FGN Bond vs Land Bonding By Dennis Isong

Meaning of FGN Bond
An FGN (Federal Government of Nigeria) bond is a debt security issued by the Nigerian government to raise public funds. These bonds are considered low-risk investments because they are backed by the government’s credit. Investors buy FGN Bonds with the expectation of receiving periodic interest payments (coupons) and returning the principal amount (face value) at maturity. The bonds are typically long-term, lasting from a few years to several decades.

Example of FGN Bond
Assume an investor purchases a 10-year FGN Bond with a face value of ₦1,000,000 and an annual interest rate of 12%. The government will pay the investor 12% of ₦1,000,000 per year, equivalent to ₦120,000 annually. After 10 years, the investor will receive their initial ₦1,000,000 principal back. This setup ensures a consistent income stream and the safety of the principal investment.

Meaning of Land Banking

Land banking is the practice of purchasing large parcels of undeveloped land to hold them until they increase in value. This strategy is widely used in real estate to capitalise on future urban expansion or infrastructure development. Investors in land banking typically do not develop the land right away, but rather wait for the right time when its value has significantly increased, allowing them to profit handsomely from its sale or development.

Example of Land Banking

An investor purchases 50 hectares of undeveloped land on the outskirts of Abuja, expecting significant urban development over the next decade. The value of the land rises over time as the city’s population grows and infrastructure projects such as roads and schools are built nearby. After ten years, the investor sells the land for a much higher price, generating a significant return on investment.

How FGN Bonds and Land Banking Correlate

FGN Bonds and land banking, while distinct, can complement one another in an investment portfolio. FGN Bonds are a stable, low-risk investment that generates regular income and can be used to fund more speculative ventures such as land banking. In contrast, profits from land banking can be reinvested in FGN Bonds to balance an investor’s risk profile. The correlation lies in investment diversification, where bond stability mitigates the risks associated with land banking, while high returns from land banking boost overall portfolio growth.

The Meaning of FGN Bonds in Land Banking for Real Estate

FGN Bonds are critical to supporting land banking activities in the real estate sector. FGN Bonds’ predictable income can be used to finance land purchases and maintenance. Bonds provide a low-risk source of capital that real estate developers can use for long-term projects. This stability enables investors to patiently await land value appreciation without the pressure of high-risk investments.

Furthermore, FGN Bonds can act as a financial buffer during economic downturns, giving real estate investors liquidity and security. The incorporation of FGN Bonds into land banking strategies ensures a balanced investment approach, which promotes long-term growth in the real estate market.

Advantages of Investing in FGN Bonds

Investing in FGN Bonds has several advantages, especially for those seeking stability and consistent income. Key advantages include:

Low Risk: FGN Bonds, which are backed by the Nigerian government, are regarded as one of the country’s safest investment options.

Regular Income: Investors receive fixed interest payments semi-annually, providing a consistent income stream.

Capital Preservation: At maturity, the principal amount is returned, ensuring that the original investment is preserved.

Tax Advantages: Interest earned on FGN Bonds is tax-free, making them more appealing than other taxable investments.

Liquidity: FGN Bonds are traded on the Nigerian Stock Exchange, allowing investors to sell them before they mature.

Benefits of Land Banking:

Land banking also has its advantages, especially for those seeking high long-term returns. Benefits include:

High Return Potential: As the value of undeveloped land increases, significant profits can be realised when sold.

Diversification: Including land in an investment portfolio diversifies risk and can increase overall returns.

Inflation Hedge: Real estate, including land, typically increases in value at a faster rate than inflation, preserving the investment’s purchasing power.

Strategic Advantage: Early land acquisition in developing areas provides a strategic advantage as infrastructure and urbanisation advance.

Risks Associated with FGN Bonds and Land Banking
While both investment options provide significant benefits, they also have inherent risks:

FGN Bonds
Interest Rate Risk: If market interest rates rise, the value of existing bonds at lower rates may fall.

Inflation Risk: Fixed interest payments may not keep up with inflation, lowering the real value of returns over time.
Land Banking
Market Risk: The value of land can be extremely volatile, influenced by economic, political, and social factors.

Liquidity Risk: Selling land takes time, and the market is not always favourable, making it less liquid than other investments.

Development Risk: Changes in zoning laws or delays in infrastructure development can have an impact on the land’s value and expected appreciation timeline.

• Isong is a top realtor in Lagos. He teaches Nigerians in the Diaspora how to own property in Lagos, Nigeria, without stress. For questions, WhatsApp/call 2348164741041.