UDO OKONJO, a lawyer and a high-end real estate market advisor and investor, is the CEO of Fine and Country West Africa. In this interview with CHUKA UROKO, Property Editor, she offers insights into how unfavourable macro-economic condition in Nigeria, bordering mainly on galloping inflation and naira devaluation, has affected property values, particularly land, in the highbrow locations in Lagos. She also speaks on luxury property rents and the opportunities the ‘dollar to naira rental transition’ has created for investors in that segment of the market. Excerpts:
Inflation and naira devaluation have pushed up property, especially land, values to unimaginable levels. What is the market situation in the last 6-12 months in the up-market locations, especially Banana Island and old Ikoyi?
We have definitely seen an astronomical rise in the average asking prices for land all across the upper quartile of the Lagos market, especially in Banana Island which, pre-Covid-19 pandemic, was just under N600,000 per square meter (sqm) but now inching towards an average asking price of N1.300,000/sqm, which represents over 100 percent increase.
The interesting thing is that we saw a dramatic demand for land all across Ikoyi, especially Banana Island, during the pandemic, starting from around April 2020 to the dizzying heights the prices have taken by the middle of 2022.
Within old Ikoyi and environs, the prices went from approximately N380,000/sqm and N450,000/sqm, depending on the location within Ikoyi, to a post-Covid 2022 average pricing of approximately N800,000/sqm and N950,000/sqm for the higher density roads. This too represents over 100 percent increase in two years for old Ikoyi.
Lekki is today referred to as the fastest developing real estate corridor. One would expect that land prices would make a significant positive shift there too. What is the story in that axis?
Lekki Phase 1 is not too far off in appreciation because, traditionally, as ‘a not-so-distant-cousin’ to Ikoyi as an up-market location, it benefits from the growth across the bridge. With average prices now at N350,000/sqm to N400,000/sqm from pre-Covid-19 prices in 2020 of about N200,000/sqm, buyers are definitely feeling the pressure here, especially as most mid-size developers scramble to acquire plots for new mini-size/cluster estates and mid-size homes projects.
Now, do you think inflation and naira devaluation are the only culprits of this dramatic rise in prices?
The twin-factors of inflation and the local currency devaluation have played a significant part in creating these price hikes. Even adjusted for dollar valuations, there has been, at least, an average of 40- 45 percent increases in the price of land in Banana Island and most of high density old Ikoyi. This means that there are clearly additional factors at play, including a changing buyer-psychology and profile.
For most of our clients and the upper quartile investors which, increasingly, are including large local corporates, their decisions are largely driven by the need to diversify from the dwindling stock market, and protect their local currency reserves as a hedge against high inflation rates, by securing appreciating assets with limited supply.
Their decisions are also based on the increasing cost of creating new asset classes including investments in new businesses, or the difficult in executing expansion plans, and the constraints and uncertainty around sourcing foreign exchange as an alternative hedge against devaluation.
This means that most astute investors have begun exploring longer term residential and commercial real estate developments, typically on a joint venture basis with experienced contractors/developers for the much bigger projects, by locking down these plots of land.
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In the housing market today, rent is the Bull in a China shop. In the low and mid-income neighbourhoods, it has become a crisis. What’s the rent situation in the highbrow locations?
Interestingly, the rent situation is not reflective of the soaring acquisition prices and, to a large extent, this is understandable especially as the profile of the end users is largely different. These are mainly corporate and local entrepreneurial tenants from the upper quartile, longer term ultra high net worth investors. More importantly, products supply here tends to be more extensive and elastic.
At the rental level, end users are typically more price-sensitive as their needs are shorter term, more flexible, plus they have more options. In addition, many are directly affected by the economy, shrinking purchasing power and reduced corporate and personal budgets.
With regards to a rental crisis, the rental prices in Ikoyi already took a nose-dive pre-pandemic and only became worse as a result of the economic factors already discussed. Particularly worthy of mention is the ‘Dollar to Naira rental transitions’ that have happened in properties that historically attracted US dollar rentals.
This affected mostly luxury residential buildings ranging from $60,000- $100,000 per annum in Banana Island and old Ikoyi. 90 percent of these properties have now been downgraded to naira rentals and at values that are in effect almost 40-50 percent below the precious dollar values before Covid-19.
This interestingly represents an opportunity for more tenants who couldn’t afford Ikoyi to upgrade and this is seen in the speed of rentals in these blocks especially in Banana Island.
There is however an exception to this pattern, as our market intelligence shows a different trajectory for the newer luxury projects which tend to remain in the ‘USD Dollar rental economy’ at least for the foreseeable future, until newer stocks or a market stabilisation occurs.
However, as a result of these significantly lower rental yields for most properties in the residential upper quartile, some high net-worth investors who were buy-to-let investors are reflecting on taking a riskier approach towards participating in new projects as co-investors for a higher yield, where appropriate, for their overall investment objective.
With the general economic downturn in the country, is now a good time to invest in real estate? Are there prospects of good return on investment? If yes, why?
As a trusted real estate advisor, and investor myself, I have always taken the professional and personal view that the time to invest in real estate is always right with a solid understanding of the key fundamentals. Every astute investor understands that there are pockets of opportunities in any economic cycle, and if those opportunities are aligned with your unique objectives as an investor, then you take the opportunity on board.
For instance, in the current market, if you are in the market for an owner-occupier home, if you already have the funds, waiting for a few years to buy with our galloping inflation, local currency devaluation and global construction supply chain delays, chances are it will get more difficult, and so if you are ready, make it happen.
Leverage your cash to negotiate a great deal and enjoy the benefit of an appreciating asset. For developers, who understand their market niche and create the right product towards the right target clientele, if they are innovative with their value engineering process, have strong execution, strong cost management, a creative sourcing strategy and are committed to investing in high impact and intelligent marketing, then opportunities abound.
In real estate average investors will always make average returns whether the market is up or down. It takes having a refined, accurate and intelligent insight, matched with uncommon clarity of vision to make great returns in any economic cycle.
