Reasons for office space investors to cheer as economy improves
For an oil-dependent economy, the rally in the oil market can only be correlated with a positive shift in the wider economy, signaling a potential shift in commercial real estate market whose health or otherwise depends on what happens in the wider economy.
Oil price has seen about 56 percent rise in the last couple of months, and that is quite significant for a product whose price had gone down from above $100 per barrel pre-recession to below $30 per barrel at the peak of recession in 2016.
The economy is, no doubt, currently on an upswing with positive growth, lower inflation of 15.4 percent as at December 2017 and relative stability in the foreign exchange market. This follows from an economic slowdown that began to manifest in 2015 and rose to be the first of its kind in two decades.
Expectedly, the economy contracted, leading to a corresponding decline in activity in the office market. Occupier demand dropped whilst new supply of quality office spaces came on to the market. Vacancy levels swung up such that landlords began to get creative with concessions in order to remain competitive in an increasingly saturated market.
But as the economic recovery takes hold, it is just natural to expect its impact on the office market.
The expectation is that the naira will remain stable in the short to medium term and this has led to renewed business and investor confidence in the market. Nnenna Alintah, Head, Occupier Services at Broll Nigeria, reasons that the rebound in business confidence coupled with the policies such as federal government’s ‘ease of doing business’ scheme may trigger a flow of new entrants into the market, edging up occupier demand as a result.
Alintah sees improved liquidity and stability in the FX market increasing the level of Foreign Direct Investment (FDI) into the economy as investors have more confidence about the repatriation of their capital and profits.
“Inflation is on a decline, which offers a sense of respite to investors and consumers in the economy as it erodes the value of returns to assets. The decline in inflation could also influence interest rate policy, which has been criticized as being growth-eroding for the real estate market”, she adds.
So far, in 2018, the number of inquiries for prime grade office space has increased which reinforces expectations of a shift in the real estate cycle. Demand inquiries and transactions have been driven by the FMCG, technology, healthcare, finance, professional services and oil and gas industries.
The oil and gas industry has accounted for a bulk of the inquiries due to the rebound in the global oil market. Demand growth is expected to gradually rise especially with improved business and investor confidence.
Experts predictions for this market in 2018 have been largely positive and promising. It is expected that over 50,000 square meters of prime office spaces will be introduced to the market this year. The market in the past five years has received over 120,000 square meters.
It is expected too that existing corporate tenants will migrate to newly built offices in search of better services while older buildings will be left vacant. David Mba, Commercial and Advisory Consultant at Fine and Country, says that in this circumstance, “landlords will look to either sell ‘as is’ or renovate and lease for significantly lower than historic rents”.
Mba foresees a slowdown in commercial activities by the fourth quarter of 2018 as the flow of foreign capital halts. His reason is that most companies will be taking strategic decisions on how to position themselves post-election.
There will a significant rise in co-works spaces for corporates and SMEs with more technological solutions being used to improve real estate operations such as property search, leasing, facilities management, and smart building technologies.
But notwithstanding the general positive outlook for the market, Alintah notes that the recovery in the market is unlikely to be consolidated in another nine to 18 months. “Conditional on the efficiency of particular markets such as the foreign exchange and debt markets, this lag could extend beyond 18 months”, she adds.
According to her, the market is to experience an injection of office space in excess of 40, 000 square metres in 2018 which is to drive up vacancy levels due to slower take up rates. This oversupply in the market is to stall rental growth in 2018.
CHUKA UROKO