Tuesday, November 22, 2016 9:08/ AM /fdc
Historically, the highbrow real estate market in Lagos had always shown extreme resilience in spite of cyclical downturns. It had been considered the typical hedge against inflation. Many analysts believed you could never go wrong with real estate.
However, since 2014, the market has changed dramatically. Our analysis reveals higher vacancy rates compounded by an increase in delinquency and abandoned properties, as recessionary pressures takes its toll.
Anecdotal evidence is now supporting empirical data, suggesting that the market may be unable to withstand current and future exogenous shocks.
In light of high price elasticity, quality of properties has become the most important determinant of effective property demand. The devaluation of the naira has meant an effective increase in the naira rental value for dollar paying tenants. To achieve an in-creased value for money at a time of squeezed incomes, tenants are switching to newer buildings with modern facilities at the same dollar rents.
The vacancy factor in the older properties is almost 65% higher than in the new facilities. Clients are even willing to pay more for well-appointed offices with a waterfront view. For example, Deloitte has moved from its dingy premises in uptown Lagos to the serenity of Ozumba Mbadiwe’s waterfront. Many other professional firms are making similar moves.
Car Parks, the New Real Estate Opportunity
Downtown Lagos and the Central Business District have become congested. This is typical of most urban centres. In the U.K for example, London has introduced a congestion tax and other penalties to discourage the use of private cars in central London and the west end.
Downtown Lagos is now facing a severe parking cri-sis. The business case for a commercial multilevel parking shows a 3-4 year payback. This is because the costs of car parks include mainly the site, cost of construction and fit-out unlike housing properties where finishing, plumbing and tile work are major costs not considered when building a car park.
Selling Property Is Now the Norm
Selling property in Nigeria was considered an anathema or a social stigma. Many property sales were by private treaties. Ever since the recession property foreclosure and sale have become more prevalent. The “to let/for sale ratio” is currently at 1:2.
This suggests that for every property that was put up for rent, 2 properties were available for sale. The ratio therefore reveals that the economic severities are having a huge impact on property owners leading to the increasing number of properties for sale.
Stakeholders React Differently
The current economic downturn will trigger divergent investment behaviours, based on their perception of the market.
Some investors use real estate as a medium for money laundering activities. These investors are able to conceal revenue from illicit activities while acquiring value from the real estate market. As a result, they become interest rate agnostic. This is a situation where investors are indifferent about dormant properties. Optimism fuels the behaviour of such investors, leading to a supply glut in downtown Lagos.
Other rational investors that borrow money for investment purposes will be interested in exiting the market. This is due to the increasing cost of servicing the debt coupled with high rates of tenant default.
Their reaction leads to increasing foreclosures, distressed sales and extension or reduction of payment plans. They understand that the economic situation has created a buyers’ market where the ability to raise rents has been curtailed, making the real estate space less profitable for them.
The diverging views of stakeholders will lead to a point where aggregate supply and demand will find its equilibrium. As a result, house prices, which are currently overstated, will find their true value.
When Will The Real Estate Market Recover?
The Q3’16 GDP report has shown the economy has contracted further by 2.2%, suggesting that a pick-up in economic activity less likely in the near term. Consequently, we do not expect a quick recovery in the real estate market as our recovery expectations have moved from 2017 to 2018.
Vacancy factor is a lagging indicator that will improve following an economic rebound. We fore-cast that the indicator will decline at about 2 quarters after recovery.
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