Market transactions favour small size office space in Q3’17 as supply glut persists
Despite the improvement in macro-economic fundamentals, activities in the real estate sector continued to trend downwards in the third quarter of this year with transactions in the prime office market favouring smaller sized spaces of 200 square metres to 500 square metres.
This is a pointer to investors that the game has changed and it is not restricted to office market alone. It cuts across the various segments of the market including retail, residential and industrial. In retail, for instance, experts advise that mall sizes shouldn’t exceed 5,000 square metres to 15,000 square metres.
Following the 0.55 percent GDP growth in the second quarter of the year after five consecutive quarters of negative growth, the third quarter of the year saw improvement in the economy with reduced inflation, positive GDP growth, increased foreign exchange (FX) supply and further increase in external reserves.
With fairly consistent intervention in the FX market of approximately US$3.5bn by the Central Bank of Nigeria (CBN) in the third quarter, there was further convergence in the interbank and parallel market rates. The Investor-Exporter Foreign Exchange (IEFEX) window which appreciated 0.8 percent in the quarter has continued to mitigate any likelihood of a speculative attack on the naira. Year-on-year inflation is down to 15.98 percent in September from 16.25 percent in July. Inflation had peaked 19 percent in January.
But the impact of this improvement is yet to be seen on the office space market. A new report by Broll Nigeria notes that the frequency of completed transactions in this market slowed in this quarter relative to other time periods.
“Although the trend of relocations to A-grade buildings from B-grade and standalone buildings by corporate organizations persists, general activity has decreased due to a supply glut which resulted in high vacancy rates”, says Nnenna Alintah, Head of Occupier Services at Broll.
During this period, average asking rentals for A-grade spaces across the core markets of Ikoyi and Victoria Island declined. In Ikoyi, rentals dropped approximately 7 percent to US$710 per square metre per annum, down from US$765 per square metre per annum, while rentals in Victoria Island dropped 7.8 percent to US$640 per square metre per annum, down from $690 per square metre per annum.
An interesting development happened in the market within this quarter. A number of existing tenants in prime grade buildings in Ikoyi and Victoria Island were taking advantage of current market conditions by seeking renegotiations of lease agreements for more favourable conditions.
In Abuja where, unlike before when rents were dollar-denominated, the appeal of naira rents resulted in some level of activity, but demand was still growing at a much slower pace relative to supply.
Alintah pointed out that market players in the information communication technology (ICT), consulting, fast moving consumer goods (FMCG), marine, oil and gas, shipping and logistics and finance sectors were the most active during the third quarter. Regional relocation of administrative staff by corporate organisations from the Niger Delta sub-market to the Lagos and Abuja submarkets were also prominent.
The office market is currently regarded as tenants’ market and, as such, landlords have become innovative with incentives in order to retain tenants in a market with high vacancy levels. Some of the incentives include rent concessions, longer rent-free periods, more flexibility in frequency of rent payments and, in certain locations, rent rebasing to naira rents.
Market outlook is, however, good. “We expect that the ongoing positive trend in the macro-economy will persist and is likely to have spill-over effects on the office sector. The consistent intervention by the CBN in the FX market has reduced speculative pressures on the naira, resulting in Nigeria’s retention in the MSCI frontier index and improved investor confidence”, Alintah noted.
It is expected that oil prices will remain relatively stable for the remainder of 2017, which could help sustain the CBN’s ability to fund the FX market and in the light of the fairly positive sentiment, there may be a gradual upward shift on the risk curve of investors towards assets such as real estate.
Bolaji Edu, Broll’s CEO, had told BusinessDay in an interview that the existing oversupply of space would remain in the short to medium term, adding that in the long term the market may not see oversupply.
But the current glut in the market may put further downward pressure on asking rentals. An additional 21,000 square metres of office space are expected in the final quarter of 2017 from the delivery of Alliance Place, Kingsway Tower and Desiderata Tower. Trinity Towers and Cornerstone Tower are anticipated for delivery in 2018, bringing an additional 23,000 square metres of space into the market.
CHUKA UROKO