Anomaly in property market as high rents persist despite supply glut

Contrary to basic economic theory that states that when supply outstrips demand, price falls, the property market in Nigeria is experiencing an anomalous situation where there is an oversupply resulting from low demand, yet house rents have remained high, especially in highbrow areas.

The property market in Nigeria is in dire straits as persistent macroeconomic headwinds in recent times have led to lower demand for prime properties in the big cities of Lagos, Abuja and Port Harcourt.

Traditional sources of demand for prime properties including stock broking firms, investment banks, insurance companies, airlines and oil companies that usually rent these properties for office space or residential use, are experiencing business downturn.

The market has seen high vacancy rate and, according to a report based on vacancy factor index (VFIX) by Financial Derivatives Company (FDC), in March 2016, the index increased only marginally to 165 from 160.7 in January, having climbed substantially in earlier months.

Bismarck Rewane, FDC’s CEO, notes that in the last 15 months, the number of properties that were vacant in March 2016 was 65 percent higher than in January 2015, which they used as base month.

“Vacant properties were higher in Lekki at 64 percent followed by Victoria Island, 35 percent, and Ikoyi, 24 percent,” he says, pointing out that Admiralty Way in Lekki has the highest vacancy ratio, which is not surprising, given the challenges that businesses face in the current macroeconomic environment and most properties on the way are offices and commercial spaces.

However, in spite of this situation, rental prices of vacant properties in these high-end locations have remained sticky such that an office space in Lekki Phase 1, for instance, costs N30,000 per square metre in TBC Building, and to rent a 1,250 square metre house in the same area will cost about N8 million to N10 million per annum on Admiralty Way and N5 million to N6 million per annum in other Lekki streets.

In an earlier report, BusinessDay had noted that the property market was undergoing price correction which has seen property prices go down 20 percent in some location, quoting Gbenga Olaniyan, CEO, Estatelinks, as saying that the rental market was not left out, having also dropped considerably.

But Rewane posits that the real estate sector has become enigmatic because of the strong correlation between the investment in real estate, money laundering and public sector corruption, stressing “this is why rents remain stubbornly high even when there is a supply glut.”

Analysts are of the view that laundered or “stolen” money find its way into real estate, linking the many empty mansions in the highbrow areas of Maitama and Wuse in Abuja, Ikoyi and Banana Island in Lagos, to these “money bags” who can afford to leave their houses for years without rents “because they have no exposure to bank or other loans.”

Empirical evidence, Rewane says, reveals that approximately 90 percent of Nigerian investors hold real estate as an asset class in their portfolios, adding that the locations of their real estate investments are principally in Lagos, London, Dubai, New York, Atlanta and Accra.

According to Rewane, premium properties across the globe have remained high, citing the 2016 Knight Frank wealth report, which reveals the 10 most expensive cities in the world of luxury properties in 2015.

On what to expect in the days and months ahead, Rewane predicts “we should expect a decline in house prices if the economic headwinds persist; specifically, we should also expect a switch in real estate pricing from dollars to naira, as landlords now realise the effect of the economic challenges faced and will be forced to change if they want to remain profitable.”