With decline in oil prices remaining the biggest concern for the Nigerian economy, a new report says the outlook for the industrial property market, like its office and retail counterparts, has turned negative, and rents likely to slip over the next six months.

The report by Cluttons Nigeria named Commercial Market Outlook, winter edition observed that the policies of the Central Bank of Nigeria are undermining the market’s ability to reach its full potential.

“The exchange rate disadvantage created through the devaluing of the Naira and the restrictions on US dollar purchases have in particular created a tough operating environment for manufacturing and industrial activities. This has subsequently filtered through to the fast moving consumer goods (FMCG) sector, which has also seen a slowdown in space requirements.”

According to the report, the industrial market still suffers from a significant demand-supply imbalance. And despite the weakness in the economy, rents have held steady throughout the first nine months of 2015.

“Very large warehouse space in excess of 70,000 square feet remains in demand, although there is a very limited amount of stock to service such requirements. And with constraints on land availability in more central locations, larger warehouse space is confined to less populated areas, such as Ikorodu and to parts of the neighbouring Ogun State.

“Away from the traditional offering of self-service basic warehouse facilities, industrial estates offering fully serviced space, including storage, haulage, security, power, water and cleaning have seen limited demand. By their very nature, serviced warehouses command a rental premium of between 25 per cent and 37 per cent, over their basic warehouse counterparts.”

And with the challenging trading environment in Nigeria likely to persist for the short to medium term as we work our way through the current economic cycle, demand is unlikely to pick up. For now however, this space is likely to remain dormant and has arguably been supplied to a market not mature enough to absorb it rapidly. Furthermore, infrastructure and utilities challenges are likely to deter occupiers from agreeing to significant premiums for such space.

In the period under review, Lagos, the gateway to Africa’s largest economy and the wider West African region, is facing the impact of the economic uncertainty has played a central role in the reduction in office space requirements. The hydrocarbon sector in particular, which is arguably the dominant occupier group in the market, continues to consolidate space and reduce headcount, in line with what we have noted in other global oil centres, particularly those in the Gulf.

The Chief Executive Officer, Cluttons Nigeria, Erejuwa Gbadebo, said: “ This has resulted in the return of a number of units to the city’s office market, with Ikoyi and Victoria Island seeing a particularly sharp upturn in the amount of space available to sublet. As we previously forecast, this coupled with the high volume of space that has completed this year has put rents under pressure across the board. In fact, Victoria Island has led the rent declines recorded across the city during the first three-quarters, with rents slipping by almost 13 per cent to USD 750 per square metre (psm).”

Similarly, Ikoyi was the next weakest performing market, with rents dipping by 3.3 per cent to USD 880 psm over the same period. Aside from the hydrocarbon sector, the financial and telecommunications sectors have led the demand for prime office space this year.

For a market that has been historically supply starved, the strengthening supply pipeline will no doubt put rents further under pressure. In addition, the rate of pre-let deals we have been recording has fallen sharply as businesses rein in expansion plans. This has slowed absorption rates and with supply levels edging ahead of demand, this suggests that further rent declines are likely to materialise over the next six to twelve months, particularly as pre-let deals are likely to ebb further.

The report forecasts, “we expect prime rents on Victoria Island to continue trending downwards over the course of the next twelve months, stabilising at about USD 700 psm. At present, deals on Victoria Island are competing in the USD 700 psm to USD 750 psm range; however with weak economic conditions likely to persist, we expect to see landlords becoming increasingly amenable to agreeing to lower rents in order to secure good tenants. Ikoyi, on the other hand, is expected to bottom out at below USD 900 psm. It is too early to assess the impact of any major global economic or oil price shocks beyond 2016.

Under the retail sub-sector, the report says, the market as a whole has been tremendously undermined by the Central Bank’s foreign exchange restrictions, which to a large extent have paralysed the ability of the market to operate normally. This, coupled with import restrictions by the Nigeria Customs Service has put landlords under pressure, with many now offering significant rent concessions, including subsidised fit-out costs, in order to retain existing tenants.