Strong outlook for Lagos industrial real estate market
Notwithstanding the redundancies mounting beyond the all-important oil sector, run-away inflation cutting property transaction volumes and investors apathy to real estate, a new report released by Cluttons Nigeria says, there is a bright spot in the Lagos commercial sector, especially the industrial market.
The global real estate firm in its ‘Winter 2016/17 Lagos Commercial Property Market Outlook’ revealed that the market has remained fairly resilient in the face of a deteriorating economic environment. According to the report, warehouse rents in all of the 16 submarkets monitored recorded no change in rents over the last six months, underpinned by the chronic lack of new supply in this segment of the commercial market.
For instance, rents in Apapa, which is closest to the ports, as well as Ilupeju, remain the most expensive at NGN 1,400 per square foot (psf) per annum, followed closely by Oshodi at N1, 200 psf per annum. The least expensive locations at N600 psf per annum are Ikorodu and Abule Egba.
“The performance of warehouse rents has been in line with our previous expectations, with the stability being underpinned by the persistent demand-supply gap and the ongoing challenges linked to the acquisition and provision of utilities and transport infrastructure to service any new developments,” Erejuwa Gbadebo, CEO of Cluttons Nigeria said.
In the office market, the weak outlook remains. Cluttons projects downward supply of spaces by 42 per cent, reviewing its supply figure for 2016 from 63,900 sqm to 37,062 sqm, as new buildings completed in 2015 remain largely unoccupied. “More positively for landlords however, is the fact that the weak market conditions appear to be forcing the stretching of completion time lines, as we had previously expected.
“The sharp rise in the cost of construction materials, combined with the exchange rate disparity, in addition to the supply overhang from the raft of project completions last year, have together stalled of developments across Lagos, while others struggle to break ground. This suggests that we may be on the cusp of a budding supply squeeze that will be felt by the market once stability returns further down the line,” according to the report.
While average of rents in the seven submarkets we monitor registered no change during the first nine months of the year, Ikoyi (-17.6 per cent) and Victoria Island (-20 per cent) have seen the sharpest declines. Rents here have slipped to an average of $ 700 psm and $600 psm, respectively.
The reductions have of course been exacerbated by the weakness of Naira, which has depreciated against the US dollar by 57.2 per cent over the first eight months of 2016, in addition to the general slowdown in the number of requirements in the market.
Gbadebo said: “There is however a handful of landlords that have demonstrated greater flexibility on rents in an effort to secure tenants. We are aware of instances where such landlords have agreed on fixed exchange rates slightly out of kilter with market rates. Going forward, we expect to see a greater proportion of landlords willing to negotiate on dollar exchange rates, putting occupiers in an ever stronger negotiating position, while also presenting occupiers with the opportunity to lock in low rates on extended tenancies.
The global Head of Research and Partner at Cluttons, Faisal Durrani added: “The disparity in the market on a firm rate of exchange is posing serious challenges to both landlords and occupiers as they are often at odds on what is perceived to be an acceptable exchange rate for the duration of the tenancy. This confusion is likely to hamper prospects of rental stability as valuations are thrown off-course and all stakeholders are left in a state of confusion.”
Looking ahead to 2017, the report warned that unless the government is able to deliver on its recovery programme, underpinned by infrastructure spending, the rate of job creation and therefore, demand for commercial of office space, is likely to remain subdued, with rent falls likely to persist.
“During 2017, should there be no major change in economic conditions, additional rental declines of up to 10 per cent in retail market cannot be ruled out across the board, “Gbadebo added.