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Recession: Stakeholders differ over impact on real estate

•Vacancy rate at 74% in Lagos — FDC
•No more sellers’ market
•Opportunity for brave investors

By Yinka Kolawole

STAKEHOLDERS have continued to express divergent views on the impact of the current economic recession in Nigeria on the nation’s real estate market. While some operators are complaining of low demand, over supply, falling prices and many unsold/unoccupied houses with no buyers or tenants, others see the crash in the property market as opportunities for brave investors with expectation of high returns when the country climbs out of recession.

A real estate development... FM experts charged to sustain the growth of such investments
A real estate development… FM experts charged to sustain the growth of such investments

Available sales data from housing developers and realtors showed that most of the enquiries they receive come from first-time buyers, who hardly return back after making enquiries. In highbrow areas in Lagos like Ikoyi, Victoria Island and Lekki which used to be hot cake, especially for wealthy Nigerians, most properties there are now up for “let” or “sale” for several months without anyone making enquiries about them. The same scenario applies to Abuja.

Most of the houses and estates in high-brow areas like Asokoro, Gwarinpa, Maitama, Wuse II, Utako, Katampe districts are unoccupied as a result of the high cost of renting or leasing. Houses and estates in Gaduwa, Apo, Dei-Dei, Gwarimpa, Lugbe, Kubwa, Gudu, Life Camp, are also in similar situation of no buyers or renters.

But in spite of the glut in the real estate market, property values have stagnated and in most cases have increased tremendously in the low and medium income neighbourhoods in major cities of Lagos, Abuja and Port Harcourt. Checks revealed that rental value or sales of block of flats, detached duplexes and town houses in Lagos are on the high side, as a three-bedroom luxury serviced apartment on Banana Island costs around $60,000 per annum; a detached duplex goes for $75,000 per annum, while a five-bedroom with a single room boys’ quarter in Victoria Garden City (VGC) goes for N70 million.

The same goes for Victoria Island where luxury flats go for between $40,000 and $50,000 per annum. Rent for a four-bedroom bungalow in Wuse, Maitama, Asokoro, Garki and Utako goes between N3million and N6million a year, while those who long to live in the same types of apartments in satellite towns like Karu, Gwarinpa, Kubwa and Lugbe pay between N800,000 and N1.5m for the apartments.

Findings also show rent of a two-bedroom apartment in areas such as Maitama, Asokoro, Wuse II going between N2.5 million and N3 million, while one-bed room apartment costs between N1million and N1.5 million and three-bedroom apartments cost between N3 million and N6 million per annum depending on the finishing, location and security of the area. Even high-density areas such as Alimosho and Ikorodu are not spared the empty houses syndrome.

Rising vacancies

The Financial Derivatives Company Limited (FDC) puts the vacancy rate in the upper class real estate neighbourhoods of Lekki, Victoria Island and Ikoyi at 74 percent at the end of September. It attributed the number of vacant properties to a combination of rising inflation, GDP contraction, falling consumer confidence and increasing unemployment rates which contrived to lower demand for housing.

“As a result of the downturn in the economy, there have been mass job losses in the banking sector, oil and gas sector, manufacturing sector, and in most cases where there have been no retrenchment, non-payment of salaries running into several months. These have reduced the ability of people to be active in the real estate market.”

FDC projects an outlook of further decline in demand for housing until the end of the year, when economic activities are expected to pick up. “Our expectation is that a point of inflexion of the index will be evident in the first quarter of 2017. Typically, high vacancy rates imply increased supply, which should translate to lower rents.

Delinquency and abandonment

However, rents have remained inflated above fair value and continue to be responsible for the high rate of delinquency and abandonment. We expect demand for housing locally to shrink further initially due to lower disposable income and a move from prime areas to more affordable locations. We also expect, in the short-term, new developments under construction. This will increase the supply of properties,” it stated.

Not a sellers’ market

Mr. Akin Olawore, former president, Nigerian Institute of Quantity Survey (NIQS), noted that the real estate sector is usually the first hit during economic recession. “This is because people don’t have money to pay their rent, or go into new leases. They just can’t find the money to pay now, so the default rate has gone up,” he said.

On the possibilities of property owner being forced to reduce prices, he said the market has to correct itself. “The market is of demand and supply, and purely a business decision. Under the current situation, the number of houses being built will drop, because if the ones in the market are not going, why invest again?

Having vacant houses lying everywhere is not helping the economy. If you look around, you will see many houses for lease. Things are expensive now, and people are not taking up leases. If landlords have their way, they would factor in the inflation rate in their rent, if it expires within this period. But given the situation of things, they also have to reduce the price at which houses are leased or sold; otherwise we will keep off-loading many houses into the market, without buyers. It is not a seller’s market any longer.”

Second Vice President of the Nigerian Institute of Building (NIOB), Mr. Kunle Awobolu, said it is ironical that despite shortage of accommodation and deficit in housing, some comfortable, attractive and functional buildings remain unoccupied.

“It is unfortunate because these are mostly new buildings. One of the reasons is that the rent may be beyond the reach of an average tenant. In Abuja, for instance, we have so many buildings that are unoccupied. One cannot but wonder why the owners wouldn’t reduce the price of the buildings. This is because if a building were left unoccupied for long, sooner or later, there would be need for maintenance.”

Lull to linger

Mr Bode Adediji, a real estate consultant, recently expressed scepticism on the possibility of the market rebounding soon. According to him, property market thrives on the fortunes and misfortunes of other sectors of the economy. He said until there is an overall turn around in the economy, the real estate market will exhibit features of worst recession experienced in the past decades.

His words: “In any economy, a period of mass disengagement of staff is always followed by a prolonged property crisis. Those laid off will default in rent payments. The cost of developing houses and property will escalate while at the same time the purchasing power of the populace may crash to the lowest ebb in recent history.” He argued that house values and rentals is bound to continue to crash in some regions while the same factor will push up the demand.

Great opportunity

Meanwhile, the crash in Nigeria’s property market has been described as an opportunity for brave investors with expectation of high returns when the country climbs out of recession.

Analysts opine that Nigeria’s fast-growing population will require more housing and shopping malls in the long-term and some investors believe the time is right to step in, particularly as banks are reluctant to grant loans to other potential buyers in the midst of the downturn.

Some private equity funds, mostly from South Africa, are investing in Lagos and Abuja, believing that the spending power of the country’s 180 million people will grow.

“We believe Nigeria has massive potential in the retail area. The sector is in its infancy and will only continue to grow from a very low base,” said Jan van Zyl, head of Nigerian property development at South African fund Novare Equity Partners.

Investors can take advantage of their purchasing power as Nigeria is desperate for dollars to replace oil revenues which account for almost all the hard currency income it needs to fund food and other imports. “What you are offering as an investor is liquidity. In the country itself, there is no liquidity,” said Jonathan Millard, Lagos-based chief operating officer at Troloppe Property Services.

“If you’re looking at this on a five to ten year cycle there are tons of opportunities.”

Property consultant Cluttons estimates that Lagos retail yields stand at around 7.5 percent, compared with 8 percent in Johannesburg, 9 percent in Accra and 10 percent in Nairobi but have the potential to rise once the economy improves. But investors say Nigeria’s size, one of the world’s fastest growing populations, means it has better long-term prospects than the rest of Africa.

 

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