There has been an overall slowdown in activity in Lagos’ commercial real estate market, with rents either stagnating or declining across most segments of the sector, according to leading international real estate consultants, Cluttons.

Cluttons’ Spring 2016 Lagos Commercial Property Market Outlook report attributes the weakness to the adverse global and domestic economic environment, which is in turn fuelling challenging trading conditions.

The Head of Research and Partner at Cluttons, Faisal Durrani said: “The decline in crude oil revenue has taken its toll on all business segments, mirroring what we have seen in other parts of the world. Perhaps most significantly however has been the devaluation of the Naira, which is supporting the high levels of inflation. In addition, the restrictions around foreign currency exchange in Nigeria have put international businesses under tremendous pressure as they struggle to cope with the inability to make payments.

“Furthermore, the deteriorating global economic conditions have also impacted Lagos’ commercial real estate market, with transaction levels dipping and vacancy rates rising across the board, which is putting rents under downward pressure and driving landlords to offering a range of lease incentives to entice demand, although this is still limited to a few landlords and is yet to become the market norm..

CEO of Cluttons Nigeria, Erejuwa Gbadebo explained: “The most expensive office submarket by some way, at the end of first quarter, was Ikoyi at USD 850 psm, followed by Victoria Island at USD 750 psm. While there has been limited movement in office rents over the past six to nine months, Victoria Island is amongst the three worst performing markets in the twelve months to the end of March 2016, with rents falling by 13per cent to USD 750 psm. Q1 2016 however, recorded no change in rents in all seven of our submarkets”.

Cluttons expects more significant falls this year, reflecting the shrinking level of overall occupier activity. In fact, on an annualised basis, rents in Ikoyi have already declined by 7per cent in the last 12 months to USD 850 psm, while Lagos Island has registered a substantial 25per cent reduction in asking rates over the same period (USD 113 psm). This will largely be due to the strong pipeline of office supply. In fact, Cluttons expects some 35,000 square metres of space will be added in Ikoyi and VI, lead by the completion of The Wings and Madina Tower

Gbadebo continued, “Clearly there are challenges ahead for the market, but there are clear opportunities for landlords to position themselves favourably. Our experience in other similar international markets suggests that well maintained and well managed properties will always be in high demand and it is those landlords that demonstrate an understanding of market conditions by offering flexible payment terms and other lease incentives that will be best placed when demand does pick up again.

Cluttons’ report explains that rents in the retail sector appear to have held steady, despite the economic conditions and tough operating environment.

Gbadebo explained: “Many retailers have committed to existing leases with built in escalations, hence no real change in rents will be immediately evident in the city’s key shopping malls. That said, we are aware of instances where landlords have reduced rates to help retailers stay profitable in the tough trading environment. For lease renewals in existing malls and the new malls coming up, however, it’s likely to be quite a different story. We expect to see some falls in rents this year, reflecting the tough operating conditions for retailers”.

The report identifies a growing trend in the retail sector with the growing provision of smaller formal retail centres with gross leasable areas of 5,000 square metres or less. Cluttons identifies this as an opportunity for investors to capitalise on the strong domestic demand, through the provision of quality retail space.

Durrani said: “The formal retail mall market has been traditionally very limited, but with the current capital controls that limit the use of Nigerian credit and debit cards overseas, there is a growing gap in the market for the provision of luxury retail and we expect to see developers home in on this emergent and lucrative niche segment.”

The industrial market appears to have been the most significantly impacted by economic conditions as manufacturers have struggled to remain operational.

Gbadebo concluded: “Demand for warehouse space, both for storage and manufacturing activities, has dropped sharply. However, as the industrial market has historically been plagued by a demand-supply imbalance, the drop in requirements has not forced rents down yet, but this may change should economic conditions remain flat for the rest of the year”.