BusinessDay

‘Unlike most real estate submarkets, student accommodation offers stable returns’

NONSO OSAKWE is a UK returnee and managing director of Collection Developments, a company with operations that cut across a spectrum of real estate asset classes, including Purpose Built Student Accommodation (PBSA). Osakwe in this interview with BusinessDay’s ENDURANCE OKAFOR and DESMOND OKON shares insights on what the sub-sector can learn from other developed markets and the role his company is playing to deepen growth. Excerpts:

Having spent most of your formative years studying and working in the UK, what informed your decision to return to Nigeria?

Three things, one is the ability to be nimble in a growing market. These days there is a lot of change happening in Nigeria and based on the socio-political landscape one can react relatively fast. I like that dynamism. Second is the opportunity to truly be at the forefront of fundamental change in certain sub-sectors of the economy.

Lastly, the supply-demand gap exists in the real estate asset classes here in Nigeria. Don’t get me wrong, I was in a fantastic position in the UK, but at a macro level, the African opportunities that I observed while I was still in London, were increasingly attractive.

The investment returns in some instances are extremely high. Doing business in Nigeria is not for the faint-hearted; it will bruise and humble you, particularly in the real estate market. Over the last 10 years, we have seen a lot of international players come in with high hopes and have now left the market.

Our research shows students are willing and able to take up good quality accommodation if provided

Why are you focusing on the student housing market?

Our business operations cut across the spectrum of real estate asset classes, and one we find very interesting is Purpose Built Student Accommodation (PBSA). It is a market I understand quite well globally. In the past, I have worked with organisations that have invested in and have developed PBSA assets across Europe. It is what I will call the last frontier in the real estate sub-asset class which is why it took a while to pick up globally but is now highly recognised and sought after investment-wise. It is a fairly nascent opportunity here in Nigeria. There is space to grow to fill the huge supply deficit.

How do you plan to ride on The Pod Living to redefine student living and student accommodation in Nigeria?

I think that we’ve been able to deliver a truly best-in-class asset in Lagos which has shown our ability to build and now operate a PBSA property in a manner that speaks confidence to investors and delivers excellence to its residents. As a business, Collection Developments decided to create The Pod Living (OpCo) purely to roll out and manage accommodation for students and youth. With The Pod Living, we’re also creating a brand experience. Our intention is to be a part of a student’s journey right from university and into their working life by developing suitable, purpose-built accommodation for both phases in their lives whether it is studios, or 1 and 2-bed flats. Market research, coupled with investor appetite also shows a demand; with the ability to hit above-market yields in PBSA and youth housing.

Prior to starting the development, we embarked on an immense amount of research to get a clearer understanding of the nuances of being a student in an African University today and more specifically a student in a Nigerian University, to gain an insight into what students expect. Interestingly, the results we received varied across different regions.

We intend to implore the same strategy to ensure that our assets satisfy both our investors and the end consumer, whose requirements are ever-dynamic.

In addition to The Pod Living at Ibeju-Lekki, what are some of the other projects Collection Developments has developed?

Our business arm is 3-fold; development, advisory, and asset management. We have explored a number of asset classes in Nigeria, many with exciting prospects. We have independently developed residential townhouses in Lagos, a multi-residential apartment building in Abuja, a state-of-the-art fitness studio, and quite a quirky retail store in Lagos.

In the pipeline, we’re looking at a number of opportunities to develop, naturally in the PBSA space and also the residential space, which we’re looking forward to kicking off this year.

Despite being described as a goldmine waiting to be tapped, student housing in Nigeria has not been as attractive to investors as other real estate markets. What is your take on the current state of the sub-sector?

The sector has grown over the last 5 years, attracting institutional, local, and international capital. Given its typical lifecycle, this asset class is more suited towards patient capital investors. Unlike most other real estate submarkets, returns in PBSA are very stable. The supply-demand gap alone shows the opportunity. There is an array of methods to structuring PBSA opportunities here to suit most types of investors. To an extent, the sector is also dependent on the credibility and growth of the tertiary institutions. It can be argued that in some instances some institutions may not be considered credible and therefore not a good investment. But broadly speaking, there are institutions nationwide that present justifiable business cases.

What are some of the challenges limiting growth?

The inability of some students to meet the periodical payments for their accommodation is a concern. Structuring license payment collection systems seamlessly between the operators and the end-users, and creating clear-cut processes for repossessing spaces in unlikely payment defaults, boosts investor confidence.

There is a high level of operational intensity required from the resident base and the academic calendar. Strict systems and processes must be established to retain asset value and customer satisfaction. Doing this right can get expensive, therefore marginalising returns.

Then of course there is the rising cost of construction, which is a challenge but not sector-specific.

With your knowledge of other markets, what lessons can Nigeria learn to deepen student housing growth while also offering affordable accommodation for the over 15 million young adults studying across different tertiary institutions in the country?

There is a need for government-backed incentives to attract more private sector players to this space. The universities are tasked with ensuring that they deliver the best education possible. They should not necessarily have to carry the burden of also providing accommodation given their limited resources. Better land allocation terms and provisions from the government institutions on their campuses and by the government outside campuses can facilitate significant growth in this space. Our research shows students are willing and able to take up good quality accommodation if provided.

With over 20 tertiary institutions in Lagos alone, do Collection Developments have plans to develop The Pod Living-like facilities in government-owned tertiary institutions?

We will love to do this and are currently looking into it. The advantage Lagos has over the rest of the country is its vast urbanisation with the majority of students living within various districts in the state and commuting to their tertiary institutions. This creates an avenue for us to target students in multiple institutions for say, a single asset in a prime location. Furthermore, the urbanisation of the city allows the asset to play a role in accommodating not just students but young professionals as well. There is a critical need for this to be done properly.

What distinguishes the projects constructed by Collection Developments from those of its industry peers?

Our track record shows we’ve gone off the beaten track to do slightly less conventional developments in this market. This has allowed us to hone our skillset at an accelerated pace delivering, best-in-class assets time after time. Typically, we are attracted to value-add and opportunistic investments, however, due to the macro volatility in this market, we only make highly informed decisions on project executions, flexing our business plans to ensure a comfortable measure of downside protection. This for example means having end-users in play ahead of breaking ground where possible.

We have a saying, “if we can’t live in it, we won’t develop it”. As a business, we have high standards for delivery and operation. We aim to beat our own mark year on year for operational excellence. This understandably comes at a price, but quality sells itself in most cases for us.

Read also: Devt activity in Lagos real estate market rises 19% amid subdued demand

What is your take on Nigeria’s housing deficit and the country’s low homeownership rate?

On the supply side, the rising cost of construction makes the mid-low income bracket less appealing to developers and investors due to its unprofitability. Without government incentives, it is hard to solve the problem at that end of the spectrum. At the high end of the spectrum, I will argue there is an oversupply in Lagos particularly. But we are seeing units being differentiated by quality with the better builds shifting faster.

On the demand side, the lack of easily accessible capital may continue to drive the homeownership rate downwards. The inability of the majority of aspiring homeowners to access conventional mortgages will hold the market back. Broadly speaking, mortgage rates remain unfavourable and should be looked at as quasi-standard loans. Their unaffordability prices out the regular Nigerian. There is also a lack of clarity in Know Your Customer (KYC) requirements. Nigeria’s ranking on the transparency index naturally also cuts across the real estate sector. An improvement in the transparency of information required from applicants can reduce the problem.

What is your outlook for the property market and what should Nigeria/Africa expect from Collection Developments in the short and longer term?

Like most other sectors in the country, real estate also operates in cycles similar to the election cycle. As we approach Q2 next year I anticipate an increase in the quantity and magnitude of private sector real estate deals, PPPs and government-backed ventures to be done – particularly in bricks and mortar.

Generally speaking, the real estate market in Nigeria continues to reinvent itself. It will be looked at more as a service to bridge the quality control gap between originators and end-users, and also increase investor returns.

Proptech has picked up across the continent over the last 2 years and this will continue to be a driver for investment in the market and facilitate in bridging that gap. This will also thrive out of the growing interest of global VC capital chasing unicorn exits in Africa while creating an impact. As a developer, this is very exciting for the space we play in. We don’t plan to get left behind in this evolution. However, we will also continue to grow in the bricks & mortar.

Looking at institutional investors across the board there is space for more real estate positions in their portfolio allocations. 2 to 3 years ago there was a flight of capital towards government bonds with their attractive rates. But given the rising inflation, currency decline, and difficulty in sourcing FX, more capital is now chasing property as an offset. Property developers are listening to this and progressively, avenues are being created to easily accommodate such investors. This has also played a role in the appetite for individual investors, becoming savvier and wanting to get a piece of the pie regardless of capital base. We will see a lot more club deals to accommodate people wanting to own a fraction of an asset or portfolio. More so, it is important that this happens because in this market debt is expensive.

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