By Kingsley Adegboye
As Nigeria is saying goodbye to recession, the currency uncertainty, falling production and double digit inflation that saw the country fall into negative growth and weighed heavily on investor confidence, are giving way to a brighter picture.
Subsequently, as the economy improves, the picture for real estate, both for occupational and capital markets, are expected to start improving through 2018.
However, there will be the usual lag between economic recovery and market recovery but real estate, which has suffered from a sharp supply- demand imbalance, widening vacancy rates and falling rents, looks close to bottoming out.
According to Nigerian Real Estate in 2018 by JLL, “In our view, 2018 will be a year of consolidation and recovery. This improving sentiment, will be underpinned by more quantifiable progress in a number of areas: First and importantly for real estate investors, the market is starting to gain more confidence in the economy backed by an improving external environment. Secondly, government policy- making is gaining some credibility through coherent plans to support diversification and fiscal consolidation with the backing of external bodies.
Thirdly, we are starting to see evidence that the decline in rental rates in Lagos is reaching the bottom of the cycle. Fourthly, the legislative framework is in place for real estate pricing to mitigate the impact of a volatile economy and fifthly, for an economy and population of the size of Nigeria, we still think there is a structural under supply of investment grade real estate stock. This is changing, which will provide increasing opportunities for both local and international investors.
The impact on real estate markets
What does this more benign outlook mean for real estate? Granted, growth is likely to be pretty modest in the short term, as the country exits recession. But at least with inflation easing as pressure on the naira dissipates, disposable income growth should have a chance to recover giving some fillip to consumer demand; a welcome break for real estate landlords.
Office rentals which have seen a 20-40 per cent reduction over the past two years are bottoming out. In retail, the slowdown in demand which has impacted footfall and pushed vacancy rates up should stabilise.
Most importantly for tenants and owners, the foreign exchange market is starting to function again. As the central bank reiterates its support for the Nafex currency window, currency markets can begin to function with some degree of normality which should prove supportive for tenants struggling to balance the spread between a myriad of competing rates.
Of course, it will take time for confidence to return fully to real estate markets. As in all emerging economies, there is a lag between economic recovery and the recovery in real estate market and Nigeria faces its own distinct set of challenges, particularly regarding the country’s leadership and an election cycle kicking in through 2018.
Foreign investors remain wary given the supply that is already in the market and the pipeline that is coming in the short term. Rental expectations as well as pricing need to adjust to the new reality.
However, Nigeria remains a core investment destination for anyone looking at Sub-Saharan African markets. In an environment where it is increasingly hard to find returns, any evidence that the country is making serious progress in implementing structural reforms and breaking the historical reliance that the country has on oil exports, will be welcomed by investors.