Why repurposing assets is now a major need in Nigeria's real estate market

Why repurposing assets is now a major need in Nigeria's real estate market

Why repurposing assets is now a major need in Nigeria's real estate market

15th July, 2022

4 minutes, 32 seconds read

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.

 Your thoughts?

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.


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5th July, 2022

4 minutes, 42 seconds read

Lagos Rental Price Index – 12 months post lockdown

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.

Source: BuyLetLive

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.

Source: BuyLetLive

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.

You can follow us on LinkedIn and Instagram to get more insights on the latest in the Nigerian real estate market. We would love to keep in touch. Send your comments and feedback to research@buyletlive.com.

14th June, 2022

4 minutes, 43 seconds read

Does the 10% recommended commission rate for Estate Agents really apply?

 If you have done real estate transactions in Nigeria, you may have noticed the variation in service fees that agents charge on successful deals. These variations are more noticeable in states that have big ticket transaction running into hundreds of millions and billions. One of the biggest contentions in the real estate market is the question of what constitutes appropriate agency commission on real estate transactions. What is the ideal fee? Is there an official document that sets the standard or scale for such service fees or is it at the discretion of the agent?  We spoke to some of the players in the industry and will share their views on these questions and more in this article.

Before we dive in, it is important to mention that the Nigerian Institution of Estate Surveyors & Valuers (NIESV), and The Estate Surveyors & Valuers Registration Board of Nigeria (ESVARBON) are the professional bodies established to regulate Estate Surveying and Valuation profession in Nigeria; of which “Real Estate Agency” is one of their services. The institution is recognized by the government under the enactment of the Estate Surveyors and Valuers (Registration Act) Decree No. 24 of 1975. You may use this link to read more about the laws establishing the NIESV/ESVARBON. For the purpose of this discussion, we will be reviewing the professional scale of charges set out by these bodies.

 Agency fee in Nigeria is 10% of Gross Rent Payable, or Gross Proceeds of Sale/Purchase.

In 2014, the NIESV set out to review the Institution's Professional Charges in line with contemporary realities in Nigeria and consistent with global best practice. Based on the revised scale of charges, an agent in Nigeria is expected to charge 10% commission on gross rent payable, or gross proceeds of sales on a property as the case may be. This is meant to be the standard practice, yet, if you are familiar with the industry, you will see that a 10% commission rate is not usually the case. The commission rate is often subject to negotiation between the parties.

When we looked at global practice, we found that the recommended charge for real estate associations in the U.S and U.K falls below the 10% rate. For instance, agency commission in the United State is between 5-6% of the transaction value and usually varies depending on location. Commission on property transactions consummated in the San Francisco area attracts a 5.04% agency commission while those in Atlanta can charge as high as 5.98% . In the U.K, the fees are between 0.75% and 3.0%+VAT on transaction value.

After giving a close look at the agency fees set out by the NIESV and comparing it with the U.S and the U.K, a few things stood out.

10% Agency commission in Nigeria is high, and this is giving too much room for negotiation.

Generally speaking, commissions on real estate transactions are usually negotiable anywhere in the world, what makes the big difference is the negotiation window. In the US, the agency commission range is between 0.75% and 3.0%+VAT which is quite wider than the 5-6% range in the U.S. This allows agents to negotiate within this range, and the final fee depends largely on the value of the transaction. For transactions exceeding £500,000, agents are most times willing to accept commission closer to the lower end of the scale. If an agent for instance agrees to charge a 1% fee on a £500,000 deal, the commission would fall around £5,000.

Bringing this home, we found that irrespective of the recommended 10% agency fee in Nigeria is 10%, the actual commission that agents achieve in practice can range from 0.5% to as much as 20% of the transaction value. Agents can charge as much as 20% commission on rental transactions of less than ₦1 Million value. On the other hand, it is quite difficult for sellers to pay up to 10% fee on sales transactions, especially if the value of the property runs into hundreds of Millions and above.

We spoke to Chibuzor Arukwe who is an Associate member of the NIESV/Deputy Head of Valuation at Diya Fatimilehin & Co, a leading Estate Surveying firm in Lagos. He mentioned that transaction fees are now dependent on the negotiation power of the parties involved in the transaction. Speaking on the impact, Chibuzor mentioned that other Agents are willing to collect lower fees on transactions and this is making the competition even tougher.

This 10% commission cap is not realistic across all transaction types and this is making compliance much more difficult.

While setting a 10% standard rate can sound reasonable considering the unique economic realities in Nigeria, this high rate is opening room for negotiations and concessions beyond reasonable boundaries. A seller who is disposing of a property worth ₦1 Billion naira will most likely never agree to pay a 10% (₦100 Million) commission to the Agent. On the other hand, most Agents will argue that a 10% (₦50,000) fee is sufficient to compensate for the troubles associated with renting out a ₦500,000 rental property. What this does is that it throws open a wide window for negotiation between the parties, and without a negotiation ceiling set by authorities, the process ends up creating a loser vs winner situation. Speaking on this, Chibuzor also noted that the 10% cap is giving leverage to quacks to penetrate the market. He described quacks as unlicensed individuals who are operating as one man businesses. According to him, they have minimal expenses and no administrative costs to bear and therefore can afford to take almost anything as agency commission on transactions. 

Unlike in the U.S and the U.K where the negotiation window is very well defined with relatively high levels of compliance, Nigeria’s high agency commission rate has opened room for foul play among practitioners in the field. The market has become very competitive, which has forced a number of agents to cut on their revenue in a bid to secure briefs. Picking a page from the practice in the advanced world, agency commission should at least be a range, to start with. Where this exists, it is easier to have a guided negotiation. Much more work is needed in regulating Agency practice in Nigeria, and developing a more flexible scale of charges is one.

We will be happy to hear your thoughts. Follow us on LinkedIn to join the conversation and across all social media platforms, to access insights on the Nigerian real estate market. You can also send your comments and feedback to research@buyletlive.com We would love to keep in touch.