Why real estate market vacancy rate is higher in residential buildings

Due largely to contraction in GDP growth, rising unemployment rate, falling consumer purchasing power, galloping inflation, among others, the real estate market now has more empty residential than commercial buildings, leading to high vacancy factor index (VFIX) estimated to rise 80 percent this year, up from 74 percent by the last quarter of 2016.
VFIX is an indicator of the state of the real estate market in the upper class neighborhoods of Nigeria including Lekki, Victoria Island and Ikoyi in Lagos; Maitama, Wuse 2, Asokoro in Abuja and such areas as Trans Amadi, Peter Odili Road and Old GRA in Port Harcourt.
The residential VFIX increased by 6.6 percent from 177 early 2016 while commercial VFIX remained flat at 148. The reason for this is not far-fetched. Financial Derivative Company Limited in one of its economic reports on VFIX in real estate market explained that residential properties have a higher sensitivity to economic downturn.
“A residential property can easily be vacated without the tenant incurring a huge cost. Business, however, will face high costs for moving and so the decision is not made as quickly. For example, companies will face switching costs like changing addresses on business cards and will most likely lose some customers as a result”, said Mercy Ogah in the report.
The contraction in the country’s GDP which happened in two consecutive quarters leading to the present recession in the country coupled with rising unemployment rate, which over 60 percent at the moment have contrived to lower the demand for housing and pushed the index higher.
The housing market has, in the past 12-18 months, seen many empty or unoccupied buildings and the 74 percent rise in VFIX in 2016 shows the rate of increase in the number of vacant properties based on the housing stock as at January 2015.
In a very significant way, the Federal Government policy on exchange rate, especially the flexible exchange rate regime has affected activities in the real estate market as building materials used for construction are part of the 41 items restricted from the official foreign exchange market. These include cement, roofing sheets, iron rods, wooden doors, and ceramic tiles.
“Their prices are subject to parallel market fluctuations thereby increasing the cost and final prices of housing. For example, the price of cement has gone up considerably N1500 to N2,500 per bag as a result of exchange rate fluctuations”, Ogah said, adding that there is a positive correlation between the VFIX and the average parallel market rate.
Presently, the future for the real estate market is still not bright, at least, in the short to medium term. With the parlous state of the economy, it is difficult to expect a quick recovery of the VFIX as there is a time lag for the market to return to equilibrium.
Expectation is that VFIX will rise this year and if there is anything that will bring about a decline, it will be due to an expansion in GDP, an increase in the hotel occupancy rates, inflow of foreign portfolio and direct investment, growing consumer confidence and, most importantly, the flow of state and federal governments spending, especially on infrastructure projects.
Until these happen, demand for housing will continue to shrink further also due to lower disposable income and a move from prime areas to more affordable locations. In the short-term, new developments under construction will increase supply of properties.

 

CHUKA UROKO