Economic Update

Published 22 Mar 2013

As Africa’s most populous country, its second-biggest economy and a major hydrocarbons producer, Nigeria has often drawn sizable capital inflows but only in recent years have real estate investors taken a studious look at the sector. Supply shortages in some segments, including high-end office space, have pushed prices and rents to highs in some cases above those of developed countries. With more developments coming onto the market in all segments, bottlenecks may ease, but demand looks set to continue its upward trajectory, underpinned by sound economic fundamentals.

Lagos, with a population that by some estimates is as high as 17.5m, is attracting growing interest from real estate developers and investors, according to a recent report by UK-headquartered property consultancy Knight Frank. The report forecasts continuing demand for high-quality commercial and residential property as the continent’s economy continues to expand and incomes rise. Migration to cities is driving demand for residential space, while growing incomes and increasing consumer sophistication are factors behind the dynamism of the retail property market.

Knight Frank noted that Nigeria’s major cities appear to be “on the cusp of significant advancement” regarding retail activity and that more – and larger – malls will be built in the coming years. The Ikeja City Mall in Lagos, which opened in December 2011, has performed well, the report notes, following the successful opening of Palms Mall on the edge of Lekki in 2006. Though there has historically been little retail development in Abuja, South African retail giant Shoprite opened a new supermarket at the Grand Towers Abuja Mall in 2012.

The report also highlighted the fact that prime office rents in Lagos are among the highest in the world due to a shortage in supply and strong demand from international companies. In the commercial segment, the supply-demand bottleneck has pushed rents in the city above $1000 per sq metre for some buildings, particularly those with high-quality space of more than 1000 sq metres, where the supply is particularly constrained, according to Knight Frank.

However, the availability of good-quality space is expanding and a number of new projects are set to substantially add to supply, including the new Churchgate II building, a flagship office complex, and the longer term 5m-sq-metre Eko Atlantic City development.

As in other emerging markets, the main story in the retail segment is the rise of the mall, both as a retail and leisure destination. South African brands, such as Shoprite, have shown particular enthusiasm for Nigeria. Meanwhile, the industrial sector is seeing investment in factories and warehousing by multinational firms looking to tap into Nigeria’s large internal market, its resources, and its position as a centre for West Africa. There is a trend toward developments outside Lagos, though Nigeria’s underdeveloped power infrastructure may be holding back growth.

Across the board, yields are fairly generous: 9% for residential, 10% for office, 11% for retail and 13% for industrial property in Accra, and 8%, 10%, 11% and 13%, respectively, in Abuja. These may moderate as more supply comes online in each segment, but they still remain well above the levels seen in many developed markets.

However, the sector is also constrained by a number of factors and there are sizable downside risks. Lack of clarity on land rights in some areas, as well as an opaque legal framework, may make some investors wary. One of the reasons that prices are so high relative to average incomes is the cost of construction, and the cost and difficulty of accessing credit is a challenge to smaller developers and less cash-rich purchasers. Uncertainty over payments during the implementation of a project and upon its completion has also led to contractors reassessing their bids.

While there is much potential to ramp up growth in the sector, a number of challenges still pose difficulties. In the public sector segment, where much of the short- and mid-term growth should occur, the problem of cost control is persistent. Not only is the weak naira and the sector’s reliance on imports fuelling cost increases, but also the demand for materials and the pressure on labour prices are adding to contract price pressures.

As many international firms are in Nigeria due to its large hydrocarbons industry and others choose to locate there as a centre for activities in West Africa, real estate is beginning to see increasing interest from international investors. As the economy diversifies, the potential to supply office space – and auxiliary space such malls – could be a lucrative opportunity for property investors.