The combination of falling oil prices, protectionist policies, and pegged Naira has caused most occupiers (existing and new entrants) to maintain a wait and see approach for the stabilization of the economy. This has had an adverse impact on the Class A commercial market space in Lagos Island which is arguably experiencing its first cyclical down-turn.
More specifically, whereas the number of developments in the Lagos Island area in 2010 was approximately five, 20+ “Class A” projects are now expected to line the Lagos Island landscape resulting in the release of 50,000+ sqm excess capacity in the next 6-12 months.The large supply has had an adverse effect on prices which are expected to decrease by up to 25.00per cent from the highs of 1200$/sqm to averaging around 800$/sqm.
However as supply has increased, the demand dynamics is stifled as occupiers have adopted a wait and see approach given the economic dynamics mentioned above. The question now becomes how to weather the storm until the market dynamic stabilizes/reverses due to a combination of increasing oil prices, government policy reversals and/or the naira devaluation?
Several approaches can be considered:
- Long play attitude: For investors, adopting a long-term play attitude towards the Nigerian real estate market is a necessity. The market is becoming more mature and opportunities for quick wins (quick in and out over five years as adopted by most PE players) is now more limited. However thanks to the population that is still expected to grow to 221 million by 2020, there will always remain a demand for office spaces. Investors will need to design creative long play financial solutions to weather the cyclicality in the Nigerian real estate space which, like other emerged markets, is unfortunately here to stay.
- Flexible and smaller floorplate designs: The majority of international and local occupiers require smaller floor plates averaging about 500sqm. Very few companies actually require spaces larger than 2000sqm and many of these firms typically adopt a built to suit approach (with some exceptions). Developers able to design spaces suitable for both local and international occupiers will establish themselves as long-term players.
- Grade B opportunities: In addition to smaller floor plates, occupiers are becoming more price and quality conscious. Unfortunately in the Lagos Island, most occupiers are forced to choose between one or the other. Developers able to provide both quality and reasonable prices by building class B spaces will carve out a unique and sustainable niche.
- Diversification to other asset classes: in addition to Class B offices, other asset classes should be considered as investment opportunities. Industrial parks with large, medium and small warehouse spaces, smaller strip mall concepts in the retail space are examples of innovative solutions that are in demand and should be considered for the market.
- Lagos Mainland vs. Lagos Island: Whereas the Island Grade A offices are experiencing a down-turn, the opposite is occurring in the mainland where grade A office spaces are not readily available – clearly an opportunity.
- Refurbishments: Investors can also consider refurbishments as a solution. Refurbishments of the various Class C/D properties in the Lagos Island area to Class B could yield interesting results for investors.
- Keep existing tenants ‘Happy’: In the past, Lagos could easily be described as a landlord friendly market. This is changing albeit in the short to medium term. Landlords, who adopt tenant friendly attitudes, providing incentives such as flexible leasing terms, rent free periods, reinstatement allowances, facility management schedules, quarterly payment options etc. will keep and maintain tenants for the long-haul.
By Chinwe Ajene-Sagna