Lagos State Real Estate Market:
The Lagos Real Estate Market has been supported in recent times by considerable strides being made by the Lagos State Government in corporate governance, regulatory improvements and efforts to improve the ease of doing business in the state.
Lagos State wishes to create an enabling environment for the development of infrastructure in the state in conjunction with the private sector. Current infrastructure projects under development that will have a considerable impact on real estate development include the Lagos Badagry Expressway, the Badagry Deep Sea Port and Free Trade Zone and the Blue Rail Line to the west of Lagos and the 4th Mainland Bridge, Dangote Refinery, Lekki Free Trade Zone, Lekki Deep Sea Port and Lekki International Airport along the Lekki-Epe axis to the east of Lagos. However, completion of a number of these projects will be subject to successfully attracting the private sector as operators and financiers of these large complex projects.
With this year offering the most challenging moments in the real estate sector, industry experts believe the property markets will continue to change, shift and evolve, sometimes quite dramatically.
They argue that in the midst of the harsh economic atmosphere, there are pockets of opportunities, which could boost the real estate industry
Leaders ranging from developers, financiers, investors, High Net worth Individuals, regulators, researchers and marketers, gathered to discuss the theme: Economic and Real Estate Outlook 2017: Investing in challenging times. This theme was borne out of the need to champion discussions around identifying where the opportunities are in the perceived challenging times.
Leading the discussions with a keynote address was Prof. Pat Utomi. He dwelled on four growth drivers’ framework; policy choice, institutions, human capital and entrepreneurship. These variables are largely determined and influenced by leadership. Leadership determines the melting point among these independent variables.
The Chief Executive Officer, Fine and Country West Africa, Mrs. Udo Okonjo noted that, real estate is changing. “The concept of location needs a re-look. Prime locations still remain prime locations but some emerging locations are beginning to require a relook at the definition of location. Location has to be re-discussed as access is redefining the value of certain locations.
“Another important emerging trend which needs to be explored is the millennia housing market which is a huge part of the middle income market. The millennial market basically needs affordable functional spaces- two to three bedrooms. This market is important for real estate developers as they must begin to target first time homeowners and not just repeat buyers. Properties re-engineered and built for solution for this emerging markets.”
Okonjo who described the real estate sector as a mirror of the economy, which directly reflects the economic status of the nation, emphasised that even the premium real estate market has its peculiar pockets of opportunities.
She said: “Prime locations still remain prime locations but properties on prime locations can be re-designed to fit the present day reality. One of which is the apartment style of living as against the villa style. Market intelligence is increasingly pointing towards affordability and accessibility, which does not necessarily imply low cost housing. Oakwood residences typifies this model of market intelligence- contemporary apartments in the prime Ikoyi suburb.”
According to her, the confidence level of diaspora investing should be addressed and developed to attract direct foreign investments. Mrs. Okonjo also mentioned the retail hub opportunities in locations like Ikoyi and Lekki Phase 1.
Historically, the highbrow real estate market in Lagos had always shown extreme resilience in spite of cyclical downturns. It had been considered the typical hedge against inflation. Many analysts believed you could never go wrong with real estate.
However, since 2014, the market has changed dramatically. Our analysis reveals higher vacancy rates compounded by an increase in delinquency and abandoned properties, as recessionary pressures takes its toll.
Anecdotal evidence is now supporting empirical data, suggesting that the market may be unable to withstand current and future exogenous shocks.
In light of high price elasticity, quality of properties has become the most important determinant of effective property demand. The devaluation of the naira has meant an effective increase in the naira rental value for dollar paying tenants. To achieve an in-creased value for money at a time of squeezed incomes, tenants are switching to newer buildings with modern facilities at the same dollar rents.
The vacancy factor in the older properties is almost 65% higher than in the new facilities. Clients are even willing to pay more for well-appointed offices with a waterfront view. For example, Deloitte has moved from its dingy premises in uptown Lagos to the serenity of Ozumba Mbadiwe’s waterfront. Many other professional firms are making similar moves.
Car Parks, the New Real Estate Opportunity :
Downtown Lagos and the Central Business District have become congested. This is typical of most urban centres. In the U.K for example, London has introduced a congestion tax and other penalties to discourage the use of private cars in central London and the west end.
Downtown Lagos is now facing a severe parking cri-sis. The business case for a commercial multilevel parking shows a 3-4 year payback. This is because the costs of car parks include mainly the site, cost of construction and fit-out unlike housing properties where finishing, plumbing and tile work are major costs not considered when building a car park.
Selling Property Is Now the Norm
Selling property in Nigeria was considered an anathema or a social stigma. Many property sales were by private treaties. Ever since the recession property foreclosure and sale have become more prevalent. The “to let/for sale ratio” is currently at 1:2.
This suggests that for every property that was put up for rent, 2 properties were available for sale. The ratio therefore reveals that the economic severities are having a huge impact on property owners leading to the increasing number of properties for sale.
Stakeholders React Differently
The current economic downturn will trigger divergent investment behaviours, based on their perception of the market.
Some investors use real estate as a medium for money laundering activities. These investors are able to conceal revenue from illicit activities while acquiring value from the real estate market. As a result, they become interest rate agnostic. This is a situation where investors are indifferent about dormant properties. Optimism fuels the behaviour of such investors, leading to a supply glut in downtown Lagos.
Other rational investors that borrow money for investment purposes will be interested in exiting the market. This is due to the increasing cost of servicing the debt coupled with high rates of tenant default.
Their reaction leads to increasing foreclosures, distressed sales and extension or reduction of payment plans. They understand that the economic situation has created a buyers’ market where the ability to raise rents has been curtailed, making the real estate space less profitable for them.
The diverging views of stakeholders will lead to a point where aggregate supply and demand will find its equilibrium. As a result, house prices, which are currently overstated, will find their true value.
When Will The Real Estate Market Recover?
The Q3’16 GDP report has shown the economy has contracted further by 2.2%, suggesting that a pick-up in economic activity less likely in the near term. Consequently, we do not expect a quick recovery in the real estate market as our recovery expectations have moved from 2017 to 2018.
Vacancy factor is a lagging indicator that will improve following an economic rebound. We fore-cast that the indicator will decline at about 2 quarters after recovery.