Cluttons, a leading firm of international real estate consultants, has noted that there has been an overall slowdown in activity in Lagos’ commercial real estate market, with rents either stagnating or declining across most segments of the sector. Cluttons’ Spring 2016 Lagos Commercial Property Market Outlook report attributes the weakness to the adverse global and domestic economic environment, which is in turn fuelling challenging trading conditions.
According to Faisal Durrani, Head of Research and Partner at Cluttons, “The decline in crude oil revenue has taken its toll on all business segments, mirroring what we have seen in other parts of the world. Perhaps, most significantly however, has been the devaluation of the Naira, which is supporting the high levels of inflation. In addition, the restrictions around foreign currency exchange in Nigeria has put international businesses under tremendous pressure as they struggle to cope with the inability to make payments.
“Furthermore, the deteriorating global economic conditions have also impacted Lagos’ commercial real estate market, with transaction levels dipping and vacancy rates rising across the board, which is putting rents under downward pressure and driving landlords towards offering a range of lease incentives to entice demand.
Expensive office sub-market
Although this is still limited to a few landlords and is yet to become the market norm”. The Chief Executive Officer of Cluttons Nigeria, Erejuwa Gbadebo, said the most expensive office sub-market at the end of first quarter was Ikoyi at the rate of 850 USD per square metre, followed by Victoria Island at the rate of 750 USD per square metre.
Gbadebo added that while there has been limited movement in office rents over the past six to nine months, Victoria Island is among the three worst performing markets in the twelve months to the end of March 2016, with rents falling by 13 per cent to 750 USD per square metre, pointing out that “Q1 2016 however, recorded no change in rents in all seven of our sub-markets”.
According to him, “Cluttons expects more significant falls this year, reflecting the shrinking level of overall occupier activity. In fact, on an annualised basis, rents in Ikoyi have already declined by 7 per cent in the last 12 months to 850 USD per square metre, while Lagos Island has registered a substantial 25 per cent reduction in asking rates over the same period (113 USD psm).
“This is largely due to the strong pipeline of office supply. In fact, Cluttons expects some 35,000 square metres of space will be added in Ikoyi and VI, lead by the completion of The Wings and Madina Tower”, Gbadebo noted.
Gbadebo continued, “Clearly, there are challenges ahead for the market, but there are clear opportunities for landlords to position themselves favourably. Our experience in other similar international markets suggests that well maintained and well managed properties will always be in high demand and it is those landlords that demonstrate an understanding of market conditions by offering flexible payment terms and other lease incentives that will be best placed when demand does pick up again. “Cluttons’ report explains that rents in the retail sector appear to have held steady, despite the economic conditions and tough operating environment. Many retailers have committed to existing leases with built in escalations, hence no real change in rents will be immediately evident in the city’s key shopping malls.
“Having said that, we are aware of instances where landlords have reduced rates to help retailers stay profitable in the tough trading environment. For lease renewals in existing malls and the new malls coming up, however, it is likely to be quite a different story. We expect to see some falls in rents this year, reflecting the tough operating conditions for retailers.
“The report identifies a growing trend in the retail sector with the growing provision of smaller formal retail centres with gross leasable areas of 5,000 square metres or less.”