Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.20, 2015 81 The Effect of Increasing Cost of Capital on the Profitability of Real Estate Development in Benin City, Nigeria Fidelis Ifeanyi Emoh (Corresponding Author), Ikhuoshio Uzuanje DEPARTMENT OF ESTATE MANGEMENT, NNAMDI AZIKIWE UNIVERSITY, AWKA, NIGERIA. ABSTRACT The cost of capital in the country has displayed steep increase in recent times as interest rates have continued to rise. This in turn has affected the profitability of real estate development. The huge capital commitment in real estate development often times drive developers to exploiting other sources of capital, apart from equity, which will incur a cost that has to be financed by part of the profit from such investment, thereby affecting the profitability of the development to the developer. This research examined the effect of increasing cost of capital on the profitability of real estate developments in Benin City, Nigeria. In carrying out investigation, questionnaires were administered to selected real estate developers who developed for income generating purposes, as well as structured interview with the officials of Central Bank of Nigeria. Data collected were analyzed using the simple percentage analysis to determine the relative strength of responses drawn and the annual repayment model to determine cash flow from real estate development. It was revealed that cost of capital created negative rate of returns which implied that the increasing cost of capital reduces the profit level of real estate development in Benin City property market. The study therefore concluded that the increasing cost of capital in Nigeria affects the profitability of real estate development negatively. However, the Federal Government of Nigeria was advised to revitalize the National Housing Fund Scheme in order to boost investors’ opportunity of accessing loans and manage interest rates as a way of stimulating the economy to starve off inflation. Keywords: Real Estate Development Cost of Capital, Profitability, Annual Repayment Model, Benin City, Nigeria. 1.0 INTRODUCTION Real estate development is arguably the safest investment in the world as it provides the investor a wide range of benefits which includes profit, prestige, collateral for bank facility, etc. Though, an attractive investment option, one wonders why many nations of the world experience shortage in supply of real estate developments. Real estate developments are capital intensive by nature, they require a considerable amount of capital to execute them; hence, only a very small percentage of the development sum/cost is normally provided from savings. It is therefore necessary for investors and the society in general to have basic knowledge on the cost of such capital in terms of interest rates. The huge capital requirement/cost for real estate developments have discouraged quite a number of investors; while the bold and unwavering lot have found wisdom in seeking professional advice and preparation of detailed viability reports in other to maximize profit and avoid unnecessary capital wastages. The estate surveyor and valuer usually offers professional advice to enlightened investors as regards the best investment option in an area with special consideration to the cost of capital, the period within which they will be recouped and the expected profit from such real estate investment. Generally, interest rates have a profound effect on the value of income producing investments. Mortgage rates influence property values and profitability of real estate developments. Interest rates have become major influence on capital flow, the supply and demand for capital, and the investors rate of return on investment i.e. investment on real estate development. In the face of global economic turmoil, unstable inflation rates, etc; increasing interest rates can drive property prices in variety of ways. This study therefore examined the effects of increasing cost of capital on the profitability of real estate development in Benin City, Nigeria. The study examined the effect of increasing cost of capital on real estate development in Benin City. Although the essence of the study examined the effect of increasing cost of capital on the profitability of real estate developments in Benin City, the research was limited to income generating real estate investments around Ekenwan Road, Ugbowo, Sakponba, Sapele/GRA in Benin City. 2.0 REAL ESTATE DEVELOPMENT/INVESTMENT The word “Development” covers a very wide spectrum. It will therefore be out of place and misleading to define development in a single and precise sentence. Aibangbee (2003), defined development in relation to land, as the process of carrying out the constructional works which are associated with a change in the use of land or of the land with its buildings or with a change in