FOREX, LENDING RATES TO AFFECT PROPERTY INVESTMENTS IN 2018
Generally, 2017 was not exactly a great year for the real estate market. Financing for real estate projects was virtually unavailable and when banks considered such projects, interest rates were set very high. New foreign investment was almost negligible. The retail market and office sector suffered from oversupply and low demand. This resulted in high vacancy rates and poor returns for landlords/investors. Positively, (depending on one’s perspective), land prices enjoyed modest increases. But will the real estate market in 2018 be different? Pundits say this will depend on factors such as foreign exchange and bank lending rates to the real estate sector.
IMPACT OF LENDING RATES
Lending rate toward the sector ranged between 22-24% in 2017 indicating a disinclination by banks to finance real estate projects. This lack of enthusiasm and unwillingness was due to two factors: large number of non-performing real estate loans within the banking system. This left a lot of banks with collateral properties that had depreciated well below their original loan value. An appetite for less risky Treasury Bills with rates as high as 18%.
But is this the current position as we proceed into 2018, pundits have offered mixed views. A section of real estate pundits believe that lending rates will remain in double digits. They say banks will continue to have a preference for Treasury Bills as against lending to the real-estate sector. They go on to say that government will continue to “drive a high price regime in order to protect foreign exchange”, making any change to the situation insignificant. Despite these thoughts, they still believe that with Government intervention, there might be a change of attitude to lending real estate. “If government says banks should not have more than 20% of their assets in Treasury Bills, it means the balance sheet structure has been constricted so much that banks will need to take in more loans. Government should create an intervention fund that will drive the real estate market”, they avow. Other school of thought believe that lending rates will come down a little because inflation is on a gradual downward trend. They say this will encourage CBN to give a little to stimulate growth. “Treasury Bills rates are already coming down from the 18% high of 2017 making banks look a bit more favourably towards lending to the real estate market”. They opine that banks will at least grant audience to loan applications from the real estate market.
ROLE OF FOREIGN INVESTORS
For international investors, the volatility of the exchange rate for the dollar has always been the point of reference as far as return on investment is concerned. For United States and European retailers, the 2017 conditions of fluctuating oil prices, unstable local currency value, and an inflated recessive economy, were not optimal conditions for investment. According to Broll (one of Africa’s leading commercial property services company), enquiries and demand from retailers in Far and Middle-Eastern countries spiked as they looked to take advantage of hesitant U.S and European retailers. Even though industry experts believe foreign investors will remain cautious given the supply already in the market, they cite stabilized forex, oil-price, recovery from recession and receding inflation as grounds for the real estate market to be optimistic. The hope, nonetheless, is that oil prices remain stable so that the country can continue to accrue the foreign reserves needed to stabilize the Naira. Once they begin to come in, it is expected that foreign investors will show high interest in the hospitality sector due to the oversupply in other real estate market sectors.
OFFICE SECTOR IMPACT
The overriding factor in commercial property space in 2017 was oversupply. Completed projects started competing with a shallow pool of tenants. In many cases, it was the same tenants moving from one new Grade-A office space to another. Coupled with the amount of office space on the market was low demand from tenants. Corporates tightened their belts by reducing staff (and space). They also began to consider both Grade-B properties as well as locations outside Ikoyi and Victoria-Island. Indeed, in 2017, the commercialization of Lekki Phase-1 and Oniru Estates moved into high gear with virtually all the banks having significant branches in both locations. The result, according to Broll’s 2017 Q3 Office Market Report, was landlords had to take steps such as, “rent concession, and longer rent-free periods” in order to retain existing tenants and market new tenants.
RETAIL SECTOR CONCERNS
The retail sector also faced similar issue of surplus supply and inadequate demand. As a result, vacancies became an issue especially in the new malls. The result, as in the Office sector, was that landlords had to offer lower rents and longer rent-free periods. There are two schools of thought regarding the commercial office sector. The first points out to the over 44,000sqm of additional space that will be added in 2018. Their belief is that landlords will face even tougher times in 2017.
The second opine that despite the oversupply, economic growth will drive demand for more space. It is this demand that will have the impact of rents ‘bottoming out’ in the year. For the retail sector, there was a glimmer of hope. While South-African, European and American retailers moved out of Nigeria or shelved plans to site their stores here, there was renewed interest from retailers in Turkey and the Far East. Miniso a Chinese retail company took up over 4,000sqm in retail space in the last half of 2017. They have indicated their desire to take up more space. If such retailers can be encouraged to set up shops in Nigeria, the retail market sector will flourish.
MATTERS WITH PRIME LAND PRICES
Available data show that prices remained stable in 2017 showing a 1% growth in Naira and Dollar terms. Oniru showed the strongest growth of 10% while Victoria Island fell by 5%. Of the prime lands tracked last year, Eko Atlantic remained the most expensive due to its infrastructures and dollar transaction benchmark. The gap between Victoria Island, Ikoyi and Banana Island prices narrowed with a 4% range in relation with each other. Generally, land prices are not expected to increase drastically. Eko Atlantic and Victoria Island are not expected to show much growth in prices. The first reason for this projection is that Eko Atlantic, being on the top of the price range, represents a daunting challenge for developers in a convalescing market. The second reason is that Victoria Island is a mature market already; therefore, it will experience little growth. The commercial office market in Victoria-Island is not currently doing well, so there’s no driver for it to show appreciation. Lekki phase-1 is expected to show strong price growth in 2018. Local and foreign demand are expected for Lekki phase-1 because of its commercial and residential market mix. Ikoyi and Banana Island are the other areas whose prices are expected to show increase. With redevelopment and increased zoning density in place, analysts believe that developers will have their eyes set particularly on mid-end residential and commercial markets of Ikoyi.