‘Nigeria office market has swung into tenants’ favour’
EREJUWA GBADEBO, a member of the Royal Institute of British Architects (RIBA) has cut her teeth in the real estate sector as the former CEO of Broll Nigeria and chief executive of the Nigerian subsidiary of the prestigious firm – Cluttons LLP, which is transitioning to International Real Estate Partners (IREP). Gbadebo, in this interview with CHINEDUM UWAEGBULAM, spoke on issues in the real estate sector.
How do you rate real estate practice this year, especially on bringing profit to the firms and boosting the market?
Real estate remains difficult this year as the industry struggles to break free from its first officially declared recession in two decades. Though overall GDP growth in the third quarter (Q3) of 2017 rose to 1.4per cent from the -1.4per cent growth recorded at the end of 2016, in nominal terms, growth in the real estate sector was lower by -0.97per cent from the growth rate reported for the same period in 2016 and lower by -4.58per cent as compared to 2Q. In addition, the contribution to nominal GDP by real estate in Q3 2017 was 7.52per cent lower than the 8.21per cent contribution reported in Q3 2016 and lower than the 7.97 per cent reported in Q2 2017.
Whatever the reasons for this, (and there are many – contracting company sizes, a scaling back on real estate strategies by companies, a reduction on recruitment plans etc.), the net result has been a slowdown on transactions and an attendant reduction on transaction values. As a lot of the remuneration to real estate firms is based on commissions, which are themselves based on percentages of transaction values received, the direct effect on the slowdown in the sector has been a reduction in revenue for firms, with many now concentrating on remaining in business rather than making massive profits per se.
Earlier, property owners in the highbrow areas in Lagos, Abuja and Port Harcourt were faced with high vacancy rate in residential apartments. Is the trend persisting?
Unfortunately yes, and in some areas, it is actually getting worse. Again the reasons for this are many and varied, but some of the key reasons have to do with the recruitment and housing of expatriate and / or executive staff. Some companies have scaled back on the number of expatriate staff that they employ, thereby reducing the number of residences in high-brow areas required. Some other companies have ‘monetised’ their housing allowances and paid these directly to their top staff. In order to maximise their benefits, some of said staff have then looked for accommodation in less prestigious neighbourhoods.
Whatever the case, whilst the twin costs of land and construction remain high, thereby ‘demanding’ the investment in ‘highbrow’ luxury residential apartments, the demand for same has dropped quite significantly leaving a vacancy rate that can exceed 50per cent in some properties.
Office market had faced decline in rents for schemes in several areas such as Lagos Island while most sought after spaces are delivering new prime benchmark rents for the city. What has prompted theses discrepancy in rental values? Do you see the office market in these submarkets transitioning into a tenant’s market? How?
Over the years, some areas like the Lagos Central Business District suffered a decline in rental due to a severe decline in the neighbourhood, this brought about by reasons like declines in security and infrastructure, and increases in density. As the situation worsened, many companies and firms moved to more secure neighbourhoods like Victoria Island and Ikoyi, and given the dearth in Grade A office buildings for a long time, rentals in these areas increased dramatically as a consequence.
As to becoming a tenants’ market, yes it has definitely become one. With the increase in newer and better built office buildings in the Ikoyi and Victoria Island submarkets at this time when there is a lull in the market, many tenants are negotiating good deals on new Grade A buildings thereby creating voids in some of the older Grade B office buildings. These are consequently also having to lower their rentals to attract those tenants that are currently occupying Grade C office buildings or previous residential grade buildings.
Everyone in the industry thought that with Nigeria coming out of recession, the real estate sector will bounce back into reckoning. What policies have undermined the market’s ability to reach its full potential?
There are quite a few issues that are affecting the real estate market’s ability to reach its full potential chief amongst them is our seeming inability to interrogate and amend the Land Use Act which is considered by many as one of the biggest impediments to converting land resources into wealth in the country. It is also considered that changing the way that land is administered and owned across the country will boost the development of the mortgage industry and consequently the real estate market.
Alongside this are issues like access to affordable funds from banks, (as these are often loathe to lend to real estate projects, many preferring Treasury bills as investments due to their more attractive rates and lower risks), and the high price of construction due to the high foreign exchange rate. Added to these, (especially here in Lagos), is the sheer cost of doing business with its multiple, sometimes conflicting, tax laws some of which appeared have stifled the growth of funds such as real estate investment trusts and pension funds, which may have aided the availability of longer-term, lower interest funding for real estate development.Until the real estate market is properly considered as a key economic driver, there will be little or no incentive to looking actively at legislation and policy changes to aid its growth.
Many key players believe that with Cluttons coming into Nigeria, competition in estate agency practice will be stiff, but the reverse is the case. What has been the challenge and how are you tackling it?
This is actually quite an interesting question, but before I answer fully, it is worth noting here that Cluttons as an international investor in Nigeria has left, leaving the company in Nigeria to transition into what is more likely to be an even more global real estate firm.
With respect to the challenges we have faced, they have been many and varied, but chief amongst them has been the perception from some of the local players that firms like Cluttons will ‘take all their jobs!’ In reality, this is actually impossible, because alongside the other international firms like Broll, JLL and Cushman & Wakefield, Cluttons (now International Real Estate Partners (IREP), really do not yet have the capacity to operate outside of the main cities of Abuja, Lagos and Port Harcourt. In addition, as many of these firms were set up to aid their parent firms’ abilities to service their global customers in Nigeria, their operations are largely located where those global companies have their operational bases. Truth is, whether acknowledged or not, many of these firms have actually helped to increase the trust of the global multinationals in the real estate practices here in Nigeria, as the vast majority of the staff in these firms are Nigerian who display a lot of knowledge in the Nigerian real estate market.
How we as the newest ‘kids on the block’ are handling it is to try to ensure that we offer value-added services to those clients who want a more bespoke service. Truth is, companies like ours cannot compete with the likes of Diya Fatimilehin, Jide Taiwo or Ubosi Eleh based on their sheer size and geographical spread. What we can then do is find a niche in the market and look to operate well at that level.
Facts show that the retail market is facing a big problem regarding rent payments, with shopping centres now becoming more flexible with their tenants. Do you foresee the market having a greater degree of stability?
It may take some time but in the long term yes. For some of the reasons stated earlier, the rentals in many of the new formal malls have ended up much higher than they ought to be, given tenants’ abilities to pay the rentals and operational costs, as well as purchase stock and remain trading. In recognition of this fact, many such malls introduced quarterly, (and some monthly), payment regimes, with many now offering rental discounts and other concessions like rent-free trading periods, and / or discounts on the exchange rate applied to any dollar-denominated rental.
In addition to this difficulty, the drop in the naira: dollar exchange rate, coupled with increases in tax tariffs on some goods has added to the troubles in this submarket. That said, the demographics of Nigeria cannot really be ignored. It is a large country with a huge, young and aspirational population, and as rentals and the cost of occupation find an acceptable level, the market will stabilise and begin to grow again.
It is worth noting that despite the challenges in the market, the growth of smaller, 4,000-5,000 sqm shopping centres offering naira-based rentals has increased exponentially, lending credibility to the argument that retail in Nigeria is still very viable.
Why is the industrial market suffering from a significant demand-supply imbalance? Do you think the weakness in the economy, have affected rents in this market?
The truth is that although demand for industrial space still exceeds supply, growth in the industry has slowed down as many tenants are unwilling expand their operations due to the fact that the weakness in the economy, coupled with FX and import policy issues, have affected their own growth.
Whilst many rents have remained stable, the product offerings are basic at best. The incentive to improve on these offerings has been hampered by the high cost of land, the uncertainty in the larger economy and the issues surrounding the supply of power and poor infrastructure. As the up-takers of this particular asset class are largely power and transport dependant, industrial real estate market is unlikely to change until there is a considerable improvement in both.
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