Exchange rate volatility creates naira, dollar ecosystem in premium real estate
The impact of exchange rate volatility in Nigeria is spreading across sectors such that in real estate, it has created what experts call ‘naira and dollar economy’ in the premium segment of the market.
In Ikoyi, Banana Island and Victoria Island, which are home to premium real estate, there is an increase in tall structures in the pipeline, under construction, and nearing completion and each development falls under the dollar or naira economy.
“Due to the fluctuation around the naira, there is a dichotomy between naira and dollar initiatives, with the result that intelligent investors tend to drift towards the dollar economy in order to enhance their return on investments,” Udo Okonjo, CEO, Fine and Country West Africa, told BusinessDay.
Okonjo noted that working with naira-based projects was dangerous for investors, especially in the elite luxury market. She added that top developers in the luxury real estate business have been sticking with the dollar economy in the past five years.
In the luxury real estate market, there are micro divisions that are sometimes referred to as affordable luxury real estate. Developers in this segment, according to Okonjo, frequently work in the luxury real estate naira-based sector. “Despite being tall buildings, these constructions are priced in naira and range in height from 8 to 12 storeys,” she said.
She pointed out that the more complex the construction and the investment necessary, the higher the cost of the building, which is reflected in the pricing, disclosing that average residential space prices in the luxury segment range from $2500 to $4500 per square metre, with more affordable options falling somewhere between $2850 and $3500 square metres. The more exclusive spaces, such as the penthouse, cost around 4500 per square metre and up.
Unlike other house-types, the development of luxury real estate takes time which is why Okonjo said “desperation does not fit with luxury.” She said that developers of luxury real estate are willing to wait and collaborate with their intended/target audience. “The delivery time frame for these developments is typically 4–7 years,” she noted.
Okonjo listed a few things potential buyers and investors in luxury real estate ought to know about that exclusive market. According to her, the luxury real estate market is often reserved for long-term investors, adding that industrialists, financial institutions, and some corporations that have capital in the country that is dedicated to the Nigerian market are among these investors.
“One strategy to diversify is to invest in luxury residential real estate, as this is an area where the fund’s worth can be preserved. Multinationals, public-private sector (Kanti Towers was sold to Nigerian Maritime Administration and Safety Agency (NIMASA) for $17.47 billion in 2021), corporate, and ultra-high net worth investors are among the commercial segments’ investors,” she said.
The Famfa Oil and Dangote skyscraper are set to deliver in 2022, adding to the stock of Grade A office space in the city, although these investors aren’t typically thought of as developers.
They plan to use these high-rise buildings for themselves or for a portion of their use, while others are looking for up-takers. These investors are patient and selective in who they allow inside their properties.
They would sometimes keep the property for a long period until they find the right kind of client to occupy this space. In the commercial luxury market, this might cause market distortions in terms of vacancy rate, supply, demand, and conversion rate.
Investors anxious about their naira stack and not being able to convert it to dollars or take it out of the country are increasingly turning to real estate as a safe haven. They may not have all of the finances, but they are willing to work together on large commercial and residential luxury space projects in terms of collaboration.
“In terms of commercial figures, it varies depending on the location, from Ikoyi to Victoria Island, which is reflected in their rates. Grade A, B and other categories exist for office spaces, but at Fine and Country, we focus on Grade A office spaces,” Okonjo said.
Some of these office space developers, investors, and landlords weren’t as flexible a few years ago. However, with the downsizing and giving back of office spaces in the previous three years, particularly with COVID, landlords have become more practical, offering concessions such as rent-free and fit-out periods as a sort of discount.