Nigeria: Low retail space presents growth opportunity

With a population of over 182 million people and retail mall space of less than one million square metres, Nigeria’s retail space is poised for growth on strong market fundamentals.

With a purchasing power parity (PPP) estimated at $5360 (World Bank 2015), Africa’s most populous nation has a total retail mall space of about 500,000 square metres, with the largest being the Tinapa Mall (80,000 square meters).

South Africa with a population of 40 million has available retail space of about 23 million square metres. Kenya has a population slightly over 45 million with a retail space close to two million square metres of retail space.

For the retail mall space to increase, an enabling policy environment is needed. For instance, in a bid to promote “made in Nigeria” goods the Central Bank of Nigeria created a list of 41 items barred from accessing foreign exchange. This is in addition to government’s reluctance to allow the forces of demand and supply determine foreign exchange rates. This has stopped intending global retailers from entering the market.

“If the government wants these retailers to produce locally, then it should demonstrate to them that there is a market for their goods. Once there is proof of effective demand for the goods, then a retailer would be prepared to start some level of backward integration at the local level” said Chudi Ubosi, managing partner at Ubosi Eleh & Coy Ltd, estate surveyors and valuers.

Ubosi added “Shoprite has created a huge impact in the retail space by working with farmers to backward integrate for instance, improving the quality of processing and packaging. But they had to first ascertain the market existed by opening up retail channels.”

However, when the policies are hindering the entry retailers, they will lose interest in the market. This loss of interest might be temporary or permanent. Even when it is temporary and policies are reversed, investors would still create a window period to observe environment before they move in.

A source familiar with the matter opined that if for instance, there is change in policy effective in three months; it allows people room to plan and builds confidence in the market. However, in cases where policy changes take effect immediately, the wrong signal is sent to the investment and business communities.

This is because it becomes clear policymakers care little about investors who might have deployed capital in that space. Investors take time to make decisions and to plan. As long as policy implementation continues to be erratic it would further keep away investors and tighten the market. There will be reduction in capital flows towards Nigeria and those investment products, stifling growth of the retail market space.

Players in the market contend that the retail market will continue to experience increase in 2017, though not as high as 2016, its fundamentals remain strong.

Many projects that are in the pipeline will continue to be funded as their developers seek more equity participation to reduce debt and to get them finished within budget limiting cost overruns.

However, the high cost of borrowing internally and the unfavaourble economic headwinds internally make it difficult for external funds as willing and attractive as they may seem to come into the Nigeria despite the strong fundamentals for the retail market.