Leasing activities in Nigeria’s formal retail drops 53% in H2

The Nigerian formal retail market saw a significant decline in new leases in the second half of 2022, a new retail report has said.

According to the report by Broll Property Group, an African commercial property services company, new leases signed in both core and secondary retail markets dropped by 53 percent to 3,544.8 in the second half of last year from 7,611 leases in H1.

“A global surge in energy costs had a significant impact on the retail sector, with many businesses facing financial difficulties or uncertainties due to a sudden increase in energy with market fundamentals held fast as businesses are forced to look elsewhere,” it said.

It said this subsequently led to a decrease in demand for new leases as businesses look to cut costs and conserve capital.

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“Additionally, Nigerians’ continuous adoption of e-commerce and online shopping has also played a role, as some businesses may be shifting their focus toward digital channels rather than physical retail locations,” it said.

The report noted that the general slowdown in the economy or a lack of investor confidence was also a contributing factor, which could lead to a decrease in new lease activity. “Rental rates remained unchanged in the secondary market despite the retail market reporting a high waiting list.”

Despite the decline, the report said there were still specific sectors that demonstrated strong demand. Food & Beverage, Mobile Phones & Accessories, Health & Fashion, and Furniture emerged as the leading sectors driving demand for retail space.

“This indicates that these sectors remain resilient and continue to show promise despite the overall slowdown in the market.”

Energy prices skyrocketed last year as a result of the Russia-Ukraine war. Diesel prices, which are deregulated in Nigeria, jumped by 183.7 percent to N817 per litre in December 2022 from N288 per litre in January, according to the National Bureau of Statistics.

The sudden rise in the price of diesel, which powers a large part of the industrial and commercial activities in the Nigerian economy, had its ripples felt throughout the economy, from manufacturing giants through medium-sized enterprises to small-scale organisations.

The increase in energy cost was also one of the major contributing factors to the country’s inflation rate which is at the highest level in 17 years.

The Broll report also revealed that asking rent remained unchanged in both the core and secondary locations, however, achieved rent grew by a notable 35.5 percent in H2 to $56/m2/annum from $35/m2/annum in H1 in the core location which is Lagos and Abuja.

“The hike in rent might be another factor that led to an increase in the number of exits in the core market coupled with the surge in energy costs and an unstable economic activity.

“The secondary market remained unchanged and most of the transactions were concluded in the local currency (naira), with exception of a few in the core location,” it added.

Analysts at Broll highlighted that the nationwide vacancy rate which dropped by one percent in the formal retail market could be seen as a positive sign for the industry, as it indicates that there is increased demand for retail space.

“However, trading rates dropped to 84 percent from 91 percent in the first half of the year. An eight percent drop in trading was caused by a variety of factors, including economic uncertainty, changes in consumer behavior, disruptions of business, or increased competition,” they said.

The report added that if current market fluctuations continue, more movement in the new leases and exit will continue until the market is stabilized.

“It is worth noting that if the current economic climate continues coupled with the election outcomes landlords may concede more and offer more incentives to retain their current tenant,” it said.