By Alex Chiejina
LAGOS (Sundiata Post) – The Real Estate Vacancy Factor Index (WFIX) has increased marginally to 165 in March 2016 from 160.7 in January, having climbed substantially in earlier months. The number of properties that were vacant in Lagos in March 2016 was 65% higher than in the base month in January 2015, according to latest findings by real estate experts. Vacant properties were higher in Lekki (64%) followed by Victoria Island (35%) and Ikoyi (24%).
Sundiata Post gathered that Admiralty Way in Lekki, Lagos has the highest vacancy ratio which is not surprising giving the challenges that businesses face in the current macroeconomic environment; most properties on the street are offices and commercial spaces.
Rental prices of vacant properties in these high-end locations have remained sticky downwards. For example, an office space in Lekki Phase 1 costs N30,000 per square metre in TBC building. To rent a 1,250 square meter house in the same area costs about N8 to N10 million annually on Admiralty Way and N5m to N6 million per annum in other Lekki streets.
Empirical evidence reveals that approximately 90% of Nigerian investors hold real estate as an asset class in their portfolios. The locations of their real estate investments are principally in Lagos, London, Dubai, New York, Atlanta and Accra.
There is however a scarcity of data, analysis and information about the Nigerian market. The sector has become enigmatic because of the strong correlation between the investment, money laundering and public sector corruption. This is why rents remain stubbornly high even when there is a supply glut.
Meanwhile, premium properties across the globe have remained high. The 2016 Knight Frank wealth report reveals the 10 most expensive cities in the world of luxury properties in 2015. In Monaco, the most expensive prime property area in the world, $1m can purchase 17sq.m. In Cape Town, Africa’s most expensive prime property zone, $1m can acquire 255sq.m. Limited supply of land and houses in cities such as Monaco and Hong Kong drive up prices of expensive real estate properties.
Though Lagos is an expensive city, $1m can secure 1,250 sq.m of prime property in ChurchGate and FF Towers in highbrow commercial buildings in Victoria Island. In essence, prime property is generally five times more expensive in Cape Town than in Lagos.
Persistent macroeconomic headwinds in recent times have led to lower demand for prime properties in Lagos. Stock broking firms, investment banks, insurance companies, airlines and oil companies that usually rent these properties for office space or residential use are experiencing a business downturn.
The VFIX is a lagging economic indicator. An example of a lagging indicator is the 2008 global economic meltdown, which led to the subprime lending crisis. This meltdown was engineered by a decline in the U.S. federal funds rates, which indirectly reduced the mortgage rates at the time. Subsequently, a period of excess liquidity created excess demand in the housing market, resulting in higher housing prices. Some homeowners took out more mortgages against this added value to use for consumption, creating a housing bubble. The collapse of the housing bubble preceded a high default on subprime loans.
In March 2016, the VFIX for residential and commercial properties was 177 and 148 respectively. The year to date comparison shows that the indices have increased significantly by 77% and 48% respectively, compared to January 2015.
The indices remained flat compared to February 2016. This is possibly due to the lagging effect of the VFIX. Supply of units has increased in excess of demand. Residential VFIX is much higher than commercial VFIX because of the rigidity of costs incurred by businesses; it is not easy for business owners to find alternative options in the short term. Also, the commercial index has been stagnant from January until March.
The likely outcome of this rise in vacancy factor is a situation in which developers wait on the side line in anticipation of improved economic conditions before embarking on new projects. This is because upon completing a building, these developers become landlords and join the rental market.
The “to let/for sale ratio” in March 2016 was 2.3:1. This suggests that for every property that was put up for sale, 2.3 properties were available for rent. This ratio reveals that the economic severities have had limited impact on property owners. However a sustained slowdown in the economy would drive up the “for sale” side of the ratio. Looking from a different angle, individuals in the Nigerian economy have faced a number of economic issues reducing their cash flow.
The jump in the inflation rate from 8.2% in January 2015 to 9.6% in December 2015 has reduced the purchasing power of individuals within the economy. As a result, the value of individual incomes has declined both in nominal and real terms.
Given that this research focuses on luxury areas, a decline in income is expected to reduce the demand for housing. Following, the real estate industry is used as a hedge against inflation. This is because real estate assets are long-lived assets that adjust to inflation, which explains the increased supply of housing. Specifically, inflation increases the value of the housing property, which provides incentives for new initiatives in the real estate market.
The increasing trend of the VFIX is in tandem with the unemployment rate, which increased from 7.5% in Q1’15 to 8.2% in Q2’15. The effect of unemployment on VFIX should take about nine months before realised as the adjustment process takes time. Specifically, the unemployed cannot afford to pay for the current housing and will most likely move out to cheaper options, or in some extreme cases back into parents’ homes.
Looking forward, with the 2016 budget that has been passed officially, analysts foresee a trickle-down effect in the real estate sector which is expected to reduce the VFIX in the second quarter. However, given that the index is lagging, the effect may only be seen from June.
A decline in house prices if the economic headwinds persist is anticipated with a switch in real estate pricing from dollars to naira likely as landlords live with the effect of the economic challenges
