Boom and Bust: How finding tenants for island homes and offices is made difficult by recession

The real estate market in Nigeria has, like many other markets, had its cycles of boom and bust. The idea of real estate being a store of value and also the best and most dependable investment asset class is not lost on yield-hungry Nigerian investors whose investment decisions have always taken them to the market for a second, third or fourth time.

Again, here is a country with the largest population estimated at 180 million but the least home ownership level among its peers. Besides its yawning 17 million housing demand-supply gap, the country has a little above 10 percent home ownership level as against UK, US, China, Korea and Singapore where home ownership levels are 78 percent, 72 percent, 54 percent, 52 percent, and 92 percent respectively.

The story of this market has, most of the time, been that of high prices, quick sales, good yield or return on investment, etc, but not so any longer, because the narrative has now changed right from the source—the national economy which has tumbled and upstaged businesses.

The fall in oil price at the international market, the devaluation of the Naira, the scarcity of foreign exchange, lack of government spending and the recent hike in fuel pump price have all had crippling impact on the economy with job losses, low productivity in industries, reduction in consumer spending power, and a cost-push inflation that rose to 16.5 percent in July from 13.8 percent in March this year.

The job losses and reduction in industrial output, among others, are reasons precedent for the contraction in the country’s GDP growth in Q1 2016 which Bolaji Edu, CEO, Broll Nigeria, estimates at 0.36 percent, noting that it is Nigeria’s lowest GDP growth rate in 25 years.

The Lagos Island residential houses including those in Ikoyi, Victoria Island and Lekki have targeted tenants including workers in oil and gas industries, banks and other corporate organizations. The Ikoyi luxury homes (mansions), particularly, are targeted at oil workers and these are the people worst hit by the challenges in the international oil workers and the recession in the economy.

“Many of these oil workers have been laid off and in the case of the expatriate workers, many of them have left for their home country, leaving many empty homes in Ikoyi”, says Gbenga Olaniyan, CEO, Estatelinks, citing a block of 48 apartments on the island which was vacated by expatriate workers in one of the top three oil firms.

“Before now, each of those apartments rented for $85,000 per annum; now the landlord is ready to accept $45, 000 per annum, but he cannot find tenants for them because nobody has that of money to part with at a time like this in this country when those who have are holding on to cash”, Olaniyan says.

Ikoyi has the highest number of empty houses today followed by Victoria Island where landlords have been compelled by the market and economic realities to review their prices and rents downwards, yet they cannot find buyers or tenants who have become, increasingly, cautious, choosy and evasive.

An estate manager who does not want to be named cited an instance of Banana Island in Ikoyi where a house that used to sell above N100 million is now on the market for N60 million, yet buyers are not in a hurry to buy despite the drop, because the buying power is not just there.

There is, however, a school of thought that differs from the reasons the island homes, especially the Ikoyi mansions, cannot find tenants. The popular notion is that Ikoyi homes are over-priced, but according to that school of thought, some of these homes are lacking in quality that can make them command the kind of price and rent tags they carry.

“A developer who compromises on the quality of materials, no matter how highbrow the property’s location, has no right to place an exorbitant price on it”, says Sijibomi Ogundele, MD/CEO, Sujimoto Construction, insisting that “luxury apartments are in high demand while poorly finished buildings with exorbitant prices constitute the pile of empty apartments constantly being alluded to”

Continuing, he says, “if we desire to be the best and want to compete with foreign developers such as the Germans, Lebanese and Italians that have spent decades mastering their craft, we will need to raise our standards in the Nigerian construction market. Or else, one day we would wake up to find all our apartments empty”, he advised.

Lagos Island is also home to Nigeria’s best prime office buildings and towers. In the past five to six years, enormous investment has gone into this segment of the market, all targeting corporate organizations, especially international corporate organizations and institutional investors who needed quality, well finished offices that are of the same standard they have back home.

The greatest challenge for this market now is the oversupply of products. It is expected that in addition to the existing stock, over the next 12 to 24 months, about 98,960 square metres of space will come to the market with 63,640 square matres intended to be added to the market by Q4 2016.

Average asking rents for A-grade offices in Ikoyi are still on the downward trend, averaging $850 per square metre per annum. Achievable rents are 8 percent to 15 percent below asking rents. Average asking rents in Victoria Island follows, and has dropped by 6 percent to $780 per square metre per annum. Achievable rents are 10 percent to 20 percent below asking rents.

The recession which has seen many organizations downsize and right-size, sent many foreign investors back to where they came from or relocate to countries where costs are at manageable levels, and made it impossible for resilient ones to expand into new off ices, has also made it pretty hard for these offices to find tenants.

However, a number of good and interesting things have come out of these challenges. Increasingly, there have been efficiency and quality in the delivery of products being put to the market as developers try to stay ahead of competition and also outsmart one another in the scramble for the few available tenants.

“We have to deal with the realities (competition) like everyone else and we think that our building is well positioned with good amenities. The floor-plates are very efficient. We have put in place very compelling green features which will make occupancy cost very competitive”, says Obi Nwogugu, Head, Real Estate Unit at African Capital Alliance, whose company is developing the 12-floor Alliance Place on Kingsway Road in Ikoyi.

In addition to this, landlords have been pushed by market realities to give concessions to tenants and these come as rent reductions. They are also more willing now to provide other incentives such as fit-out allowances, which are attractive to tenants deterred by the large capital expenditure needed to furnish space.

CHUKA UROKO