Why rents remain high despite supply glut in property market

Unlike a normal market situation where the interplay demand and supply determine price, what obtains in the property market in Nigeria could best be described as anomalous because, though there is an oversupply resulting from low demand, house rents have remained high, especially in highbrow areas.

Persistent macroeconomic headwinds that brought Nigeria to where it is today in a recession have led to lower demand for prime properties in the big cities of Lagos, Abuja and Port Harcourt.

Traditional sources of demand for prime properties including stock broking firms, investment banks, insurance companies, airlines and oil companies that usually rent these properties for office space or residential use are experiencing business downturn.

Looking at various locations in Lagos, Bismarck Rewane, FDC’s CEO, Financial Derivatives Company (FDC) noted in his monthly economic review that “vacant properties are higher in Lekki at 64 percent followed by Victoria Island, 35 percent, and Ikoyi, 24 percent”, pointing out that Admiralty Way in Lekki has the highest vacancy ratio which is not surprising given the challenges that businesses face in the current macroeconomic environment and most properties on that Way are offices and commercial spaces.

However, in spite of this situation, rental prices of vacant properties in these high-end locations have remained sticky such that an office space in Lekki Phase 1, for instance, costs N30,000 per square metre in TBC Building, and to rent a 1,250 square metre house in the same area will cost about N8 million to N10 million per annum on Admiralty Way and N5million to N6 million per annum in other Lekki streets.

But Rewane posits that the real estate sector has become enigmatic because of the strong correlation between the investment in real estate, money laundering and public sector corruption, stressing that “this is why rents remain stubbornly high even when there is a supply glut”.

Analysts are of the view that laundered or “stolen” money find its way into real estate, linking the many empty mansions in the highbrow areas of Maitama and Wuse in Abuja, Ikoyi and Banana Island in Lagos to these “money bags” who can afford to leave their houses for years without rents “because they have no exposure to bank or other loans”.

Empirical evidence, Rewane says, reveals that approximately 90 percent of Nigerian investors hold real estate as an asset class in their portfolios, adding that the locations of their real estate investments are principally in Lagos, London, Dubai, New York, Atlanta and Accra.

According to him, premium properties across the globe have remained high, citing the 2016 Knight Frank wealth report which reveals the 10 most expensive cities in the world of luxury properties in 2015.

On what to expect in the days and months ahead, Rewane predicts “we should expect a decline in house prices; specifically, we should also expect a switch in real estate pricing from dollars to naira, as landlords now realize the effect of the economic challenges faced and will be forced to change if they want to remain profitable”.

CHUKA UROKO