The going gets rougher
A pandemic and socio-political tension have added fresh pressure to Nigeria’s real estate down cycle. The outbreak of Covid-19 across the world and its attendant impact on commodity prices and international trade has dealt a hard blow to owners of large hotels and grade A office buildings in Lagos, the country’s commercial capital, and other urban centres.
According to the National Bureau of Statistics, Nigeria’s real estate sector has been contracting every year since 2016. “The market moves in cycles and we are certainly in the middle of a down cycle right now. We think the real estate market will trail a significant and sustainable recovery of the broader economy by 8 to 12 months. So we think a return to the good times that we saw in 2014 is still some ways away.” said Ayo Ibaru, Chief Operating Officer at Northcourt, a Lagos based real estate advisory and research firm. He added that in the context of the prevailing economic conditions, real estate assets were on average richly priced and correcting over the last 12 months.
A change in work culture to protect employees from the coronavirus has also had a negative impact on commercial real estate. Ayo Ibaru said he expects the increasing adoption of remote working to show in weaker demand for commercial office space in the short to medium term. Tola Akinhanmi, Head, Real Estate Finance for West Africa Stanbic IBTC Capital, shares this sentiment. “There is already an oversupply of office space, especially in the Lagos Island area. When you add the adoption of a flexible work culture to the mix, it is expected that organizations may to rationalize their space requirements” Akinhanmi said. The vacancy rate of some grade A office spaces remains as high as 55%, according to data gathered by Northcourt.
More recently, the social unrest and looting that trailed peaceful #endsars protests against police brutality have added a fresh dimension to the struggles of investors in commercial real estate such as shopping malls. Property owners and tenants endured massive losses as looters hijacked the protests in an unprecedented spree of attacks on banks, malls and warehouses across the nation. “We estimate that 14 percent of all grade malls in the country were looted and vandalized.” said Ayo Ibaru about the scale of the carnage.
In the residential property segment, the slow economic growth seen in the last 5 years has resulted in weak demand from house buyers. “We have seen very weak demand for properties valued at between N50 million and N120 million” said Damola Akindolire. In addition, five-star hotels struggled amid low patronage linked to Covid-19 lockdowns even though room occupancy has picked up slowly as the lockdown were eased.
Market players adapting to challenging times
Real estate investors have been adapting to the challenging times in several ways. One trend has been the conversion of some residential real estate build for outright sale to residential and commercial property for lease. “We have seen a trend of conversion of property since 2017 and that trend has continued this year “ said Ayo Ibaru. Some properties were also converted into facilities designed for co-living and co-working arrangements. However, the onset of Covid-19 has impacted the popularity of these arrangements.
Another trend is the emergence of cafes and remote working facilities as alternatives for those seeking a temporary work area. “In some cases, there is scope to convert traditional office space into facilities suited for those who will like to work for a few hours at a time and avoid the investment in a permanent office” said Tola Akinhanmi.
The adoption of remote working due to safety concerns relating to the spread of Covid-19 has boosted demand for residential property located further away from commercial hubs like Victoria and the Lekki 1 axis. “Some tenants and home buyers are seeing more value for money in larger property than they would be able to get closer to the commercial hubs. The fact that they are spending more time at home because of Covid-19 means that they are more willing to live further away from their workplaces.” said Damola Akindolire, Managing Director, Alpha Mead Development Company.
Some property owners are also more willing to accept monthly rental payments instead of bulk annual payments as they adapt of the income pressures that many tenants have faced in a turbulent year. In the last few years, developers have also adapted to the weaker spending power of property buyers and tenants by developing smaller property. “One and 2-bedroom residential properties are emerging in the Lekki 1 axis, a community where such property was previously not popular” said Tola Akinhanmi.
The recent spate of looting across the country may have traumatized current and prospective tenants and buyers and this could manifest in a preference for property in gated communities. Some property developers also cite the rise of e-commerce this year as a trend that could influence demand for large spaces by retailers in grade A malls.
Room for optimism
However, in the midst of the decline, market watchers point to isolated opportunities in the sector as investors seek higher yields considering the negative real returns that currently characterize the fixed income market. “Despite the recent declines, real estate is still seen as a store of value by many investors. When you consider the historically low yields in some segments of the government securities market, there are certainly some investors that are willing to turn to the real estate market” said Damola Akindolire.
He cites investment in land in largely underdeveloped communities as something to consider, noting that the growing investment in infrastructure should catalyse a rise in land prices in areas such as the Sangotedo and Lakowe areas of Lagos.
There is also a range of less traditional real estate that should attract decent demand. “Hospitals, data centres, student housing are emerging but specialized assets for which there is a strong investment case.” said Tola Akinhanmi. He added that the Covid-19 pandemic and the growth of agriculture should underpin investments in warehouses and similar storage facilities.