Investors show risk appetite, snap up 14,500sqm prime office space in Q4’18

Investors in Nigeria are becoming, increasingly, risk averse in spite of the lull in economy and the political risk and uncertainty occasioned by the just concluded presidential and national assembly as well as the upcoming governorship and state assembly elections.

This diminishing risk aversion to the aftermath of the elections relative to the previous electoral cycle of 2015 was reflected in the market transactions in the last quarter of 2018 when approximately14,500 square metres of  A-grade  office space  was  taken-up in the Ikoyi, Lagos market  alone.

Ikoyi, an upscale real estate destination in Lagos, was originally and predominantly residential, but today it is about  an unrivalled home of glitzy luxury high-rise office buildings mostly along Kingsway Road.  In this location are the Heritage Place (15,631 sqm), Alliance Place (6,670 sqm), Kingsway Tower (12,000 sqm), Temple Tower (14,000 sqm), BAT’s Rising Sun (10,000 sqm) and Lake Point Towers (13,400 sqm).

Heritage Place, arguably, is Nigeria’s first green office building standing on 14 floors.  “This ultra modern, eco-friendly building is Nigeria’s most advanced development, employing the latest building principles and state-of-the-art finishes; it is one of Lagos’s most recognizable and accessible buildings”, said Funke Okubadejo, a director at Actis—the developers of the office complex.

Heritage Place is the only Leadership in Energy and Environmental Design (LEED)-certified building in Nigeria. It has five floors of parking with the highest parking availability for 360 cars. It has high profile tenants including Actis, British Petroleum, BBC, HP, Visionscape and others.

In Q4 2018, longer  term  investors continued to enhance their presence in the market with a  number  of  signed  leases being  for  more  than1,000 square metres,   which deviates   from the   smaller   sized   office transactions in previous years when investors looked for between 200 and 500 square metres.

Bolaji Edu, CEO, Broll Nigeria in their office market viewpoint with Intel Property, noted that 2018 saw a significant amount of activity relative to the previous year, especially as the economy forged ahead in its  path  to  recovery.

“The  level  of enquiries for office space increased in 2018 with a more diverse  profile  of  tenants  in  the  technology,  finance,  oil  and gas, fast moving consumer goods (FMCG), aviation and pharmaceutical industries”, he affirmed, adding that 2018 also  witnessed  a  slight  evolution  of  occupier requirements   for   lease   acquisitions.

An increased number of tenants have  started looking  at  flexible, serviced   office   options,   especially small  scale new entrants seeking flexibility to either expand or exit the market as   and when   required.      Co-working   space requirements  has risen significantly and service operators  are   operating at full or near full capacity.

Service providers are primarily local providers, operating in stand-alone converted residential properties or B-to C-grade office buildings. Co-working space is coming up thick and investment opportunity here is huge. Demand, driven mostly by milliennials and start-up community, is growing exponentially.

“Millennials and the startup community continue to drive up the demand for coworking spaces with service providers seeking to convince traditional large-scale employers of the benefits of coworking just as corporates are in conversations geared towards putting up underutilised space for coworking use”, Ayo Ibaru, Director at Northcourt Real Estate, confirmed.

But, for the prime office, there is no denying the fact that challenges remain despite the transactional improvement seen in the last 12 months. Though vacancy rates are are currently down, 59 percent  and 54 percent in Ikoyi and Victoria Island respectively, over 40,000 square metres space is expected in the market to add to the existing 400,000 square metres stock.

“In 2018, landlords  were  increasingly  sensitive  to  the existing oversupply of stock in the market and as such strategic leasing options had to be devised in order to attract tenants to their buildings. These leasing options included    attractive    financial    incentives    such    as extended rent-free periods as  high as  12  months, longer beneficial occupation (BO)periods of 6 months and tenant fit-out allowances of as high as US$400 per square metre”, Edu recalled.

This means that, although  asking  rentals  remained  constant for much of 2018, net effective rents (base rents net of incentives) fluctuated below asking rents.  The median average asking rent for  A-grade  offices  in Ikoyi remained   constant   at   US$750 per square metre per annum   in Q4:2018.  In the Victoria Island commercial  node,  the median   average   asking   rent also   remained   fairly constant at US$650 per square metre per annum.

Edu pointed out that there are two major risks for investors to watch and these oil price and the local currency. According to him, with    the economy  still heavily  dependent  on  oil  revenues  to sustain  economic  activity,  a  slowdown  in  oil  prices could have  adverse effects on economic activity.

This means that if economic activity contracts,  office  market  activity, which moves in tangent with the economic cycle, is also very likely to be negatively affected.  Similarly, a  possible devaluation in the local currency  by  year  end  could  introduce  risk impacts in the form of increased occupational costs within  office buildings.



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