In basic accounting, rents are classified as an operational expense. However, these days, one begins to wonder whether rent is actually an operating expense as the amounts are now tending towards the cost of some capital projects. While this might sound like an exaggeration, paying rental fees is fast becoming one of the expense lines that take the biggest chunks of Lagos residents’ annual income.
Research we conducted a month ago revealed that in Lagos, residents now spend as much as 70% of their annual income on rent. Our recent analysis of residential rent pricing across the city also found that the average asking rents for properties have increased by over 20% in the last 12 months. As input costs continue to be on the rise, property development budgets are at their all-time highest, as the mismatch between general demand & supply continues to widen; rental prices are driven further up.
For starters, what does this mean for the average Nigerian looking to rent an apartment? How does this increase impact the purchasing power and saving culture? What does it mean for property developers and investors? These questions and more are what we discuss in this article. Before we dive deeper, here are some key takeaways.
● Average rental price in Lagos has increased by over 20%.
● Rental prices for properties on the “Island” in Lagos are now 37.5% higher than in the rest of the city.
● Asking rents in Lagos frequently represents closing prices.
● Rising construction costs may not fully justify the extent of rental price surge as even the asking price for older properties match closely to newer ones.
● Lagos residents in general, now have more rent burden to bear in addition to hikes in the prices of other commodities.
● Average personal savings have likely deflated by at least 25% since last year.
The average rental price has increased by over 20% and there is barely enough room for the renters to negotiate.
After a detailed analysis of our citywide property listings database, we found that the average rental price in Lagos grew over 20% in the last 12 months. This data point is striking for us, and probably you too. While it is good news for developers and Landlords, it means that the average Lagos resident whose income may not have seen a similar increase in the period now has more rental burden to bear in addition to the surge in the price of other commodities.
In most markets, asking prices are usually subject to negotiations between the Landlord and the proposed tenant. Typically, negotiation windows range from 1% to as high as 20%. Conversely, the Lagos rental market does not allow much room for negotiation. An intense demand pressure throws a high volume of requests to Landlords who then rent to the highest bidder. This logic is how asking prices in Lagos end up becoming the actual price that tenants pay.
With rental fees being demanded one year in advance, the expense is even more burdensome. Our research showed that about half of Lagos’ population will need to spend up to 70% of their annual income on rent if they were to get decent apartments in locations close to the Commercial and Business Hubs. Going by the data from the Nigerian Bureau of Statistics, the headline inflation rate as of May 2022 stood at 17.71% on the backdrop of rising energy prices and Food inflation at 19.5%. The overall implication is that the average person in Lagos now has more financial burdens to bear.
One of the most obvious reasons for increasing rent is the rising cost of construction. Like in every production market, an increase in input cost mostly results in a corresponding increase in the selling price. Ideally, rental fees of new developments may increase at the rate of the inflation of construction materials, but a lower fee increase is expected for older structures. Yet, when we analyzed our pool of property listings, we discovered that even older projects, barely carrying renovation expenses, are also pricing significantly high.
This increase in rent means that potential renters also have to pay the higher agency and legal fees, which are tied to the rental fees. A number of prospective renters we spoke with pointed out that these fees are major discouraging factors. After we dug deeper, we found that the asking rent in some locations has grown more than in other locations across Lagos.
Rent prices in Lekki 1, Victoria Island, and Ikoyi have grown at 37.5% above the average growth rate in Mainland locations. This is not surprising because property owners now spend more to build houses, and therefore charge higher to compensate for the high cost of land and other location-specific cost factors. Most properties on our database for Lekki 1, Victoria Island, and Ikoyi are either recently built or renovated. Due to this, property owners in these regions have reason to charge higher than similar projects in other parts of the city. The cost of land in these locations is also higher, warranting developers to charge more, to cover associated costs.
Among all property types analyzed, 3-bedroom apartments had the highest price change.
Based on tracked data, we noticed that the asking price for 2-bedroom apartments across Lagos has grown higher than other apartment types. Asking rents for a single bedroom, 3 bedroom and 4 bedroom increased at 26%, 24%, and 22% respectively. On the other hand, the asking price for 2 bedrooms increased by a whopping 27% in 2021. An emerging and more prominent reason is that young professionals working remotely need extra room to accommodate a home office. It accounts for the reduction in the supply of 2-bedroom apartments compared to other property typologies. This creeping scarcity adds to the increase in cost.
In a nutshell, there is more financial pressure on the average Nigerian. The cost of transportation, food, and other basic living necessities have increased over the year. While many are struggling to keep up with this, the rise in rental rates would mean that residents either find alternative sources of income or figure out creative ways to manage these costs.
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