Arriving in Nigeria’s bustling city of Lagos on Monday evening seemed like an anomaly.
Disembarking from the plane at the Murtala Muhammed International Airport through to immigration clearance was a fairly seamless process. Surprisingly, the drive from the airport to the Maison Fahrenheit Hotel in Victoria Island also felt shorter than normal without the city’s notorious traffic and congestion.
The JLL Africa team made its way to the inaugural West Africa Global Real Estate Institutes (GRI) Conference – a sought after event in the continent’s real estate calendar. JLL was one of the main sponsors of the conference.
On the ground, Nigeria’s real estate market does not appear to be slowing down as a result of macroeconomic headwinds. This is seen in erected cranes, which continue to multiply and dominate the skyline of Lagos and buzzing construction sites indicating a lively real estate market.
With Nigeria’s economy heavily exposed to the oil and gas sector, there are concerns among GRI delegates that the drop in the oil price – which is currently at a 12 year low –will impact economic growth in the short term.
The oil and gas sector is significant as it accounts for approximately 90% of government revenues. The oil price rout has the potential to threaten government’s revenue and fiscal position. However, this is the same fate that many oil-producing countries face.
While the format of GRI discussions is based around informal group discussions – where delegates actively participate – it seems like the oil price decline is just one of the risks that could potentially undermine Nigeria’s front-runner status on the continent.
Other risks include the acute shortage of dollar inflows coupled with a wide discrepancy between the official exchange rate and the rate on the parallel market; changes in investment sentiment towards emerging markets; rising inflation and interest rates.
Conversations with various investors and real estate players also continued at JLL’s cocktail function on Tuesday hosted at the Maison Fahrenheit Hotel. The function managed to draw in a good crowd – which is a notable feat – considering that JLL has only had a presence in Lagos for just over a year.
Office and retail sector
What certainly emerged from my conversations at various GRI and JLL gatherings is that investors still remain positive on Nigeria’s real estate story and take a long-term view.
The office sector in Nigeria has started to reflect the economic reality, with rentals in the market starting to pull back from recent highs. For instance, office towers in Victoria Island and Ikoyi fetched US$1 200/sqm (per annum) in 2010. While fast forward to 2015, rentals cooled down between US$800 to US$1 000/sqm. Not only have rentals declined but the demand for office space has also waned. This is causing some landlords to consider Naira-based leases instead of USD-denominated leases. For years, tenants in Nigeria and other burgeoning African economies have been subjected to USD-denominated leases by international developers and investors. The affordability of USD rentals is becoming more topical given the lack of available dollars and the devaluation of the Naira on the parallel market. Furthermore, the ability of debt funders to source hard currency is making it more difficult for USD-based debt funding for real estate projects.
Already there is a fair amount of office and retail supply in Lagos. I had an opportunity to view Nigeria’s prime properties which include Victoria Island’s 26 000 sqm (in GLA) Wings Office Tower and The Palms Shopping Centre; and Heritage Place in Ikoyi.
Another tour was of the Eko-Atlantic development site, where South Energyx plans to build one of the worlds’ most advanced new cities. The 10 million sqm mixed-use development in Lagos is expected to accommodate at least 250 000 residents. Eko-Atlantic city will be constructed on land reclaimed from the Atlantic Ocean.
Although the development is certainly a game changer for Nigeria, there were initially doubts in the market about this project coming to fruition. As it nears closer to completion, there are now fewer sceptics.
Another ambitious plan is the rollout of government-led infrastructure investments in transport, roads, housing and power. The investment programme will have a positive spin-off for Nigeria’s industrials and logistics sector.
Responding to economic headwinds
It was put forward by one of the GRI delegates that there are likely to be a few casualties amongst property schemes and retailers owing to tough economic conditions. However, this is a common occurrence in an economic down cycle.
Developers must adapt to market challenges by securing tenants before embarking on developments. And in the case of the retail sector, developers must supply properties that are appropriately sized for the market, well designed and tenanted. The major centres in Nigeria and other West African countries are experiencing fairly rapid urbanisation and enjoy favourable demographics.
The uncertainty in the economy is causing corporate occupiers, real estate investors and developers to take a longer time to make decisions. Thus, many will take a wait-and-see approach. As the Nigerian economy improves, the demand for physical real estate from central Lagos to Nigeria’s capital of Abuja will also recover.
I believe that Nigeria’s market will reward prudent real estate investors who take a long-term view and look through the current down cycle.