Who would have thought it? Prime commercial properties in Ikoyi and Victoria Island are struggling and average rental rates have dropped to as low as $800/sqm/annum. This is in stark contrast to the days where rental rates were in excess of $1000/sqm/annum with double digit escalation clauses which meant tenants end up paying as much as $1,200/sqm/annum or more once their lease enters its second or third anniversary. This was also backed by stringent landlord requirements such as upfront rental payments of two years or more, properties being delivered in shell and core state with no provision for a fit out or upgrades allowance as well as many other landlord favourable terms.
Today, the situation is very different:
- Rental rates have dropped by over 20%
- Landlords are now offering more flexible payment terms such as quarterly rent payments
- Fit out allowances are now being discussed and what is most interesting is that these new terms are being discussed for newer, better and more advanced buildings.
How then did this happen? I believe the market was hit by a triple whammy of the following factors:
- Unprecedented Supply:
Over the last 12 – 24 months, more than 90,000 sqm of office space has been introduced into the commercial real estate market in the shape of developments such as Civic Towers, Temple Towers and NIPOST Towers. In the next 12 – 24 months another 100,000+ sqm of prime office space will be added to the existing supply stock with developments such as The Wings, Heritage Place, Nestoil Tower, Kingsway Tower, Madina Towers and Alliance Place set to be completed. This is without taking into consideration a few more developments in conception, on hold or barely off the ground in foundation stage. This existing supply and the imminent additions to the supply stock are unprecedented and have in no small measure had a major bearing on current vacancy levels and rental rates being experienced.
- Oil Price Slump:
The oil industry with its documented history of boom and busts is in its deepest slump since the 1990s. A barrel of oil has dropped in price by more than 70% since June 2014. It is no secret that the Nigerian economy is largely if not wholly dependent on oil and this slump has greatly squeezed government revenue, severely weakened the Naira and strained the formerly buoyant oil and gas industry as well as the numerous other sub sectors serving it. The effect on the commercial real estate market is evident; oil and gas companies are not as liquid and are unable to contribute to the take up of the commercial spaces on offer. Some oil and gas industry players are contracting within their current real estate holdings while other players who had made commitments to expansion plans have had to put these plans on hold with one notable casualty even declaring for administration. The oil price slump has definitely contributed to the fall in rental rates and uptake of commercial properties in Lagos.
- Economic Downturn:
Owing to the aforementioned oil price slump, Nigeria’s economy is struggling. But oil alone is not to blame as the protectionist policies employed by the Nigerian government aimed at reducing FX demand and defending the Naira value have also not been effective to date. The value of the naira against the dollar has been in freefall in recent weeks with trading on the parallel market recorded at NGN 390 to USD 1.00 as at February 18th according to Bloomberg. Experts say that this freefall is artificial and a true reflection of the Naira value will be seen in the coming weeks but this has in no small part caused investors to adopt a wait and see approach. The decision appears to be for companies who have an interest in the Nigerian market either on an initial market entry basis or whether in terms of expansion to be cautious and wait to see how things turn out before making the plunge.
What has historically been a very landlord favourable market is shifting increasingly towards the tenants’ side as the variety and quality of options available to corporate occupiers are increasing almost on a monthly or quarterly basis. This market correction as I like to call it is bringing landlords and tenants to a more level playing field and whilst I have listed three factors, I strongly believe that the unprecedented supply being experienced alone would have provided a strong enough reason for this correction to occur or at least commence.