Build-to-let, buy-to-let and house-for-rent segment of the real estate market in Nigeria faces an uncertain future as investors shun that segment due to rising rent defaults induced by high cost of living and renters’ shrinking disposable incomes.
Nigeria has one of the most active rental markets in the world, with over 80 percent of its 200 million population living in rented accommodation, according to a Pison Housing Company report on ‘The State of Real Estate Market in Nigeria,’ which notes that these renters spend over 50 percent of their incomes on house rents.
However, adverse macro-economic condition is not helping matters as professional estate agents say it has created an imbalance in the market. The most affected are office buildings, malls, grocery stores, low, high-rise and other types of residential buildings in major cities of Lagos, Abuja and Port Harcourt.
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The situation is raising concerns among existing landlords and investors whose investments are at risk of zero returns with escalating defaults in rent payments and lease agreements. Some of them are considering eviction moratorium for small businesses, commercial and residential tenants while some tenants are already facing outright evictions.
BusinessDay was told that some of the landlords are finding it difficult to collect rents due to defaults by tenants who have lived in their properties for four or more years and are, therefore, foot-dragging to pay their rents conformably.
“I am getting frustrated with mounting rent defaults in my properties. This is why I am considering quitting the tenants and selling off those properties,” Bernard Nnaji, a landlord at Idimu, a Lagos suburb, told BusinessDay, blaming the Lagos State Tenancy Law for landlords’ woes in the state.
Nnaji explained that the law does not help property owners to recover their assets from defaulting tenants as the process has loopholes.
“Due to this, we have cases of tenants living in your property for a year and six months without paying rents and one day they just wake up and leave with the unpaid rents,” he lamented.
Funso Adebayo, an estate manager, noted that new investments are no longer going into that buy-to-let market in spite of its large size, pointing out that Nigerians are in dire situation, battling high energy costs, transport fares for short commutes to offices and business premises, rising school fees, among others.
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“The high renting population in the country, ordinarily, means an attractive opportunity for investors, but that is no longer the case as rent defaults have been on the rise as a result of bad economic conditions in the country,” said Olurogba Orimalade, an estate surveyor and valuer.
According to him, the default rate is high. “Rents are high and economic circumstances are tough with many families finding it difficult to feed.Rents have gone up significantly and so, if you developed your property 10 years ago, you would be fine, but developing today for investment is a huge challenge and it is difficult to earn good income in the present economic environment,” he said.
“About 80 percent of all properties under my care have defaulting tenants who were previously meeting up their obligations. Some sectors, including oil and gas, that were hitherto known to offer job security are among the worst hit lately.”
Continuing, he said, “What is most worrisome about this development is that the sectors, where jobs were said to be secure, such as oil and gas, banking and other blue-chip companies, are now the ones that are not secure and, so, their workers are also defaulting in their rent obligations.”
Besides rent defaults, investors are also hesitant going into rental properties because, according to them, it takes much longer time to recoup their investments from the market than from buildings for outright sale.
“Many investors will not go into this kind of investment because, in this part of the world, poverty emboldens tenants. Some of them rent houses, pay for the first two years and as from the third, they are ready to fight or take you to court.
“Given the kind of judicial system we have in Nigeria, the case can drag for more than 10 years and during this period, the tenant will not be paying rent,” Meckson Okoro, an estate surveyor and valuer, explained to BusinessDay in an interview.
Yemi Edun, managing director, Daniel Ford International, agreed, adding that “rental income of most properties is five percent of market value of the property which gives a minimum of 20-30 years to recoup investment through rent.” He stressed that low occupancy, high cost of repairing or renovating the property every five years and the risk of having no tenants are pushing investment recovery periods up to as high as 30-50 years.
In a comparative analysis of properties in Lagos, Edun cited Dolphin Estate Ikoyi, Lagos where he said that, whereas the sales price of a duplex is between N80 million and N100 million, the rental income is about N5 million to N7 million per annum, meaning that it takes a minimum of 20-30 years to recoup that investment through rental income at 5 percent.
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