Why Escrow Accounts Matter; And Why Structure Matters Even More

The Federal Government’s proposal to institute mandatory escrow accounts for off-plan property investments has generated significant discussion in the Nigerian real estate industry. Although this suggestion has received widespread approval, professionals within the industry have rightfully criticized the idea on the grounds that having funds held in an escrow account will not guarantee the removal of the risks of off-plan investment. ¹ ²

They are correct.

Escrow is an effective process, but it is just one component of a wider investment protection scheme.

The solution to the problem can be found in combining escrow with good governance, effective fund management, and disbursement based on milestones.

If the reform is executed properly, then this can turn out to be a revolution in the Nigerian real estate industry.

Why Escrow Matters

For quite some time now, off-plan investment has been used by the investor as a strategy to invest in land at favourable prices without the developers losing sleep about how they will get their hands on funding for the venture.

This type of investment scheme also presents risks to investors that are quite real.

In some instances, money meant for funding one development has been used for funding other developments or business operations altogether. Time delays, increased costs, poor planning, and lack of oversight have contributed to the loss of credibility in the industry.

Escrow account solves this problem because here investors’ money is separated from developers’ operational money.

Here money is not made available to developers freely but only as per conditions defined beforehand.

Accountability gets a boost here.

But accountability cannot end here.

Escrow Without Structure Is Not Enough

In the recently published expert opinion, an important fact was revealed – information on where the investors’ funds are stored accounts for only half the process. ³

More importantly is the question of: how those funds will be disbursed?

The escrow account that holds funds but does not oversee project completion does not eliminate the risk of bad governance.

A proper system should consist of:

• Independent fund management,
• Boundaries for construction phases,
• Professional checkup before any disbursements,
• Reporting of transactions to investors,
• Adequate regulatory control at all stages of the project.

This way the funds follow the progress of construction works, rather than commitments.

And here lies the difference between deposit protection and investment protection.

A Welcome Step for Nigeria’s Real Estate Market

The Federal Government deserves commendation for introducing this proposal.

Real estate is among the most crucial areas to invest in Nigeria, but the level of trust has usually been hampered by lack of consistency in delivery and absence of proper measures to protect investors.

Escrow accounts, developer licensing and regulation constitute an important move towards professionalization. ¹

Should the proposal become a law with proper implementation guidelines, it would lead to:

• Having more confident investors
• Less disputes between the developer and the buyer
• Transparency in the industry
• The influx of more money from both institutional and international investors
• Better performance in project delivery

Developed countries with real estate industries have understood that protecting investors is critical to the development of such an industry.

Nigeria is headed in the right direction.

What This Means for Investors

This is a key indication to investors.

From now on, when making investments, one should not base his/her decision-making process on geographical location and returns only.

The following factors become equally relevant for consideration:

• Who controls the investor’s money?
• Is there any independent escrow scheme?
• How are the project milestones verified?
• Who approves the release of funds?
• What kinds of structures guarantee protection of investors’ interests in the entire investment cycle?