Marginal increase in transactions yet to change real estate growth narratives

Expectation that the marginal increase in transaction rates in the real estate market would change the narratives which leave the sector in negative growth territory did not materialise in the second quarter (Q2) of 2018, a new report on the sector has revealed.

Increased transactions were recorded mostly in the office market where demand for prime office space slowly picked up and a lot of enquiries were received for vacant spaces, but many of those transactions failed to conclude primarily due to high initial costs.

However, the increased transaction and enquiries provided a welcome relief to investors and the sector which has struggled with high vacancy rates and oversupply of office spaces in the last four years.

Analysts observe that ahead of the 2019 elections, pre-election uncertainties are threatening the fragile foreign investor confidence as this may drive uncertainty around government  policies. There are fears, therefore, that these uncertainties may rob-off on activities in the real estate sector.

As predicted and hoped for in the first quarter (Q1) of  2018, the economy regained some lost momentum in the Q2 2018 as the purchasing manager’s index (PMI) hit a new record high in May, oil prices remained firm in April and May, and inflation dropped steadily to its lowest rate since Q1 2016 to 11.23 percent in June.

However, the new report compiled by International Real Estate Partners (IREP) notes that  while investors seem set to benefit from this improving business climate, the delay in the implementation of the 2018 budget has stalled major investments and projects for the year.

“To add to these woes in the real estate sector, the World Bank has ranked Lagos, the commercial capital of Nigeria, 36th and 31st out of 36 (when compared to the other cities in Nigeria including Abuja), for dealing with construction permits and registering a property respectively.

“It is clear that something urgent needs to change if the real estate sector is to see a rise in growth rates and /or reach the contribution to GDP levels seen in other emerging economies”, the report says.

Unlike the oil sector which, according to the Nigeria Bureau of Statistics (NBS), witnessed a boost as its real  GDP growth was at 14.77 percent  year-on-year and 13.24 percent quarter-on-quarter in Q1 2018,   real GDP growth in the real estate sector contracted by 3.48 percent to -9.40 percent in Q1 2018.

Erejuwa Gbadebo, IREP’s CEO, noted in the report that this contraction made the sector the highest dip in two years and saw it in fourth consecutive decline, pointing out that  the sector’s  contribution to total real GDP also dropped to 5.63 percent in Q1 2018, lower than the 6.43 percent and 7.03 percent  contributions recorded  in Q1 2017 and Q4 2017 respectively.

In Q2 2018, however, there were some upsides in the sector. There was a couple of new entrants into the market and there were some notable business relocations by some multi-nationals to prime office spaces in Ikoyi and Victoria Island. Some top indigenous companies also moved to  their newly constructed office buildings. These, plus reduction in energy costs experienced by tenants in the LEED  certified Heritage Place and increased interest in co-working space, were no doubt welcome news to a beleaguered sector. These were also reflections of improved business environment.

Asking rents for annual prime office spaces in Ikoyi and Victoria Island have largely remained stable at $700 and $600  respectively.

But the challenges remain. Even though rental  concessions are still being given, with the delivery of some building projects  such as Desiderata, Kingsway Towers, Madina, Cornerstone  and Grey Stone Towers, and the  refurbishment of a couple of Grade B buildings, including the iconic IMB Plaza, over 50,000 square metres  of new office space will be offloaded into the market this year.  These will be further adding downward pressure to asking rents in the prime office sub-markets.

In the retail segment of the market, Gbadebo noted a significant stability in the larger malls in Q2 2018 , adding that the wider retail industry is  on the rebound with  occupancy rates in many malls improving from lows of 30-60 percent  to  60-80 percent.

Asking rentals for the big malls, which are still largely dollar-denominated, have remained stable through Q2 2018 as many tenants have adjusted to the current state of the economy and are keeping up better with payments, probably due to rental discounts and concessions granted by landlords such as fixed exchange rates for dollar-denominated rents.

The quarter witnessed an increase in smaller new entrants, especially along the Lekki corridor. This, evidently, has helped to boost the retail industry,  with a lot of retailers expanding to take up spaces in newly built and well located, smaller neighbourhood retail centres.

But a new trend in this segment of the market, which is somewhat disturbing, is the conversion of residential buildings on major streets to small shopping centres, catering largely to small retailers serving to  completely change the look and feel of hitherto residential  neighborhoods.

“In the short to medium term, we expect that the larger malls will continue to strive to differentiate themselves from their  smaller neighbours by seeking to create a more memorable shopping and entertainment experience for customers”, Gbadebo predicted.

Changes in business dynamics have compelled many corporate and multinationals to rethink and re-order their priories, leading to a preference of short-let-apartments to full scale residential accommodation.  Demand for short-let apartments has maintained an upward trend in spite of the challenging economic environment.

“This increased demand has spurred savvy business operators to accelerate their expansion plans in 2018 by seeking out strategically located  residential buildings or vacant apartments in prime areas to be converted into short-let apartments to meet the flexible needs of  people who require such accommodation”,  the IREP CEO  noted.

According to her, one factor that has led to the increases in this sector is the upsurge in demand by  corporates who would rather pay for short-let apartments for  their expatriate staff than pay annual apartment  rentals.

The rental range for short-let apartments is wide and depends on the quality, branding, unit size and location of the offer.  Rents can go as low as NGN 25,000.00 for a studio apartment to as high as NGN 140,000.00 per day for a 3-Bed apartment.

“The commercial outlook for short-let apartments remains attractive in the light of positive market fundamentals, expansion possibilities and strong levels of profitability. We believe this market presents unlimited opportunities and is a sector likely to spur increased investor interest”, she posited.

CHUKA UROKO