• Wednesday, July 24, 2024
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BusinessDay

Prime office tenants in dilemma as dollar-rents surge 200% in naira value

Prime office rent

For tenants in prime or Grade-A office buildings, these are not the best of times as rental reality in this segment of commercial real estate, where rents are mostly dollar-priced, has put them in dilemma.

Whereas the landlords or space suppliers find it convenient and safe to price their rents in dollars for reasons of stability and hedging against inflation and rate fluctuation, the tenants are at the receiving end of these anomalies in the financial system.

Read also: Vacancy rate drops 24% in Nigeria’s prime office space market

This is made worse by the rising exchange rate of the naira against the US dollar which, at a point, peaked at N1,900 to $1. The tenants are, therefore, caught in the web of sticking with the dollar which, though stable, is hard to come by, or the naira whose value is uncertain and wobbling.

“The rent situation in this segment of the market is such that, in the last 12 months, tenants have seen their rent increase by over 200 percent, Funsho Adebayo, a real estate consultant, confirmed to BusinessDay, citing a data comparing the rent as at June 2023 and what it is now, June 2024.

According to the data compiled by Estate Links, a Lagos-based firm of estate surveyors and valuers, a 1000-square-metre office space was rented for $700 per square metre in 2023. The naira value of that rent, based on Nigerian Autonomous Foreign Exchange (Nafex) rate of N465 to $1, was N325,000,000 ($700 x 1000 x 465).

But in June 2024, when Nafex rate is N1,400 to $1, same size apartment is renting for N980,000,000, that is, $700 x 1000 x 1,400. “This shows clearly over 200 percent increase in just 12 months,” Adebayo noted, adding that the rent could be more than this because rates are not stable and, at the parallel or black market, the rate is over N1,500 to a dollar.

According to him, the fallout of this situation in the rental market is increased vacancy rate which, he said, hovers between 20 and 30 percent and may continue to worsen unless government authorities do something to stabilize the exchange rate of the naira against other currencies.

Gbenga Olaniyan, chairman, Estate Links, also confirmed to BusinessDay that tenants in dollar-priced properties are now facing variations in the region of 201.5 percent increase in naira terms, adding that they are, therefore, negotiating terms to either return to naira leases/rents or take a major ‘haircut’ on dollar rent.

Olaniyan, who is also a developer, playing at the middle-class luxury segment of the market, advised that, in the face of these foreign exchange volatility, developers need to re-examine their funding structures, projections and designs as they build for the future.

In sourcing their funding for future developments, he advised that developers should consider crowd funding which means raising small amounts of money from a large number of people, typically through online platforms.

Another source of funding, according to him, is tokenisation which, in real estate, refers to the process of representing ownership of a property or asset as a digital token on a blockchain.

“This token represents a unit of ownership, similar to a share in a company, and can be traded, sold or transferred like a digital asset. By tokenising real estate assets, the industry can become more accessible, efficient, and open to new investment opportunities,” he explained further.

For purposes of reducing construction cost and, ultimately, house prices, builders are making significant shift from the traditional method of building to modern ones where emphasis is on efficient use of materials for sustainability.

Experts advise that, in order to comply to environment sustainability and governance (ESG), builders should embrace the use of energy efficient or energy saving materials which lower the cost of running building facilities.

To reduce both cost and waste in terms of material use, builders are encouraged to use self-healing concrete which is capable of autonomously repairing cracks and damage over time. It has potential cost savings by minimizing repair and maintenance expenses just as it enhances overall infrastructure resilience by maintaining structural integrity over extended periods.

“Green buildings with eco-friendly designs and materials integrate sustainable practices to minimize environmental impact; integration of smart technologies for optimal control and efficiency in energy consumption; synergies with solar panels, wind turbines, and other clean energy solutions for sustainable power are necessary considerations for the future of construction,” Tunde Obileye, a trained lawyer and facilities manager, says.