute for each other. Valuers in Nigeria should endervour to choose the valuation approach that is best suited for their needs. Moreover, combination of two or more techniques and comparing the results is likely to produce a more accurate valuation.
Some well known authors like Patchin(1988, 1991a, 1991b, 1994), Mundy(1992a, 1992b, 1992c), Wiltshaw(1998), Roddewig (1996), and Chalmers & Roehr(1993) discussed the way in which contamination can affect value of a property, and the appropriate use of the Sales Comparison and Income Approaches to estimate the value of a contaminated property.
The respondents from the telephone interview pinpointed the fact that out of the impacts of contamination on land, Stigma is the biggest and most damaging effect on the property.Sitgma is identified as a loss in value due to the increased risk associated with a contaminated propertyeven after remediation. Properties sold within industrial zoning are often discounted substantially by the market for various reasons such as limited alternative future use, cost of clean-up, and potential liability from being close to a contaminated site.
Stigma was then derived from determining the unimpaired value of a property and subtracting the impaired value and the costs of claen-up. This was evident on the following scenarios of the case studies.
Case Study1 and case Study1A- It was analysed that properties with high demand and enhanced features has no substitute and hence its stigma impact is low.
Case Study2 – Stigma as a result of proximity to contaminted site was used as a bargaining stick to negotiate the final price.
EXPERIENCE IS INEVITABLE; LEARNING IS NOT.
Nigerian practitioners need a broader and stronger academic backup in theory and systematic emperical research on areas such as urban economics, environmental risk assessment, market, and feasibility analysis.
Basic knowledge of environmental contaminants and risk assessment as appraisal cases involving contaminated properties spans more than one traditional field of study and as such should be treated with all inputs from all participating bodies. Certification of valuers is therefore essential and will go a long way to limit prolification into the industry
More work is required in continous professional development training to improve valuers access to valuation literature, and communication between those who commission and those who undertake research.
Bridging the gap between the conventional valuation techniques used by Nigerian valuers and their reluctance to discard them for the more contemporary methods to imrove the quality of their valuations. There is actually low level od awareness, understanding and usage of these new techniques by Nigerian valuers and this inability to underatand the theoritical basis underlying their use is linked to their educational background.
The application of risk analysis and statistical valuation approaches have been successfully used in countries like UK and USA Sipan &Rahman(1996).
The Nigerian government should equally double their efforts to strengthen its environmental laws especially in the areas of enforcement and monitoring. There is no doubt that the Nigerian state ands federal government have enacted environmental laws that can compete favourably with those of UK And USA, but there weakness alway lies on enforcement and implimentation.
Both the federal and state governmnet in Nigeria should avoid the formulation of rigorous environmental policies which fails to take into account the indigenious social, economic characteristics in the country leading to confusion rather than clarity. Most of these policies are fragmented and formulated without contributions from informed mass es or based on nationally generated baseline data. Participation of the people in policy formulation and implementation is lacking in Nigeria. Implementation and monitoring are wishy-washy and din-don affairs crippled by the widening and deepening corruption. Implementation and monitoring agencies should be re-organised and re-oriented for improved performance.
APPENDIX 1 : LETTER OF INTRODUCTION AND NOTIFICATION
INTERVIEWS: VALUATION OF CONTAMINATED LAND IN NIGERIA
Introduction and Notification
This study forms part of a research project for a Masters Degree from the above university with the intention of gaining an understanding of the valuation of contaminated land in Nigeria. Please feel free to contribute and give your candid opinion on this noble topic. All information will be treated as highly confidential and participoants will not be identified.
Thanks for participating.
Ugochinyere Ozurumba(MSC student).
APPENDIX 11: INTERVIEW WITH HEAD OF DEPARTMENT OF A LOCAL GOVERNMENT COUNCIL IN LAGOS.
Sir,According to UNEP(1992) estimate of 2 billion hectares of land that was once productive has been excessively contaminated in the past 100 years, and new contamination is being created everyday.
What is your opinion on how these land are being identified and the action taken once contamination has been positively identified in your local government(objective 3).
Head of Department: potential sites are identified from a number of primary sources, including historical maps, aerial photographs and geology and then assessed and prioritised according to an atributed ranking of risks. There are basically three stages of site investigation in Nigeria
PHASE 1 – Desk Study. The resultant information enables a preliminary risk assessment to be conducted.
PHASE 11- Intrusive study. Site investigation is carried out by an environmetal expert. Risk is then assessed inorder to determine the potential for harm to receptors both on site and off-site from known contaminants. Sampling and anal;ysis are required on other phase1 and phase 11 investigation. Remediation is now planned, focusing on key liabilities and ‘Suitability for use’ requirement inorder to manage the risks at minimum cost. Monitoring and performance review to meet regulatory requirements.
Sir, How do you think risk and uncertainties are incorporated in the valuation process?
Head of Department: Risk varies inversely with the knowledge of and uncertainty concerning remediation costs, loss in value, liability for clean-up, potential off-site impacts and other factors. The outcome of any valuation is only certain if the future is accurately predicted. This is not always possible as there is always an element of risk and uncertainty that the actual value differs from the predicted estimate.
Sir, I would like to use this opportunity to express my gratitude to you for granting me this period of your time by answering my questions very clearly. Your contribution is going to be of utmost importance to my study. Thank you.
Director: You are welcome.
APPENDIX 111: INTERVIEW WITH THE DIRECTOR OF MINISTRY OF LAND AND TOWN PLANNING IN LAGOS.
Sir, what is your impression on the valuation techniques currently in use by Nigerian Estate Surveyors and Valuers(Objective 2 and 3)
Manager: Yes, I am expecting this question. To be honest with you, the majority of the Nigerian practitioers are not only unaware of, do not understand, and had not been using any of the contemporary methods. Initially, Nigerian practitioners who were trained in the United Kingdom fashioned their practice according to the RICS guidaince and they were carried out successfully due to their dedication and brighter economic climate to satisfy the clients. Today, due to the low level of economic activities as a result of the economic recession, low occupancy rates and high cost of building materials, valuers could no longer use the Investment method of valuation. The reason was the economic volatility and unstability to support the Investment method. The Investment method provides capital value estimate that is lower than the market prices thereby requiring adjustments of constituent variables to produce accurate capital values.
The Depreciated Replacement Cost method produces estimates closer to market prices and is therefore more realistic method of valuing Income producing properties in the current economic climate.
The Investment Valuation method in Nigeria has perculiar problems. The imported valuation table widely used assumes annual rent paid in arrears whereas rent is usually paid in two to three years in advance. There is discrepancies in the valuation figure arrived at using theories derived from UK literature and the actual values produced by local market evidence.
The Sales Comparison Approach could be useful in analysing risk and stigma, but most often is severely hampered by the lack of sufficient data.
Sir, I want to use this oportunity to express my profound gratitude for your patience thoughout the course of this interview. Your contributions would be very helpfull to my research.
APPENDIX 1V : INTERVIEW WITH THE DIRECTOR OF PLANNING HOUSING AND THE ENVIRONMENT IN LAGOS METROPOLIS.
Sir, We are now bearing the cost of becoming an industrialised nation. What are the impacts of land contamination on the property industry in Nigeria
Director: The environmental implications of land contamination is extremely serious posing a potential threat to human health, the natural and built environment, and a risk to investment and regeneration particularly in urban areas. Severe cases has rendered land uninhabitable and severely constrain land use options for decades. There is also decrease in land values, too much demand on available land for development and consequently rise in land prices. Properties that are close to contaminated sites are stigmatized making sale of such lands difiicult.
About 80-85% of the industries in Nigeria are located in Lagos Metropolis. With this high concentration of industries and commercial activities, the state faces grave urban crisis associated with land contamination.
Finally, Is there any regulations in place governing the condition of sale, and use of contaminated land?
Director: Yes there is regulation in place governing the use and sale of land that is contaminated. But these regulations are not adequately enforced. Most buyers of commercial property have environmental site assessment prepared but not for residential property. A buyer of a commercial property that did not have risk assessment done to quantify the risk of contmaination is not well informed which is usually the case.
Sir, I want to thank you specially for your time and your wonderful contribution to this study. Thank you.
Director: You are welcome and good luck.
APPENDIX V: INTERVIEW WITH MANAGER OF PHYSICAL PLANNING AND URBAN DEVELOPMENT
Sir, The biggest problem in valuation of contaminated land is the presence of stigma. How do you determine stigma attached to a contaminated property(objective 1)
Manager: Stigma is the residual loss in value after all costs of remediation, including insurance and monitoring costs have been allowed.
Stigma is a market resistance due to the fear of future health risks, legal and financial liabilities. This is because even after clean-up, the market value will take longer time to return to the clean land value level , and for the impact of the stigma to fade. There is also fluctuations in price and rent of other properties in close proximity to the area. Stigma can be derived from determining the unimpaired value of the property and deducting the impaired value and the costs of clean-up. The unimpaired value was derived from either a purchase agreement that had failed due to the discovery of contamination, a previous sale, or even a valuation.
What is the general attitude of Estate Surveyors and Valuers on contaminated properties?(Objective 3).
Manager: The general attitude of practitioners is to ignore contamination and the potential for contamination in their valuations. The government equally does nothing on contaminated land until when a development plan for the property is drawn up. If there is substatial contamination on a sold property, the municipal enters into negotiation with the buyers on the remediation action and the costs. Usually, the land is sold lower than the market value instead of remediating before selling. This is usually because of the problem of determining the the nature, degree and extent of contamination and the costs for remediation.
Sir, I wish to express my profound gratitude to all who have participated in this study.
Acks, K ‘ Valuation of Environmental Damages to Real Estate. 1995 Available at:
Adair, A ; Hutschinson, N; MacGregor, B; McGreal, S & Nantha-Kumaran, N.. An Analysis of Valuation Variation in the UK Commercial property market, Journal of valuation and Investment, 14(5) 1996 : 34-47.
Ademola, K & Onishi, T Spatial Determinants of Urban land use change in Lagos, Nigeria, 2006.
Ajayi, C. Property Investment and Analysis. Ibadan: De-Ayo publications.1998.
Ajibola, M, Valuation Inaccuracy: An Examination of causes in Lagos Metropolis. A Journal of Sustainable Development. Vol 3, no 4; December 2010.
Alkali, Planning Sustainable urban Growth in Nigeria: Challenges and Strategies. 2005.
Antai ,I Valuation of Contaminated land in Sweden: A Comparative Study.2003.
Baum, A & Crosby, N . Property Investment Appraisal, 2nd edition. London: 1995. Routledge.
Baum, A ‘Forward’ in Ajayi, C(1998) ‘Property Investment Valuation and Analysis. De Ayo publication, Ibadan. Page vi-lx.
Bello, V & Bello, M; The Valuation of Environmental Contaminated properties: The Position of the Nigerian Estate Surveyors and Valuers in the Global Context. Journal of land use and Development Studies. Vol1, no1, 2005.
Bello, V & Bello, M; The Influence of Contemporary Modes on Valuation Practice in Nigeria. 2007.
Bond, S, The Valaution of Contaminated land- Methods Adopted in the UK and New Zealand. Journal of property Investment and Finance, vol18, no 2, 2000,pp 254-271.
Bosman, R, & Arendt, K (eds) Contaminated Soil ’95. The 5th Interactive Conference. October- November. Kulwer Academic Publishers. Appraisal Pp75-83.
BRE (200$), Environment Profiles. BRE website, Available from:
Browner, C, Environmental Protection Agency opening comments at Brownfields, 1998.
Chalmers, J & Roehr, S Issues in the Valuation of Contaminated Properties. Appraisal Journal. January 1993, pp.28-41.
Chan, N, Stigma and its Assessment Methods: How Australlian Appraisers Assess Contaminated Land, The Appraisal Journal, 2000 . pp.432-440.
Chan, N, Contaminated land Valuation and the problem of Stigma. 2001.
Cheng, J; Proverbs, D; Oduoza & Flemming, C, Towards Green and Intelligent Buildings: The Economic and Environmental Impact- A UK Perspective.
Clarinet , Sustainable management Of Contaminated Land: An Overview, 2002.
Colangelo, R & Miller, R Environmental Site Assessments and Their Impact on property value: The Appraisers Role. Appraisal Institute. Chicago, USA. 1995.
Coming Clean, Supra Note 7 at 1-2.
Connor, P, Business Personal property Valuation. Available on: http://e-articles. Info/e/a/tittle/business-personal-property-valuation.
Contaminated Land and Remediation: A World- Class Industry. UK Know How. Available on: www.uk.ti.gov.uk.
Denner, J & Lowe, M;UK Contaminated land Policy Developments, In van den Brink, W..1995.
Environmental agency website. Available on: http://www.environment-agency.gov.uk.
Environment protection Act, 1995.
Gay, L. R., & Airasian, P. Educational Research: Competencies for Analysis and Applications. No7. 2003, New Jersey, Merrill prentice-Hall.
Gibson, Y, ‘ Strategic property management’ How Can Local Authority Develop a property Strategy’Property Management. Vol 12. 1994. no3,pp.9-14 MCB University Press, 0263-7472.
Goldberg, M.A., Transportation, Urban land Values and Rents: A Synthesis land Economics, 46, 2 may 1970, 153-162.
Guilding Principles for land Contamination, 2010.
Gummersson, E., Qualitative Methods in Managemetn Research. Sage Publications. London.1991.
Handley, J., The post Industrial Landscape, Groundwork , 1995.
Hoesli, M., & MacGregor, B., Property Investment: Principles and practice of portfolio management. Pearson Education Ltd, 2000, Uk.