Q1 PERFORMANCE REPORT ON THE LAGOS PROPERTY MARKET!
MCO Real Estate Report shows relative stability in the Lagos Property Market despite economic recession.
MCO Real Estate Limited (mcorealestate.com), a real estate investment and advisory firm that provides services and solutions to a global audience of investors & developers to enable them achieve their real estate investment objectives primarily in Nigeria, has released its first quarter of the year 2017 report on the Lagos Property Market. Headed by Munachi Okoye, the report shows that with the considerable divergence between the official and parallel market rates, the fear still remains of a future Naira devaluation making it difficult for foreign investors to commit to investment in the country. Equally , with the Monetary Policy Rate (MPR) currently standing at 14 per cent and lending rates at c.25 per cent, local developers continue to face considerable challenges of funding their projects at such high borrowing costs with all the risks sitting with the developer while all the profits accrue to the lending bank.
Before the recent Naira devaluation, developers saw Dollar funding at single digit rates and terms of up to 5 years as a panacea to the high cost of Naira borrowing, however following the Naira collapse, there has been a re-think as the risks of a currency mismatch – Naira receivables against Dollar loan servicing has come to the fore. In recent times, the idea of hybrid structures, part funding in Dollars and part in Naira is considered a workable solution where the blended rates bring down the overall cost of borrowing while reducing exposure to a potential currency mismatch, allowing the loan to still be serviced in the event of a potential Naira devaluation. Accelerated repayment of the Naira portion of the loan is preferred via a sale of assets rather than holding them for a rental/lease return.
PRIME LAND PRICE MOVEMENTS
Prime land asking prices have done well over the last year with an average increase of 22 per cent. Eko Atlantic City where prices are benchmarked in Dollars stands as an outlier as the Naira devaluation means that prices in Naira terms have increased by 55 per cent over the year. At the other end of the range, Victoria Island has fallen by 7 per cent over the year. Prime land prices currently fall into three distinct price brackets with Eko Atlantic City retaining its title as the most expensive land in Lagos at a dollar pegged (blended) price of US$1,700 psqm (N523,000 psqm). Ikoyi (31% YTD), Banana Island (4% YTD) and Victoria Island (-7% YTD) all fall within a tight band at N373,000 (US$1,226), N359,000 (US$1,181) and N379,000 (US$1,244) respectively while Lekki Phase 1 (34% YTD) and Oniru (14% YTD) fall within a lower priced band at N207,000 (US$579) and N176,000 (US$681) respectively.
Banana Island price have fallen by 23 per cent from their highs of N440, 000 psqm achieved in August this year to a current price of N373, 000 psqm. Densities per square metre continue to rise in Banana Island as detached houses on single plots give way to multi-family apartment blocks on larger plots. Lekki Phase 1 in general and Admiralty and Freedom Way in particular have benefitted from the road widening and re re-surfacing of both roads with Admiralty Way now being seen as a major commercial thoroughfare leading to a considerable 14 per cent increase in advertised land prices over Q1 and a 34 per cent increase over the year.
THE RESIDENTIAL MARKET
The residential market is supported by demand from the middle market segment consisting of primarily terraced houses, town houses and flats priced at between N25m and N60m ($82,000 – $198,000). Middle market housing built with an eye for quality and priced competitively continues to find a market from buyers. The primary areas of growth for residential housing are the Lekki-Ajah axis while the on-going investment in transport infrastructure along the Lagos – Badagry axis consisting of the Blue Rail Line, the Lagos-Badagry Expressway and the Badagry Deep Sea Port and Free Trade Zone suggests potential for strong growth along that corridor also. The premium residential market consisting of property above N120m ($393,000) continues to suffer from a fall in consumer income coupled with a fall in demand from the corporate leasing market particularly impacting the Ikoyi prime residential apartment leasing market.
THE COMMERCIAL OFFICE MARKET
The Lagos commercial office market continues to remain in a slump brought about by the strong growth in supply over the last three years coupled with the fall away in demand on the back of the contraction in economic growth over the same period. There is currently a total of c.544,000 square metre of institutional commercial office space with 8 per cent of this amount added in 2016 and 20 per cent added over the last two years alone primarily in Ikoyi and Victoria Island. As the market re-aligns itself to the current state of affairs, both landlords and tenants are seeking the means to protect their interests by reducing costs and increasing profits in the current challenging economic environment.
Intense negotiations are at play as corporate occupiers seek to convert Dollar denominated rents to Naira with a wide margin existing between the landlord’s ideal of a conversion at a parallel market rate and the tenant’s preference to convert at official market rates. Meanwhile, inflexible landlords that are unwilling to negotiate on improved tenant terms run the risk of desertion by tenants seeking more flexible terms. Tenants are also seeking to reduce costs by rationalising space particularly where they can move from multiple locations to a single location while at the same time benefiting from a greater supply of good quality buildings and softer rents that have fallen by 20 per cent over the last 18 months. Pro-active landlords are fighting back by seeking to lock in desirable tenants on long leases at negotiated rents. Ikoyi prime rents currently stand at c.US$800 psqm while Victoria Island prime rents stand at c.US$700 psqm
THE RETAIL MARKET
Support remains in the retail sector particularly for basic consumer goods and entertainment which both tend to do well in an economic downturn. However, in the current challenging market, even Shoprite, the anchor tenant of choice with seven branches currently across Lagos has been forced to cut back on its growth ambitions. Development challenges of identifying large land sizes of 50,000 sqm and above has led to an increase in the development of smaller malls on 15,000 sqm or less. The challenging market conditions means that tenants are seeking rent reductions, fixed exchange rates, naira based rents and shorter leases subject to negotiation. In addition, new malls face challenges of low trading numbers and slower uptake of space. Headline rents in prime locations stand at $700 – $900 psqm, however in recent times, achievable rents have fallen by up to 20 per cent below asking rents. Total Gross Leasable Area for Lagos modern retail currently stands at $118,000 square metres of space.