Returns on prime office space investment pressured as market continues to struggle

For investors in prime office market in the main cities of Nigeria notably Lagos, Abuja and Port Harcourt, improvement in macro-economic environment means little or nothing as the market’s continued struggle piles downward pressure on the return on their investment (RoI).

Whereas increased supply from project completions and the rise and rise of co-working space is exerting a pull on demand in the Lagos market, security risks and environmental hazards in Port Harcourt sent office rents to their lowest in over five years.

Grade-A office vacancies remain high and it appears the economy would need to strengthen much more to reverse this trend. The wait for the global brands looking to open up shop in Grade-A signature addresses worthy of their presence may be taking too long.

As at the first half of this year (H1 2018), there was an average of 28 percent decline in office rents per square metres across the major cities. In the Central Business District (CBD) of Abuja, rents dropped 30 percent to N40/$0.11 per square metre per month down from N57/$0.16 per square metre per month.

On Olu Obasanjo Way in Port Harcourt, rents declined from N16/$0.04 per square metre per month in 2017 to N12.5/$0.03 per square metre per month in H1 2018, representing -23 percent drop. This is slightly better than the situation in Ikoyi, Lagos, where rents dropped -33 percent to N207/$0.57 per square metre in H1 2018, down from N309/$0.85 per square metre per month in 2017.

The implication of this is that investors will be under pressure from their financiers who are no Father Christmas and so, would get their agreed repayment sum plus the interest in spite of the market situation. Those who are not exposed to bank credit may decide to stick to old rents, leading to high vacancy factor which, in turn, leads to depreciation and high maintenance cost.

But, on the other hand, demand for grade B and smaller office space remained stable when compared with last year and, according to a new report by Northcourt Real Estate, co-working spaces continue to grow in popularity with a few service providers opening more locations.

The report hopes that with increased flexibility in pricing and terms, a renewed focus on volume, partnerships and programmes will drive profitability.

“The development pipeline remains rich and is much more active in comparison to H1 2017. With over 100,000 square metres of office currently available for lease on the market, completions scheduled for 2018 already have significant competition for the few multinationals and big brands that can afford grade-A space, not accounting for the brands that are willing to settle for the more flexible and affordable co-work option”, said Tayo Odunsi, Northcourt’s CEO.

The retail market also continued to struggle with shrinking middle class and dwindling purchasing power of the customer. It however, differs from the office market because stable exchange rate regime makes planning around operational costs and profit projections much more feasible for retailers. Local investors, emboldened to make further investments, softly opened the Next Mall in Port Harcourt and The Atlantic in Lagos and the Novare Central Mall in Abuja.

Unlike the office market again, vacancy rates reduced largely across the Grade-A malls. For instance, The Palms and Ikeja City Mall had the lowest vacancies at 0 percent and 2 percent respectively. Novare Mall came in at 28 percent, down from 47 percent at the end of 2017. Artee’s Port Harcourt Mall, Big Treat and Genesis Centre had 8 percent, 15 percent and 25 percent respectively.

But whereas Ceddi Plaza and Gateway Mall in Abuja recorded 21 percent and 38 percent respectively, Abuja’s largest mall – Jabi Lake (20,000square metres) recorded the highest vacancy rate in city at 40 percent and this was due to a number of stores that closed down in Q1 2018 coupled with high rentals.

These high vacancy rates find explanation in some international investors finding business conditions in Nigeria less favorable and are instead pursuing retail interests in Eastern Europe and Eastern Africa, local HNI’s (High Net- worth Individuals) who are not disturbed by currency risks amongst others, are moving into the retail space to make large-scale investments.

“Outside purpose-built and A-grade malls, high street retail within central locations continue to experience high demand. Larger malls, though more appealing to international retailers due to better infrastructure, are less attractive to local brands due to higher rents and service charge costs, Odunsi noted.

“Events, entertainment and leisure features continue to be a traffic pull for large malls with car park payments remaining a key income stream and a counter-weight to the pain of declined rents in major malls,” he added.

Data from the Nigeria Bureau of Statistics (NBS) shows that payment channel transactions reached an all-time high of ₦86.1 trillion in 2017, representing a 32 percent increase from ₦65.1trillion recorded in 2016. Within this period too, online transactions came up thick, rising by 39.5 percent from ₦132 billion in 2016 to ₦185 billion a year later.

“As such, it was only reasonable that online retailer, Konga, join forces with Yudala, an e-commerce company to become one of the largest online and ecommerce firms in Africa”, Odunsi said, pointing out however, that Jumia, a prominent player in Nigeria’s online retail space saw its adjusted loss before interest, tax, depreciation and amortisation widen to €80.7 million in the first nine months of 2017 even though revenues moved up to €57.3 million.

CHUKA UROKO