‘Vacancy created by movements out of properties is a reflection of economy’
The poor state of the Nigerian economy has manifested in various sectors including real estate where falling demand, rent default, high vacancy rate, etc define market reality. In this interview, GBENGA OLANIYAN, an estate surveyor and valuer, offers insights into a struggling market that has remained in negative growth territory for 11 consecutive quarters. He speaks with CHUKA UROKO.
More than 12 months after the economy walked out of recession, the property market is still recording negative growth. What is going on?
The good news about this year, from my own perspective, is that unlike last year when people expected miracles to happen and so did not believe that things were really bad, a lot of people are now adjusting.
For instance, rents on properties have come down to a level where we see people rent properties again. There is a property in Osborne Phase 1 that was rented out for N15 million per annum three years ago. Now, the landlord has collected N6.5 million per annum. This shows that people are now being more realistic on both the rental and sales side.
However, it is those on the sales side that are being heavily hit because, on the rental side, majority of the property owners are not owing banks. For those who have houses for rent, all that has reduced is their income, unlike the man who has borrowed from the bank with mounting interest rate. We are at a point now where people are sitting down with the banks to renegotiate their loan terms.
There are some landlords out there called ‘legacy landlords’ who would rather leave their properties empty than drop their rents. What is your take on such landlords?
These are people who don’t want money and so, would rather hold on to their property. They would not drop their rent. Some of them even feel insulted by tenants coming for a downward review of their rents. But this is not affecting the mid-level market where demand is still strong.
What some people are doing at the commercial space is to find a way to give allowances to the tenant. Where rent is $800 per square metre, the landlord may decide to give back, say 30 percent, of this to the tenant as fit out allowance. The rent remains $800 but the tenant pays effectively $500 per square metre. The advantage of this is that when the market returns, renegotiation starts from $800, not $500 the tenant has paid.
In the past 24 months, there have been observable movement of people from one location to another where rents are considered more affordable. What does this mean for the market?
The vacancy created by people moving out of properties is a clear reflection of the state of the economy. But people moving out properties are not dying, but are somewhere. Offices are shrinking. We had a client who was about to sign for a 2,000 square metres space in a new location, after one year they came back to ask us to rent out half of the 500-square metre space they have been operating from. This is because they have reduced their operation and that means some staff have gone.
Again, there is another company that moved out of a commercial property into a guest house. They are now using upstairs for offices and the downstairs for residential. By this action, they have cut the cost of office space. The market is obviously taking a hit from all these.
What is the situation like in the residential segment of the market?
A lot of people have downgraded. If you look at apartments between Lekki Phase 1 and Chevron, they are occupied. This is because the N3 million to N3.5 million property renters in Lekki Phase 1 have move down to this axis to pay N2 million rent. A company has just relocated from an apartment in Ikoyi where it was paying $70,000 per annum to a flat where it is paying just N6 million per annum. What they have done is to leave a more luxurious property to another that is cheaper.
Presently, in the housing market, what people are looking at, over and above facilities, is security. Once there is security with generator to give light and pump water, the house is good to go. By this, the definition of luxury flat has changed a bit.
What lessons are there for players in this market to learn?
We have this herd mentality where everybody just follows the guy in front. Before this lull happened, we were advising developers who cared to listen, especially since we bounced back from the 2007-2009 downturn, that there were too many luxury properties coming up on the island and they are always the worst hit whenever there is a glut. Many did not heed this advice.
Right now, properties in the middle market are not hit at all. If they cannot be sold, they can be rented. As for the high end, they cannot sale and they can’t rent. Research is still lacking in real estate. Many of the developers are not researching. My advice for those still planning to do a development, is to slow down and wait till when the market is expected to pick up again.