Sunday, 2nd October 2022
<To guardian.ng
Search
Breaking News:

Investors downsize as retail sector witnesses growth in major cities

By Victor Gbonegun
22 August 2022   |   2:40 am
After months of decline in activities, the Nigerian retail sector of commercial real estate is witnessing a boost, following the return of abandoned mall projects in major cities.

One of the shopping malls in Lagos

After months of decline in activities, the Nigerian retail sector of commercial real estate is witnessing a boost, following the return of abandoned mall projects in major cities.

The COVID-19 pandemic severely affected the commercial real estate sector, as travel restrictions and social distancing affected commercial activities and gathering facilities. Office, retail and hospitality sectors were the most affected market segments.     

Despite the COVID-19 disruption, a report by Research and Markets said the retail real estate sector saw significant growth, which is leveraged by the digitisation of the workplace, the transformation of physical retail and the shift towards environmental, social and governance (ESG) considerations.
  
In fact, the retail sector faced challenges from the e-commerce sector and changing customer behaviour during the pandemic. Despite these challenges, the sector remained resilient, as the e-commerce sales during the pandemic accounted for only 14 per cent compared to overall retail sales.

         
The disruption in the fortunes of the retail sector, which gave e-commerce a boost in developed economies accounted for roughly half of the world’s economic output, as online retail sales increased from $2 trillion in 2019 to about $2.9 trillion in 2021, according to United Nations Trade Agency (UNCTAD).
   
Operators in those markets felt the impact as over 17,500 chain store outlets plummeted across Britain in the first year of the pandemic. The number of malls that experienced a lull in footfall traffic also increased.
 
As the pandemic continues to wane, over 300,000 square metres of new lettable retail space have been completed across countries like South Africa this year, as against the 367,000 square metres over the previous two years combined.
   
Moreover, to meet the consumer demand and adapt to the changing retail environment, developers are focusing on different strategies, such as remodelling shopping centres to serve multiple purposes, customising tenant mix, and developing new lease models to attract the latest business models.
 
 
Essentially, the retail real estate sector of Nigeria’s economy gained significant investment between 2009 and 2015, from local and international investors – developers, who sought to support the development of modern shopping malls in line with what is obtainable in Europe, America and South Africa.
 
The sector attracted Foreign Direct Investments (FDIs) of about $3 billion from a zero base, which was deployed towards the development of about 20 shopping malls and centres in over 10 cities, including Lagos, Ibadan, Abuja, Port Harcourt, Kano, Warri, Ilorin, Enugu, among others.
    
Investments in big physical stores were at their peak during these periods, when foreign developers like Resilient Africa, ShopRite, ACTIS, ACA and others, came into the country. Many have, however, pulled out or failed to expand their portfolio due to economic challenges, while the few ones in operation are struggling with getting tenants.
    
Findings revealed that mall development in major city centres could cost over $4, 285 on average per square metres in Lagos, over $4,087 in Abuja and $3,942 in second-tier cities due to the naira/dollar rate crisis and inflationary trends affecting the cost of construction.
   
Specifically, among the projects on the course are the Tropicana Mall, one of the components of a massive leisure complex in Akwa Ibom. Others are located in Abuja, Kaduna (Galaxy mall in Barnawa) and Edo (Edo mall) which were slowed down for some years are nearing completion with the hope of yielding returns for investors.
  
There is also the 38,000 square metres Purple Lekki, Lagos, which encompasses a premium 157-unit mixed-use development that blends high-quality residential, retail, entertainment, hospitality and co-working spaces to tap into the increasing demand for all-inclusive living, is slated for completion this year, ditto for Galaxy mall in Kaduna
   
Experts say 5, 000 square metres size retail outlets and neighbourhood malls have gained prominence as the future of sustainable retail development. 
    
A senior official of CBRE Excellerate, Nigeria, Francis Okafor, explained that despite the high demand for retail space, developers and tenants are adjusting to the harsh economic reality in the country.
 
Okafor said: “Investors are avoiding bigger size mall development and local players like Ebeano are sticking to two-floors and 5,000 lettable space rather than the big ones. Those who have invested in over two floors are having a lot of unoccupied lettable space. Smart investors are keeping it simple for the sustainability of their investments.
      
“The disinterest in bigger mall development is hinged on the inability of prospective tenants to recover their rents, power and service charge. Any developer that is wise should not be building anything in excess of 5,000 or 8,000sqm.
   
“Getting tenants has become difficult due to shortage of funds as developers, most time request for two years rent to cover the cost. The second-tier cities are coming up in terms of mall development but we are not having more than 10,000 or 15, 000 square metres of malls around.
  
“There is the challenge of receiving revenue in foreign exchange, which was the currency used for initial investment. If I am investing with dollars, I will need to get back my investment in dollars but the challenge is that developers are unable to get forex.
   
“What the developers do is they quote rent in dollars and at the end, they collect naira, which is unable to match up with dollar investment. It is only the local investors that can bear the risk of naira because they understand the Nigerian market.”
   
The exit of foreign investors, he noted, has increased the risk of more foreign investors coming into the market. However, he said their exit hasn’t frightened local investors in the second-tier cities, adding that it is the local players that have cushioned the degree of that impact.
  
A shopping centre specialist, Mr Bayo Akintoye, attributed the previous low moment in the sector to a decline in economic activities in the country, insecurity, an increase in the inflation rate, and lack of FDIs, which affected the growth of the large malls and abandonment of projects.
   
He said: “Local investors are the major players in the development of malls with focus on communal, neighbourhood retail centres, which are smaller lettable areas for affordability and deployment of capital that is required for the development.
  
“This helps in proper management without bringing in a lot of infrastructure for the management of the mall. The rentals will be naira denominated, unlike international investors who denominate their rentals in dollars because they’re repatriating their funds.”
  
An official of Purple Mall, Lekki, and Tolani Olusola explained that expanding the availability of retail and entertainment facilities can only be positive in the light of how undersupplied the formal retail sector is.
  
He said that the smaller malls are quicker to build and fill up, as well as easier to manage, while larger centres require huge amounts of contiguous land, which are increasingly difficult to obtain in urban and well-populated areas.
  
Olusola said: “Smaller centres are easier to fit into populated city centres where they can attract large amounts of traffic week-in-week out. We favour a mixed-use approach, as we understand the value of a great location for both residential and retail segments.
  
“City centres present an attractive proposition for mixed-use developments, especially as they can cater for the varied types of customers that naturally congregate in city centres. They provide a mix of facilities designed to draw as many people into them as possible, which are good for retailers and business owners.”
  
According to him, developers in the real estate sector are currently struggling with access to finance and lack of infrastructure, adding that the current global energy crisis is also creating more difficulties for practitioners.
 
He said these are driving up the cost of development, which makes it more difficult to invest in the sector.
  
On how the government should encourage investors in that segment of the market, Okafor and Olusola urged the Federal Government to encourage foreign investments to build up its foreign reserve in the economy. They also want support for retail businesses in terms of funding and cancellation of double taxation on mall investors.
   
They further called for a regulatory body for the real estate community within cities like Lagos, to protect investors from fraud, which could be replicated on a national level.