Mall developers slow investments on retail woes

The huge investments that went into providing retail space for Western-styled shopping malls in Nigeria in the last three to four years has slowed considerably due to the crippling foreign exchange policy of the Federal Government, and declining patronage arising from the downturn in the country’s economy.

Between 2009 and 2015, the retail sector gained significant interest from local and international investors, including developers and retailers, who built and anchored modern shopping malls similar to those in Europe, America, and emerging markets like South Africa.

It attracted foreign direct investments estimated at $3 billion from a zero base, which was deployed to the development of about 20 shopping malls in over 10 Nigerian cities, including Lagos, Ibadan, Abuja, Port Harcourt, Kano, Warri, Ilorin, Enugu, Onitsha, and Owerri.

Largely, the country’s strong demographics, an emerging middle class with strong buying power, and a change in shopping culture drove the phenomenal growth seen in the sector.

However, Nigeria’s retail sector has started experiencing a setback in its growth in the last 12-18 months due to what Hakeem Oguniran, MD, UAC Property Development Company (UPDC) Plc, attributes to “some abrupt modifications to certain regulatory policies which stalled new development activities and stifled existing operations.”

Nigeria has pegged the naira at 197-199 per dollar since March 2015 through import and currency-trading restrictions.

Analysts say the Government’s new restrictive and prohibitive monetary policies, especially on foreign exchange and imports have not been favourable to the retail sector.

“Most of what are sold in retail malls are imported; a lot of the foreign retailers have their money stuck in Nigeria because they can’t have access to foreign exchange. And when they succeed in bringing in their wares and convert the cost to local currency, the wares go beyond the reach of average Nigerians,” said Femi Akintunde, MD/CEO, AMFacilities Limited.

The capital controls have sent investors fleeing and the black-market exchange rate has plummeted to N350 as the dollar scarcity has worsened.

When BusinessDay visited a few of the malls in Lagos recently, it was observed that many retailers who have already fitted out their spaces could not open because they were still battling with either getting dollars to import or the bottlenecks associated with bringing out already imported items from the seaports.

In some cases, some retailers, especially foreign ones, have closed shop such as “Truworths, a fashion retailer, which disclosed its intention to close their remaining two stores in Enugu and Delta States due to capital controls, thereby joining other South African retailers such as Woolworths in deciding that the returns did not outweigh the risks and challenges faced in the country.

“A lot of people who go to malls these days are there for picnic and window shopping. For every 10 people that go to the malls, you hardly get six that buy anything other than popcorn and soft drinks. So, the crowd you see at retail malls is not all there to do real shopping. Some are there to ease tension from job loss and for relaxation,” said Akintunde of AMFacilities Limited.

Apart from land cost, which Ogunniran of UPDC says is largely very expensive, accounting for 20-25 percent of construction cost, absence or lack of retailers taking up completed stores, is also a major headache for developers, leading to competition for the few ones available.

To keep up with this competition and to sustain their business, developers now offer free-rent period and quarterly rent payments, among other incentives aimed at wooing more tenants to take up spaces.

“Developers may have to opt for phased developments or reduce the size of the developments all together to limit risks,” says Broll Properties in its Q1 2016 report which also points out that cutting back on projects size will further slow down the growth of the formal retail market across Nigeria, especially outside the prime locations in core cities of Lagos, Port Harcourt and Abuja.

Akintunde agrees, stressing that scaling down the size of projects come with far-reaching implications. “If you scale down too low, you miss the economy of scale,” he says. “There is a certain amount of cost a developer incurs which he distributes among the many retailers that he now has to carry or load on a small number of retailers who are already squeezed by rising costs and falling sales or demand.”

CHUKA UROKO