Decline in commercial real estate triggers reduction in valuation jobs

With commercial real estate market impacted by major disruptions, including the global financial crisis and the COVID-19 pandemic, property valuations jobs are becoming hard to find among professionals.

The sector has also been slowed down by uncertainties in the market and turbulent Nigerian economy, especially monetary and fiscal policies.

Besides, the market has also been hit by the rise in building materials, especially cement, rods and sanitary wares that made it impossible for investors to delve into commercial real estate developments, while facility managers tripled their charges due to energy and other maintenance costs.

For instance, a 50-kilogramme bag of cement earlier sold for N4, 200 has shot up to N4, 700 in some locations. A set of sanitary wares now goes for N50, 000, against the earlier price of N45, 000 and a tonne of iron rods climbed to N500, 000 from N490, 000.

The total value of global commercial property fell by five per cent in 2020, to $32.6 trillion, at a time when global economic output contracted by more than three per cent.

In Nigeria, especially Lagos, commercial real estate sector declined by 14 per cent in 2022 compared to 2021 amid currency challenges and rising inflation. Interestingly, office demand remains within the premise of either quality or affordability.

Notably, the office market continues to exhibit varying levels of occupancy across different grades. The B+ grade segment appears to have the highest occupancy level at 78.36 per cent, while the A and B+ grade segments have 71.35 per cent and 75.35 per cent occupancy levels respectively.

Estate Intel said the office sector in Nigeria recorded a decline to 16 per cent of total stock from the 25 per cent recorded in 2022. However, it stated that the sector has continued to remain resilient in terms of occupancy rates despite pandemic headwinds and leasing activity still being driven by relocations.

According to Savills World Research, the value of all the world’s real estate reached $326.5 trillion in 2020, a five per cent increase on 2019 levels and a record high. Growth was driven by residential, which is by far the largest real estate sector, accounting for 79 per cent of all global real estate value. It saw its value increase by eight per cent over the year, to some $258.5 trillion.

The world’s most significant store of wealth, real estate, is more valuable than all global equities and debt securities combined, and almost four times that of global Gross Domestic Product (GDP). The value of all gold ever mined pales by comparison at $12.1 trillion, at just four per cent the value of global property.

For instance, International Monetary Fund (IMF) said tighter financial conditions tend to have a direct impact on commercial property prices by making it more expensive for investors to finance new deals or refinance existing loans, thereby, lowering investment in the sector.

They could also have an indirect impact on the sector by slowing economic activity, reducing demand for commercial property such as shops, restaurants and industrial buildings.

Estate surveyors and valuers, who confirmed the decline in commercial real estate in Nigeria, however, said the sector is currently peaking up again. “The major challenge is lack of commercial spaces as investors shy away from developing commercial real as part of fall out of COVID- 19 challenges.

“Now that businesses are coming back to traditional offices, we have gaps that will take some time to fill,” according to the Chairman, Faculty Plant and Equipment Valuation, Nigerian Institution of Estate Surveyors and Valuers (NIESV), Mr. Kevin Ofili.

He admitted that the decline in commercial real estate transactions have affected valuation jobs. “Naturally, because of void earlier created by COVID-19, valuation jobs as it relates to office buildings dropped significantly since 2020, but studies for developing new office buildings is picking up again,” he said.

Ofili said government is spending less in capital-related expenditure and Central Bank of Nigeria (CBN) continuous increase in Monetary Policy Rate (MPR) is a major challenge to valuation and other services-related jobs in Nigeria.

“Once business activities reduces in any society, valuation assignments will reduce couple with continuous rising interest rate in Nigeria and world over,” he said.

Ofili called for special incentives from government, such as tax incentives for developers and to lower property-based taxation for uses in the short to medium term. He also suggested compulsory valuation by government in dealing with excise duties assessment among others like compulsory insurance valuation for government premium payments.

For the Chairman, NIESV, Valuation Professional Group, Gbenga Ismail, the market is stagnant and not many new developments in the pipeline and valuation instruction has reduced, as main valuation instructions are for mortgages commercial loans and financial reporting. “So, if mortgages are reducing definitely valuation instructions will reduce,” he said.

He also pointed out the main issue is advancement in technology. “It is becoming easier to determine valuation process coupled with this is policy. If policy does not insist on valuation then no corporate will do it. So, policies like financial reporting are expected to increase valuation.”

Ismail, who is also Vice Chairman, NIESV Lagos , said the good old days have gone, like in Asset Management Corporation of Nigeria (AMCON), when the process required that valuations be done before a transaction is concluded.

“Government should also request valuation under Bureau of Public Procurement (BPP) rules before any real estate procurement is done.

“All valuation reports are financial reporting instruments. The purpose of the report is to guide before any major decision is taken. What the valuer does is to provide market intelligence through the report to add to what you already know,” he added.