Prime office rent drops to $500/sqm as market anticipates 20% of existing supply

When experts gather to discuss trends in the property market, concerns are often raised on the fate of the huge investments that have gone into commercial office market which today is struggling with oversupply arising from the fall away of corpo­rate demand and slowing business activities.

The concerns are, perhaps, more with an observable possibility that rents for Grade A office space which has already dropped from US$1,200 per square metres to US$800 per square metre are likely to come down to US$500 per square metre when the market receives, in the next 24 months, the expected 100,000 square metres space, representing 20 percent of the existing supply.

Presently, total commercial office space in Victoria Island and Ikoyi, La­gos amount to 500,000 square meters with Victoria Island space about three times that of Ikoyi. But, over the next two years, a further 100,000 square metres or 20 percent of existing sup­ply will be coming to the market with Ikoyi adding twice as much space as Victoria Island over this time period.

Ikoyi has a large tranche of pipeline developments including the Kingsway Towers by Glover Road, a commercial office space development that will de­liver 15,000 square metres on 15 floors. Just close to it is the BAT Rising Sun opposite Ikoyi Club. This is a mixed use development that holds promise for 13 floors out of which four will be used for office space.

By Lugard and Kingsway Avenue junction is the Heritage Place, a com­mercial development that stands on 14 floors and offers 15,600 square metres. Eight of the 14 floors will be for office space and the rest for parking. The Sogenal Towers located beside the Mercedes Place is a mixed use development rising 15 floors to deliver 7,500 square metres that will be leased or rented out. Some metres away from here is the 14-floor Alliance being promoted by African Capital Alliance.

Munachi Okoye, CEO, MCO Real Estate Limited, notes that dollar-denominated rents have come under increasing pressure based on com­parisons to office space charged in Naira. “There is also an additional argument as to the conversion rate to use considering the official rate of one dollar to N305 compared to the parallel market rate of one dollar to N460 and the obvious preference to use the official rate”, he said in a recent report on real estate market by his company.

Erejuwa Gbadebo, CEO, Clut­tons Nigeria, affirms, stressing that schemes where rents have been particularly vulnerable are those that are priced in dollars. She notes that a widespread disparity in the market on a firm rate of exchange is posing seri­ous challenges to both landlords and occupiers as they are often at odds on what is perceived to be an acceptable exchange rate for the tenancy period.

“There is however a handful of landlords that have demonstrated greater flexibility on rents in an effort to secure tenants. We are aware of instances where such landlords have agreed on fixed exchange rates slightly out of the market rates”, she observes.

Outlook for this segment of the market remains largely weak despite efforts by developers to stimulate de­mand and stay ahead of competition through different strategies which includes product differentiation and added incentives.

“We have to deal with the realities (competition) like everyone else and we think that our building is well po­sitioned with good amenities. We have put in place very compelling green features which will make occupancy cost very competitive”, Obi Nwogugu, Head, real estate unit at Africa Capital Alliance, disclosed to BusinessDay at a topping out event for Alliance Place.

The 20 percent apiece and 25 per­cent rents fall in Ikoyi, Victoria Island and Lagos Island respectively, has already exceeded expectations of a 10 percent to 15 percent correction by the end of 2016 and Gbadebo predicts that with no let-up in the economic insta­bility at a global and more importantly, a local level, “it is our view that rents in these three core markets are likely to end 2016 down by 25 percent to 30 percent on last year”.

She notes however that more secondary locations such as Apapa or Yaba are expected to demonstrate greater resilience, particularly as rents in these markets—about $60 per square metre to 70 per square metre—are about a 10th of those in prime locations in Lagos.

“Looking ahead to 2017, unless the government is able to deliver on its recovery programme, underpinned by infrastructure spending, the rate of job creation and therefore, demand for commercial office space, is likely to remain subdued, with rent falls likely to persist. In addition, with the low oil price era now well entrenched, oil occupiers remain in consolidation mode”, he says.