It is interesting how virtual working and virtual shopping have fused into our daily living, fundamentally changing the world, especially the global real estate market dynamics. The initial impact was a downward turn in revenue from shopping malls, office space rentals, and purchases. Although macroeconomic statistics show that adversely impacted sectors are beginning to rebound, one critical fact is that the way our world works may not return to what it was pre-COVID-19.
Will the real estate market in Nigeria make a full recovery? Can companies operate without a physical office or return to the status quo? How can the real estate market in Nigeria make a full recovery to pre-COVID19 revenue levels and grow above it? Perhaps repurposing some of the purpose-built real estate assets to the property types in current demand can give respite? Let’s dive in!
Since the 2016 Recession, retail and office sectors in Nigeria have recorded a decline in performance. In Nigeria, COVID-19 only accelerated the impending decline as factors like xenophobic attacks on malls, reduced office occupancy, remote work, and booming e-commerce were already reducing the demand for office spaces, shopping malls, and retail chain stores. Before the pandemic, the asking rent in Lagos for prime office projects in Ikoyi and Victoria Island (VI) was already down to $700 and $600 respectively from about $1,000 and $800 per square meter while prime shopping centers in Lagos like Ikeja City Mall (ICM) had a weighted average rent of more than $42/m²/month. In contrast with today, these rents have dropped by over 15% between 2016 and 2021. Further deepening this, a number of major anchor retailers including Shoprite, Mr. Price, Woolworths, and Truworths International have recently made an exit from the Nigerian market further declining the real estate demand in their supply chain.
How is this impacting the bottom line of asset owners?
Reports show that Investors have lost over 40% of rental revenue since 2016. Since 2018, the rent and occupancy levels for Grade A office spaces in Lagos have fallen by more than 20% according to data from Knight Frank Africa and Estate Intel. According to a report by W Hospitality Group, the Lagos and Abuja hotel markets since 2016 and through the pandemic have seen a double-digit decline in occupancy rates. According to hotel experts, room occupancy in April 2019 was 63.7% but had dropped by over 30% in April 2020, leaving the market struggling to date. Abuja experienced a 51% drop in occupancy over the same period. There is a widening gap to fill following the exit of these major anchor retailers.
According to Broll Property Services, the ideal average rent in core markets including Lagos was between US$50 to US$80/m² per month in 2016 but is now at a 16% decline over a 6-year period. Even worse, outside Lagos, rentals in less prime locations, previously reported to be within $35-$50/sqm/month before 2016 currently average at $20/sqm/month. It represents a steep 43% decline. Following the facts, we estimate that investors have lost over 40% of revenue on office, hotel, and retail assets since 2016.
How can investors make a recovery? Repurpose, relaunch and sweat their existing assets.
With the world’s revolution post-COVID, investors are constantly exploring ways to adapt assets for alternative uses. Real estate investors across the world are doing this too to make the best of the situation. In a highly sought-after city like Lagos, possibilities exist for investors to benefit from this approach. At the beginning of the year, Growthpoint, South Africa’s largest office developer partnered with Setso and BlackBrick to convert its Riverwoods, Bedfordview office project into a residential villa. This was a clever response to oversupply in the market and the growing demand in the city’s residential sector after the pandemic.
What strategies should you consider when repurposing?
Target sub-sectors with a strong long-term demand pool
At the end of 2021, it was estimated that Nigeria had a housing deficit of over 20 million units. Lagos alone, reputed to be the commercial nerve center of the country, had a deficit of about 3.2 million units. To date, housing Nigeria’s growing population remains a national challenge.
Estate Intel reports that Lagos has approximately 13,490 hospital beds in the healthcare sector, serving a population of over 21 million. This means that there is less than 1 hospital bed to serve a thousand people. It is 88% short of WHO’s recommended 5 beds per 1,000 population.
In a 2021 report by Knight Frank, the real estate consulting firm alluded that changing occupier requirements and fast-moving consumer goods underpin strong demand for real estate tailored to logistics. According to Knight Frank, warehouse demand in Lagos currently stands at over 1,000,000 square meters, with only about 300,000 square meters available for supply.
All these data reflect a strong undersupply of real estate in the residential, healthcare, and logistics sectors of Nigeria’s economy. It clearly shows what investors thinking about repurposing their assets should consider.
There is also a need for investors to position their assets to help address broader economic and social issues.
ESG, Sustainability Considerations, and the need to treat each asset uniquely.
The rising prominence of Environmental, Social, and Corporate Governance (ESG) in our world today is also shifting real estate needs. Responsible and socially conscious investing is another way to term it. Rising global concerns over climate change are prompting actions from all players in the industry. Investors are beginning to demand more sustainable buildings and it is not only because of pressures from governments and authorities. Sustainable buildings tend to save on maintenance and operational costs in the long term.
However, not ‘one-size-fits-all’, location, demand, and local infrastructure will inform what is viable. In the context of Lagos State, possible use cases are likely to range from residential (especially for younger people) to healthcare and pharmaceuticals. Co-working/flex spaces and provision for logistics will occur with demonstrated demand. Although it might be a difficult time for investors, we believe this presents an opportunity to meet a new and evolving market demand.
Let us know how else non-performing real estate assets can be better positioned for profitability. You can check out BuyLetLive.com to find affordable homes that meet your taste and budget. We would love to keep in touch! Follow us on LinkedIn and Instagram for more insights on how to navigate the Nigerian real estate market.