Developers lose appetite for build-to-let properties on rent defaults

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 sub-sector 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 income on house rents.

However, adverse macroeconomic conditions have induced rent defaults in the segment.

Read also: Mortgage banks ride on rising demand for properties to drive growth

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.

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 several years and are 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 properties from defaulting tenants, noting that the process has loopholes.

“Due to of 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 the buy-to-let market in spite of its large size, pointing out that Nigerians are generally in dire situation, battling high energy costs, transport fares for short commutes to offices and business premises, rising school fees, among others.

“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 the bad economic situation 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.”

Meckson Okoro, an estate surveyor and valuer, explained to BusinessDay in an interview that given the kind of judicial system in Nigeria, where cases can drag for more than 10 years, tenants can evade rents and go scot-free.

Read also: Experts explain why properties are getting more expensive in Lagos

According to Yemi Edun, managing director, Daniel Ford International, “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 and cost of repairing and renovating the property every five years or risk of having no tenants push 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.