Real Estate Vacancy Factor Index (VFIX) Increases in March


Tuesday, April 19, 2016 4.47AM / fdc

This is the pioneer edition of our real estate vacancy factor index (VFIX) for the Lagos metropolis. It is a measure of the strength of the real estate rental market in the Ikoyi, Victoria Island and Lekki neighborhoods. The base month for this index is January 2015, which was just before the historic election that saw a change in government. It was also the month prior to the last exchange rate adjustment from 186 to 199/$. The VFIX is a useful tool of analysis for developers, agents, tenants, landlords and policy makers.


1.       Lekki Anomaly - high rents despite supply glut

2.      The link between money laundering and property development

3.      In dollar terms, Lagos is not that expensive

4.      Residential and Commercial Sub index

5.      To Let/For sale ratio

6.      Impact of Macro-economic on the VFIX


·         VFIX and inflation


·         VFIX and unemployment


·         VFIX and exchange rate


·         VFIX and stock market


7.      Outlook

Lekki Anomaly - high rents despite supply glut

In March 2016, the index increased only marginally to 165 from 160.7 in January, having climbed substantially in earlier months. What this tells you is that the number of properties that were vacant in March 2016 was 65% higher than in the base month in January 2015. Vacant properties were higher in Lekki (64%) followed by Victoria Island (35%) and Ikoyi (24%).

Admiralty Way in Lekki has the highest vacancy ratio which is not surprising giving the challenges that businesses face in the current macroeconomic environment; most properties on the street are offices and commercial spaces. Nevertheless, rental prices of vacant properties in these high-end locations have remained sticky downwards. For example, an office space in Lekki phase 1 costs N30,000 per sq.m in TBC building. To rent a 1,250 sq.m house in the same area will cost you about N8- 10 million per annum on Admiralty Way and N5-6 million per annum in other Lekki streets.

The link between money laundering and property development

Empirical evidence reveals that approximately 90% of Nigerian investors hold real estate as an asset class in their portfolios. The locations of their real estate investments are principally in Lagos, London, Dubai, New York, Atlanta and Accra. There is however a dearth of data, analysis and information about the Nigerian market. The sector has become enigmatic because of the strong correlation between the investment, money laundering and public sector corruption. This is why rents remain stubbornly high even when there is a supply glut.


In dollar terms, Lagos is not that expensive


Meanwhile, premium properties across the globe have remained high. The 2016 Knight Frank wealth report reveals the 10 most expensive cities in the world of luxury properties in 2015. The table below shows how many square meters can be purchased with $1mn in the most expensive cities in the world. In Monaco, the most expensive prime property area in the world, $1mn can purchase 17sq.m. In Cape Town, Africa’s most expensive prime property zone, $1mn can acquire 255sq.m. Limited supply of land and houses in cities such as Monaco and Hong Kong drive up prices of expensive real estate properties.


Though Lagos is an expensive city, $1mn can secure 1,250 sq.m of prime property in Churchgate and FF Towers in highbrow commercial buildings in Victoria Island. In essence, prime property is generally five times more expensive in Cape Town than in Lagos. Persistent macroeconomic headwinds in recent times have led to lower demand for prime properties in Lagos. Stock broking firms, investment banks, insurance companies, airlines and oil companies that usually rent these properties for office space or residential use are experiencing a business downturn.

In macroeconomics, there are three types of indicators: leading, lagging and coincident indicators. A leading indicator is an indicator that changes before the economy changes; a lagging indicator changes after the economy has changed; a coincident indicator changes at approximately the same time the economy changes.

The VFIX is a lagging economic indicator. This means that real estate spikes or declines only after the business cycle has moved. In other words, if there is a boom in economic activity, the real estate sector will follow with an expansion, lower vacancy factors and higher housing starts. This is because businesses invest more, hire more people and rent additional office space.

An example of a lagging indicator is the 2008 global economic meltdown, which led to the subprime lending crisis. This meltdown was engineered by a decline in the U.S. federal funds rates in 2001, which indirectly reduced the mortgage rates at the time. Subsequently, a period of excess liquidity created excess demand in the housing market, resulting in higher housing prices. Some homeowners took out more mortgages against this added value to use for consumption, creating a housing bubble. The collapse of the housing bubble preceded a high default on subprime loans.

Residential and Commercial Sub index
In March 2016, the VFIX for residential and commercial properties was 177 and 148 respectively. The year to date comparison shows that the indices have increased significantly by 77% and 48% respectively, compared to January 2015.

The indices remained flat compared to February 2016. This is possibly due to the lagging effect of the VFIX. Supply of units has increased in excess of demand. Residential VFIX is much higher than commercial VFIX because of the rigidity of costs incurred by businesses; it is not easy for business owners to find alternative options in the short term. Also, the commercial index has been stagnant from January until March.

The likely outcome of this rise in vacancy factor is a situation in which developers wait on the side line in anticipation for improved economic conditions before embarking on new projects. This is because upon completing a building, these developers become landlords and join the rental market.

To Let/For sale ratio

The “to let/for sale ratio” in March 2016 was 2.3:1. This suggests that for every property that was put up for sale, 2.3 properties were available for rent. This ratio reveals that the economic severities have had limited impact on property owners. However a sustained slowdown in the economy would drive up the “for sale” side of the ratio. Looking from a different angle, individuals in the Nigerian economy have faced a number of economic issues reducing their cash flow.

Impact of Macro-economic on the VFIX

VFIX and inflation

The jump in the inflation rate from 8.2% in January 2015 to 9.6% in December 2015 has reduced the purchasing power of individuals within the economy. As a result, the value of individual incomes has declined both in nominal and real terms. Given that this research focuses on luxury areas, a decline in income is expected to reduce the demand for housing. Following, the real estate industry is used as a hedge against inflation. This is because real estate assets are long-lived assets that adjust to inflation, which explains the increased supply of housing. Specifically, inflation increases the value of the housing property, which provides incentives for new initiatives in the real estate market.

VFIX and unemployment

The increasing trend of the VFIX is in tandem with the unemployment rate, which increased from 7.5% in Q1’15 to 8.2% in Q2’15. The effect of unemployment on VFIX should take about 9 months before realized as the adjustment process takes time. Specifically, the unemployed cannot afford to pay for the current housing and will most likely move out to cheaper options, or in some extreme cases back into parents’ homes.

VFIX and exchange rate

The official exchange rate rigidity in the face of imminent devaluation is discouraging investors from taking final investments decisions. Thus in aggregate, is reducing the demand for both residential and commercial properties. The potential investments will naturally lead to demand for office space and commercial properties.

VFIX and stock market

The Nigerian Stock Exchange (NSE) index has fallen by 13.94% YTD, reducing the returns to investors’ and stockbrokers. This fall in returns has reduced the attraction for international investors, thereby reducing the demand for office spaces and housing, and increasing the current VFIX. This is because the status of the market affects the psychology of investors. If investors notice that the downturn in the market is as a result of lack of government policy, the level of uncertainty in the market increases. Therefore investors would rather hold on to their money, which puts the real estate market in a state of disequilibrium.


Looking forward, with the 2016 budget that has been passed officially, we should see a trickle-down effect in the real estate sector. This should reduce the VFIX in the second quarter. However, given that the index is lagging, the effect may only be seen from June. We should also expect a decline in house prices if the economic headwinds persist. Specifically, we should also expect a switch in real estate pricing from dollars to naira, as landlords now realize the effect of the economic challenges faced and will be forced to change if they want to remain profitable. Therefore, the VFIX today is expected to affect the development and leasing decisions in the second quarter.

The unemployment figure for Q4’15 was at 10.4%, a 0.5% increase from the previous quarter. We expect to see the lagging effect on VFIX to be realized in Q3. This means a rise in the VFIX in future quarters.

The NBS recently released the inflation figure for March 2016 as 12.8%. This is the highest rate so far year-on-year since July 2012. With persistent inflation in the economy, we expect to see a rise in the VFIX in the second quarter. This price increase will most likely reduce the ability of individuals to pay their rents, thereby reducing the demand for housing.

Regardless, we predict that the increasing VFIX is a transient phenomenon in the Nigerian economy that is likely to fall, as there is a light at the end of the tunnel.

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