Increased supply, subdued demand define prime office market in H1 2015

The prime office market story in Lagos, Sub-Saharan Africa’s largest commercial city, changed significantly in the first half (H1) of 2015 from inadequate to over-supply of Grade A office spaces largely sought after by multi-national oil companies and corporate institutions.

The market, during this period, was defined by over-supply and subdued demand and NorthCourt Real Estate explains that recent and imminent completions such as NIPOST Towers, 100 Pier Point, Civic Center Tower, Heritage Place, Landmark Tower and Temple Tower have added over 60,000 square metres to the market in Victoria Island and Ikoyi with little demand from the traditional consumers—the oil companies and corporate institutions.

In its half year report on the real estate market, Northcourt reveals a slight fall in rentals of 3 percent and  4 percent for Victoria Island and Ikoyi respectively, pointing out that increasing supply appears to be giving tenants an edge at negotiations and placing negative pressure on rents as landlords clamour to secure occupiers for their large investments.

Other regions like Lagos Island, Yaba and Ikeja have not felt such pressure as there is only limited prime office space  in these regions which corroborates an earlier revelation by Lamudi, an online property marketplace, that rent in Yaba, which is a residential middle class market, is now way above any other location in Lagos.

Lack of negative pressure on rent in Ikeja has resulted in the construction of many speculative (relatively) prime developments coming in at rentals of N45,000 per square metre which are slightly above the market (N30,000) and one recent completion in this region is the Landmark Place, which has Procter and Gamble, Bosch and Nielsen as the main tenants.

At the high, Tayo Odunsi, CEO/Director, Real Estate Advisory at Northcourt, explains that oil price volatility in recent quarters means that previously strong office space demand from Nigeria’s largest industry is also falling, pointing out that oil companies, which have been noted as key occupiers in Lagos, are reducing their demand leading to reduction in the take up of new properties.

A high end property vendor who did not want to be named, attested to this, saying, “oil companies who take up a large chunk of the high end properties have cut down on cost; one of the big names in the oil industry wanted to lease 4,000 square metres from us but have changed its mind and is ready to pay anything to get out of the deal”.

This is not limited to prime office spaces alone as the oil companies are also letting go of their residential accommodation and monetizing same for their staff. “Before now, it was the oil companies that were taking up most of the flats in residential buildings. But that is no more. Two months ago, one of the top three oil companies just let go of 48 flats in Ikoyi. The owner of the building has told us to go ahead and rent at 60 percent of what the former tenant paid five years ago”, the vendor added.

Looking over the next 12 months, Odunsi says economic activity needs to increase rapidly to ensure there is not a surge of prime office space vacancies in Lagos,  noting that with oil prices staying constant at $60 levels, new fields may go into production at lower production costs per barrel, thereby causing a rebound for the sector which is Nigeria’s biggest real estate patron at the moment.

Over all, activity in the real estate market during H1 2015 was less vigorous when compared to previous periods  and Odunsi attributes  this to the macro-economic and socio-political events in the country which took some toll on the sector.

According to him, a combination of these events saw a number of planned developments halt while rents either grew only slightly or remained unchanged, adding, “in most cases, on-going construction continued at a slower pace as either materials and labour costs needed to be re-priced or factors such as feared political uprisings and fuel scarcity kept workers away from construction sites”.

CHUKA UROKO