Pre-letting and pre-sale financing arrangements for property development: insights into key drivers from an emerging Lagos property market, Nigeria

Purpose The inadequacy of financing sources for real estate development has increased the housing shortage in developing countries. Despite mortgages being recognised as a primary source of housing finance, the associated high interest rate underscores the need for improved alternatives. Extant studies have identified pre-letting and pre-sale finance as better alternatives. These alternatives are noted to substitute trust for interest rate, provide interest-free finance and reduce capital cost. While studies have identified these finance arrangements as part of housing delivery techniques in emerging markets, a dearth of studies exists on key drivers for their adoption. Hence, this study provides insight into key drivers of pre-letting and pre-sale financing arrangements for property development in an emerging property market like Lagos, Nigeria. Design/methodology/approach Adopting a total enumeration approach, a closed-ended questionnaire was administered to 87 property development companies (PDCs) in the Lagos property market. Variables that drive the adoption of pre-letting and pre-sale financing arrangements were presented to the respondents for rating on a 5-point Likert scale, ranging from 1 (not significant) to 5 (very highly significant). With the aid of SPSS software, the data were analysed using Principal Component Analysis (PCA), Mean Rating and Standard Deviation (SD). Findings The most rated pre-letting and pre-sale components were capital access, risk sharing and price security with 22.167% variances, and hedge against default risk and access to additional loan, with 16.951% variance. The findings suggested that while pre-letting helps PDC to share financial risk with tenants, using the advantage of information asymmetry, pre-sale aids in raising cost-effective capital and testing the market for the acceptability of proposed development. Both arrangements were found to be an effective antidote for capital inaccessibility. Research limitations/implications The findings of this study were from the perspective of the PDCs only. Further studies can be carried out from the perspective of both the PDCs and buyers. Practical implications The findings from the study could be relevant to similar emerging markets where pre-letting and pre-sale financing arrangements are being used. The results could also aid the government in formulating policies aimed at regulating pre-letting and pre-sale financing agreements. These policies will enhance the quality of outputs from PDCs and boost the confidence of stakeholders in adopting these arrangements. The findings of this study were from the perspective of the PDCs only. Further studies can be carried out from the perspective of both the PDCs and buyers. Originality/value There have been relatively few attempts to examine the drivers of pre-letting and pre-sale financing arrangements in the global southern countries. To the best of the authors’ knowledge, this is the first paper from the study area to discover that the driving force for PDCs adoption of pre-letting and pre-sale arrangements is the sharing of financial risk and raising of capital, respectively.