Vacancy rate rises 30% on shallow tenant pool, diminishing retailer interest in 2nd tier cities

The uncertainty that defines Nigeria’s economic and political landscape in the past 12 to 15 months has, in more ways than one, impacted negatively on various sectors of the economy and, perhaps, no other sector has received more or worse bashing than real estate where all the various segments are struggling and gasping for breath.

This trend of uncertainty continued into the second quarter  of this year with additional headwinds facing an already weakened economy such that challenges caused by dwindling oil prices and tight forex controls were exacerbated by renewed unrest in the Niger Delta and the deregulation of the oil downstream sector.  While the former saw oil output decline by around 50 percent, the latter saw a 49 percent increase in the pump price of petrol, piling more pressure on the economy and consumer prices.

Due largely to limiting monetary policies and declining consumer spending power, the retail market seems to have been in deeper challenges. By the second quarter of the year, the vacancy rate in that  market deepened and, according to a recent report by Broll Nigeria, shallow tenant pool in the overall retail sector as well as unfavorable market conditions continued to hit the second tier cities or secondary markets  particularly hard.

The report adds that with diminishing levels of interest from retailers to expand into these  second tier cities market, lower take-up rates and lower trading densities continued to materialize, culminating in a considerably higher vacancy rate at approximately 30 percent.

“Landlords remained uncompromising with respect to downward rental reviews despite the push back from tenants and were more willing to extend concessions in other forms on a case-by-case basis. Average asking rents continued to range between $35 and $50 per square metre per month”, says Nnenna Alintah, a research analyst at  Broll.

Within the same period, inflationary pressure in the economy continued unabated with the Consumer Price Index (CPI) hitting a 6-year high of 16.5 percent in June 2016, up from 12.8 percent in March, which was a significant breach of the Central Bank of Nigeria’s (CBN) target range of 6-9 percent.

Retailers felt the effects of the weakening economic climate with their margins shrinking further as operational costs increased while consumers also faced a decline in real wages as productive activities reduced and many even lost their jobs, putting downward pressure on their purchasing power.

Alintah observes that although no new mall construction started in the second quarter, the quarter saw the opening of a number of new malls across core and secondary markets including the Onitsha Mall which increased retail space at the secondary market by 12,000 square metres, and the  Maryland Mall which brought additional 7,000 square metres to the retail space at the core markets.

“The mall, developed by Purple Capital Partners, is anchored by Shoprite Usave –a subsidiary of Shoprite Holdings—which made its maiden entry into the Nigerian retail market. Currently leased to a considerable number of indigenous retailers, Maryland Mall is set to benefit from the large number of consumers in its catchment area on the Lagos mainland”, she noted.

She noted further that, though established malls in core markets continued to record strong performance due to first movers’ advantage, newer malls across core markets faced serious challenges as market conditions took a turn for the worse, explaining that recently delivered malls recorded low trading densities and a slower take-up rate as tenants found it difficult to complete fit-out and commence trading.

Bolaji Edu, Broll Nigeria’s CEO, is however positive, pointing out that despite the current headwinds facing the sector and the wider economy, Nigeria has remained a key, relatively untapped market for players across the retail industry’s value chain.

“Developers such as Novare, Resilient Africa and Artee Group are going ahead with planned schemes in their development pipeline despite economic challenges. We are seeing that developers are adapting strategies that better suit market realities; this is most apparent in recent and expected mall deliveries in the secondary market ranging between 8,000 square metres and 12,000 square metres”, he stated.

Though the change in CBN policy is expected to increases liquidity and access to forex, Edu does not see cheering outlook for the retail sector as, he says, the sector will continue to face significant challenges over the next 12 months. “The inadmissibility of items currently banned from the interbank forex market under the CBN’s new policy will see many retailers continue to depend on the higher forex rates offered on the parallel market to fund Imports”, he adds.

Rents for retail space has continued to be dollar-denominated and he notes that as the market practice continues to allow leases with dollar denominated rents payable in Naira at the interbank exchange rate, upward rental pressure is expected in the foreseeable future given the imminent depreciation of the Naira against the dollar.

“We however expect that push back from tenants, given these realities, will intensify and we anticipate that landlords might be willing to consider extending substantial concessions to tenants who are likely to see effective rents increase by 35 percent to 45 percent.

“On the investment side, the change in the forex market is expected to fuel investor confidence. Given the inherent opportunities in the retail market, we expect that investors who, up till now, delayed investments will intensify the consideration of allocating capital to the retail sector”, he hopes.

According to him, a sustained surge in investor confidence in the medium- to long-term is however predicated on a favorable and predictable regulatory environment which remains largely speculative in the coming six to 12 months.