With currency volatility and inflation affecting developers and consumer spending, the ability of tenants in retail centres to pay rents keeps decreasing and making the asset class unattractive. Investors are considering opportunities for smaller packaged, localised and niche retail developments, Victor Gbonegun writes.

The era of large-scale mall development in Nigeria’s major cities is fast fading out as developers who committed funds to such ventures are facing a challenging operating environment, unable to maximise profits and exit the market.

Despite Nigeria’s rich investment potential, some serious challenges have reduced foot traffic at many malls due to inability of most tenants to pay rent, e-commerce growth, foreign exchange (FX) volatility and diminishing disposable income of consumers.

The Guardian gathered that many large-scale mall projects were recently put on hold owing to high construction costs, FX volatility and spiraling inflation, which currently stand at 24.08 per cent.

Unlike in past years when the sector witnessed the best of times with both foreign and local investment interests, big investors are shying away from committing huge funds on grade A retail centres and shifting from large size mall development to smaller sized and neighbourhood malls.

According to Nigeria retail industry report 2023, convenience stores continue to grow amid difficult periods for retailers, while there was double digit current value growth in retail in 2022, constant value sales fell and there was limited opening of outlets as soaring inflation hits consumers’ purchasing power. The headline inflation rate increased to 25.80 per cent in August relative to the July 2023 inflation rate of 24.08 per cent.

Essentially, many of the existing large malls in Lagos, Port Harcourt, Abuja, Kaduna, Enugu, Onitsha and Asaba among others hardly account for 100 per cent occupancy, thereby making it difficult for investors to recoup investments.

There have been major retailers exiting markets and resurgence of local investor interest in the retail sector. Only recently, major investors in retail properties, Novare real estate (malls) announced plans to put up four of its Grade ‘A’ portfolio mall properties for sale in Lagos and Abuja.

One of the facilities named, ‘Novare Mall’ was completed in 2016 and occupies a 22,000 square metres space along the Lekki-Ajah Expressway, costing about $83 million. It is the largest retail mall in the commercial city of Lagos. Others in Abuja are sited on 8,000, 11, 000 and 14,000 square metres of land respectively.

Currently, the 38,000 square metres Purple Lekki Mall, Lagos, which encompasses a premium 157-unit mixed-use development that blends high-quality residential, retail, entertainment, hospitality and co-working spaces, is about the only grade A facility in Lagos.

Novare, Resilient Africa and Artee Group were leading investors who went ahead with their development pipeline in 2016 despite economic challenges. The move by Novare to put up the facilities for sale, is seen by many industry players as a significant event in Nigeria’s real estate market.

Sources revealed that most of the facility developers took loans to develop them, but high cost of maintenance, volatility in foreign exchange market and increase in diesel cost are impacting their ability to repay.

The Guardian learnt that it could cost investors as high as $6,100 to complete per square metre of mall. Development challenges of identifying large land sizes of about 50,000 square metres and above have led to an increase in the development of smaller malls of 15,000 square metres and below.

Experts say in prime locations, new malls face challenges of low trading and limited uptake of space with rents growing as high as $700 per square metre. Regrettably for developers and shopping mall owners, it is really challenging times as they face the options of losing their tenants or yielding to their pressure on concessions on rents and relaxation of terms of engagement. Retail space tenants are, increasingly, seeking rent reductions, naira-based rents and shorter leases subject to negotiation.

Former Chairman of Nigerian Institution of Estate Surveyors and Valuers, (NIESV) Lagos branch, Mr. Rogba Orimalade, said institutional investors that brought in investment from overseas and local investors are being impacted by some key economic factors. The cost of servicing and maintaining the grade A malls, he said, keeps skyrocketing in the market.

“For the overseas institutional investors, the key factors include the issue of foreign exchange. There has been a struggle over the years of not being able to repatriate their funds. Secondly, the naira has depreciated to an alarming rate to the extent that at the end of the day, the value of the asset class doesn’t look viable to their own mind.

“Such investment is also about Return on Investment (RoI) and if other climates have better policies that attract investors and can also generate as much revenue as possible, they will go there because there is no sentiment in business. A situation where you have the big boys from South Africa, who came with investors when most of the grade ‘A’ malls were set up, now leaving the scene, gives a wrong signal” he said.

However, he said, some of the issues are self-inflicted because the majority of developers don’t do proper valuation to realistically regenerate the ideal rents to charge customers, adding that many of the mall owners don’t pay attention to tenant mix in malls in the urge to quickly fill up the facility.

“Developers bend backward by not focusing on getting the right mix for the commercial retail space. It is only when you work towards getting the right mix that you get the right footfalls for tenants. Anything less than that, you are going to naturally have a lot of voids in those asset classes. It is a disaster when you have voids in malls because the service charges and maintenance is dependent on the mall being fully occupied,” Orimalade said.

He further noted that the trend in the formal retail sector is focused on neighbourhood, smaller developments that don’t exceed two to three floors.

“There are more neighbourhood malls closer to residential settlements. There is still a big appetite for certain retail assets irrespective of whether they are grade A or wherever they are located. Asset classes such as pharmaceutical industry, wellness/lifestyle within the cities, recreation related/gyms, food and drink are still bullish but these categories are not enough to fill up a grade A mall. The supermarkets have realised that it is better to use their own facility and traditional malls where they are anchor tenants,” he said.

Vice President, International Real Estate Federation, (FIABCI) Nigeria, Mr. Akin Opatola, said the retail sector has always been attractive.
However, he noted that after the outbreak of COVID-19 Pandemic, a lot changed with increased attraction to online space.

He said grade ‘A’ malls with location advantage will continue to thrive as against those that lacked such advantage. Although, he said some tenants are subjected to very high rents, but are also happy because of the footfalls they enjoyed.

Opatola said: “Deeper perspective of what is happening in the retail sector shows that some investors when they enter the market, there are certain yields and investment potential they expect, after sometimes such investors exit and put the asset in the market at a high trajectory.’’