By Maduka Nweke
The year 2016 has come and gone but the year cannot go without remarkable impressions it created for both operators and investors in the real property sector. It is certain, the Nigeria economy tanked and plummeted with no sector given a reprieve, however, no other sector of the economy was more affected than the real estate sector particularly in the major urban centers such as Lagos, Abuja and Port-Harcourt. This, though does not mean that other cities did not experience the adverse economy.
The real estate industry is increasingly influenced by rapid technological advancements and significant demographic shifts, which include growing urbanization, longevity of baby boomers, and differentiated lifestyle patterns of Millennials. In addition, macroeconomic and regulatory developments continued to impact profitability.
The effect of the decline of the naira against major foreign currencies like the dollar rendered transactions in real estate in some areas in Lagos, like Ikoyi, Victoria Garden City (VGC) unattainable to the medium and low income earners. This drop in naira value also largely affected the apex bank’s borrowing mechanism and less businessmen could afford it as the banker’s bank tightened its lending window.
Although, a lot of houses were out for sale and rent, the harsh economy gave no one the muscles to venture whether for office occupation or residential and so many of the completed buildings churned out became redundant despite drop in prices.
The lending window of 2015 has great similarities with that of 2016 because since the lending institutions were also facing their own troubles, lending to the sector was anything but cheerful and, according to a Central Bank of Nigeria’s report of November 2016, interest rate on prime lending to real estate activities from 26 percent of lending banks was between 24 percent-29 percent per annum and 18 percent-23 percent per annum from 52 percent of lenders.
The maximum lending rate from most of the lending banks (87 percent) was between 24 percent-36 percent per annum. Mortgage financing to property buyers did not fare better, with unpleasant consequences for dreams of potential property buyers and real estate operators.
Both commercial and residential real estate have taken a hit from this crisis which has brought about a slow-down in market transactions across the country as demands for real estate assets dropped significantly, leading to price fall, especially at the high end residential markets where demand, by the third quarter of the year, dropped by about 20 percent.
Many buildings, including old and newly completed apartment blocks, have remained unoccupied, pushing vacancy factor index (VFIX) in residential properties to a new high which Bismarck Rewane, CEO, Financial Derivative Company, estimated at 74 percent, up from 64 percent in 2015.
Though construction activities were seen here and there with a few mansions, residential, retail malls and office towers springing up and changing the city skyline in 2016, the real estate sector within the year had a fair share of the impact of economic headwinds as subdued demand and buyer supremacy defined market transactions, leaving investors and developers in sobering moods.
Again, falling national revenue, liquidity squeeze, decline in foreign and local investment, high interest rate, weakening currency, low productivity and contraction in GDP growth all culminated in an economic recession that crippled consumer purchasing power and almost dried up appetite for investment. Virtually, all sectors of the economy have been affected and businesses were struggling to remain afloat.
However, a major landmark entered the built environment as retailing of buildings became more lucrative on the internet which was not the norm in the previous years. The increased volume of online retail sales continues to disrupt the traditional brick-and-mortar sales models of many retailers, pushing up demand for modern distribution centers with the latest logistics technology.
During the past 15 years, e-commerce sales have grown to nearly 8 per cent of total retail sales in the United States, up from 1 per cent at the turn of the century (according to AFC report). The source of demand started coming not only from major online retailers with dominant market shares, but also traditional brick-and-mortar retailers looking to grow their own e-commerce capabilities. As a result, a record number of warehouse facilities were under construction in 2016. Still, demand is outstripping supply. As a result, vacancy rates have plummeted and leasing rates have risen in many major markets.
As e-commerce growth continues, competitive dynamics are also driving demand for new warehouse distribution space near more densely populated markets. In the past, much of the industrial warehouse space was built in suburban or rural areas where land was plentiful and cheap, and labor and taxes were low. Many online retailers are trying to differentiate themselves by offering speedy or “last-mile” delivery, and some are charging a premium for it. To be effective, retailers are now looking for warehouse space closer to their customers, many of whom reside in urban markets. This dynamism is pushing up the value of land in and near cities, where it is scarce. Online retailers often find themselves in a bidding war for key space with third-party parcel delivery companies in urban markets
Baring all circumstances, real estate companies will need to reinvent their strategies in 2017 to prepare and respond to the changes in the macroeconomics of the built environment. Specifically, companies will need to consider the influence of technology advancements, urbanization, changing consumer preferences, security, climate change, and resource scarcity concerns on real estate decisions. There will be need to leverage technologies such as the Internet, cloud computing, mobility, 3D printing, and advanced analytics to be innovative with respect to locating future developments. There will also be need to resolve integration issues with legacy systems while adopting new technologies. This will be achieved if companies dopt a targeted and multipronged cybersecurity strategy that is secure, vigilant, and resilient. This will help to drive innovation by partnering with existing startups, establishing research and innovation labs, and creating corporate accelerators and invest in the tools and talent to respond to the changes in the ecosystem at a desirable pace.
There were major buildings collapse recorded during the year. The Lekki Garden was one, the Akwa Ibom Church building was another one including other skirmishes on the built environment. They were classified as major as a result of the number of casualties and the length of building. It will be recalled that after the various building collapse in Lagos State, the State Government enacted some laws that would henceforth help to guide builders to avert the kind of catastrophes recorded in project constructions. To help achieve this, the state government also reformed waste management to guide waste collection and disposals. The rate of vacancy in both residential and commercial properties, including retail malls and commercial office buildings, is however a matter of debate but a walk through the highbrow locations in the country such as Asokoro in Abuja and Ikoyi, Victoria Island, Lekki, Amuwo- Odofin in Festac and Apapa in Lagos show quite a good number of houses looking for buyers or tenants or both. Adetokunmbo Ajayi, President/CEO, Propertygate Development and Investment Company Plc, recalls that the market as at the end of third quarter of the year had recorded 8.20 percent sectoral contributions to GDP, a decline compared to 8.74 percent recorded the same period in 2015.
A developer who compromises on the quality of materials, no matter how highbrow the property’s location, has no right to place an exorbitant price on it”, says Sijibomi Ogundele, MD/CEO, Sujimoto Construction, insisting that “luxury apartments are in high demand while poorly finished buildings with exorbitant prices constitute the pile of empty apartments constantly being alluded to. He says that Nigerian developers must realise that times have changed and the ‘quick fix – quick gain’ syndrome has ended. “Real estate developers who fail to understand that investors are now upbeat about quality and finishing after having seen same from their travels abroad, will soon fade away”.
Besides low demand and high vacancy rate, another dominant feature of market in the outgoing year was the supremacy of the buyer. It was literally a buyer’s market as the few that were on the market became cautious, choosy and evasive, caring so much about finishing and quality of materials. The buyers ownership of the market provided more fillip to the crippling impact of recession which has created an unusual economic situation where there is inflation alongside negative growth in the economy.
“We are at a time when there is need to involve prospective clients and take their opinions into consideration in every step of the construction process in order to give more value and avoid waste; now people are much more choosy, they want value for their money and they know exactly what they want”, said Andrea Geday, MD, Elalan Construction, who spoke at a forum in Lagos.
Also, Hakeem Oguniran, MD, UAC Property Development Company (UPDC) advised that developers should re-think their value proposition beyond the usual value drivers such as location, quality and pricing. “Softer issues are now critical such as flexibility in payment plan; there is need for customer leadership, project customization, financing support, post delivery management, and asset replacement”, he pointed out, stressing that time was now to sit customers down and get exactly what they want.
In the commercial office space, falling demand and increased supply of space has dropped rents significantly from $1,000 and above per square metre as at the last quarter of 2015 to $800-$850 per square metres, creating a situation that has given ownership advantage of the market to tenants. As at the third quarter of this, corporate occupiers continued to seek out deals to be had in the commercial office space which has increasingly turned into a tenant’s market. The oversupply in office space and low tenant demand continued to put downward pressure on achievable rents.
Opuda Sekibo, a researcher at Broll Nigeria, notes that although landlords maintained asking rents over the third quarter of the year, they were however willing to include attractive non-rent incentives, by way of fit out allowance and rent free periods as a means to drive up occupancy in their buildings. Unlike before when oil and gas companies were the major market drivers, some of the key drivers of demand for Grade A office space in the market now have come from the multinational manufacturing as well as financial and business service sector most of whom are looking to relocate to better quality buildings in the core commercial districts According to Mr. Tayo Odunsi, Director Real Estate Advisor in Nigeria, Developers in the hospitality and leisure space are taking an aggressive stance, based on strong economic fundamentals and impressive growth prospects. On the retail front, Nigeria has a significant pipeline of shopping malls and still growing. The largest concentration is in Lagos, which will aid in decongesting the tonnes of shoppers seen on any given day in the existing malls. In the residential sector, despite various austerity measures the government has explained that initiatives like the NMRC should have the green light for the considerable future.