Cluttons sees opportunities for investors in commercial real estate market slowdown

There has been a general slowdown in activities in Lagos commercial real estate market with rents either stagnating or declining across most segments of the sector, but amidst this situation, Cluttons, an international real estate consultant, says there are opportunities for investors in the market.

Though there are challenges ahead for the market, Cluttons sees those opportunities for landlords and investors who position themselves favourably, citing experiences in similar international markets which show that well maintained and well managed properties will always be in high demand, but it is those landlords that demonstrate an understanding of market conditions by offering flexible payment terms and other lease incentives that will be best placed when demand picks up again.

The company in its Spring 2016 Lagos Commercial Property Market Outlook report, launched recently in Lagos, notes that there is general weakness in Nigeria’s commercial real estate market and attributes this to the adverse global and domestic economic environment which is, in turn, fueling challenging trading conditions.

“The decline in crude oil revenue has taken its toll on all business segments, mirroring what we have seen in other parts of the world”, says Faisal Durrani, Head of Research and Partner at Cluttons, pointing out that what has most significant in this regard has been the devaluation of the Naira which is supporting high level inflation.

The restrictions around foreign currency exchange in Nigeria, Durrani says, has put international businesses under tremendous pressure as they struggle to cope with inability to make payments.

The deteriorating global economic conditions has also impacted Lagos’ commercial real estate market, with transaction levels dipping and vacancy rates rising across board and this, according to him, is putting rents under downward pressure and driving landlords to offer a range of lease incentives to stimulate demand, which is still limited to a few landlords and yet to become the market norm..

Erejuwa Gbadebo, CEO of Cluttons Nigeria, noted at the launch that explained that the most expensive office submarket, by some way, at the end of Q1, was Ikoyi, Lagos at USD850 per square metre, followed by Victoria Island at USD 750/sqm.

“While there has been limited movement in office rents over the past six to nine months, Victoria Island was amongst the three worst performing markets in the 12 months to the end of March 2016 with rents falling by 13 percent to USD750/sqm. The first quarter of Q1 2016 however, recorded no change in rents in all seven of our submarkets”, Gbadebo noted further.

Cluttons expects more significant rent falls this year, reflecting the shrinking level of overall occupier activity. On an annualised basis, the company reveals that rents in Ikoyi have already declined by 7 peercent in the last 12 months to USD850/sqm, while Lagos Island has registered a substantial 25 percent reduction in asking rates over the same period at USD113/sqm.

It attributes this decline largely to the strong pipeline of office supply and expects that 35,000 square metres of commercial office space will be coming to Ikoyi and VI markets to be led by the completion of The Wings and Madina Towers

On retail, the report explains that rents in this sector appears to have held steady, despite the economic conditions and tough operating environment. Gbadebo explained that “many retailers have committed to existing leases with built-in escalations, hence no real change in rents will be immediately evident in the city’s key shopping malls”

“That said, we are aware of instances where landlords have reduced rates to help retailers stay profitable in the tough trading environment. For lease renewals in existing malls and the new malls coming up, however, it’s likely to be quite a different story. We expect to see some falls in rents this year, reflecting the tough operating conditions for retailers”, she added.

CHUKA UROKO