Ninety per cent of property owners in Nigeria hold real estate as asset class because it offers stable income returns, partial protection against inflation, and good diversification strategy, a report has shown.
The pioneer edition of real estate vacancy factor index (VFIX), a report by the Financial Derivatives Company Limited obtained on Monday, described the real estate sector as enigmatic. The report covered Ikoyi, Victoria Island and Lekki neighborhoods. The base month for index was January 2015, just before the country’s general election. That was prior to the last exchange rate adjustment from N186 to N199/$. According to the report, VFIX was up by 65 per cent from the base month, meaning that vacant properties increased by 65 per cent in 15 months.
It noted that there is a strong correlation between real estate and investment, money laundering and public sector corruption.
Furthermore, the report stated that in spite of the supply glut in the state, the cost of rents are still high, adding that developers are funded mainly from family savings, pension assets and illicit Income
It showed that in March 2016, VFIX for residential and commercial was 177 and 148, respectively, stating that both indices increased by 77 per cent and 48 per cent respectively compared to January 2015.
“There is anomaly of high supply and high rent. Macroeconomic challenges drive increasing vacancy. In Lekki Phase 1, an office space in TBC building cost about N30,000 per square metre,” it added.
However, the report pointed out that in Africa, Lagos is not very expensive in dollar terms, disclosing that Cape Town is the continent’s most expensive property zone
“$1 million can buy 1,250 square metres in Church gate and FF Towers of Victoria Island, but can only purchase 255 square metres in Cape Town, South Africa,” it stated.
“Real estate can be used as a hedge against inflation. Increasing trend of the VFIX in tandem with unemployment rate, forex controls discouraging investors, poor stock market returns affecting investor sentiment thereby reducing demand for office space and housing. VFIX will decline as economy improves as we should see decline in house prices,” it added.
A report by Credit Suisse had stated that the advantages of real estate, such as a low correlation to other financial assets and relatively high, stable income returns, have come into greater focus. The real asset character of real estate offers investors stability in the current environment, which is subject to a number of uncertainties.
Thus, it further stated that investors are drawn to those real estate segments that are largely capable of producing income.
“In an international setting, this mainly includes investments in office and retail space. However, rental apartments, logistics properties, senior housing, or hotels are also in consideration. We believe that as a strategic asset class, real estate belongs in the investment portfolios of institutional and private investors.
“Generally, real estate accounts for 5-30 per cent of most investment portfolios. However, the strategic share of a real estate portfolio also depends on the investor›s individual situation and can be fine-tuned in respect thereof. While most investors still have a major home bias in their real estate portfolios, the trend toward a heavier international focus has been on the rise for some years,” it added.