Review of the Real Estate Sector in 2017 and Expectations for 2018

In 2017, the Nigerian economy and investment market was in distress. For most Nigerians, being lost in the surging tides was a whole lot easier than staying afloat. Nigeria as a country managed to survive the storm of 2017. In this piece, we review 2017 as a guide to what lies for the real estate sector and it’s affiliates in 2018.

Though the economic climate in the country was quite harsh in a greater part of 2017, there was a rebound towards the end and this was via the decisive actions taken by Vice-President Yemi Osinbajo who deputized for President Muhammad Buhari while he was on medical leave.

The naira came back to life following several falls, facilitating ease of doing business for foreigners and locals alike and calming nerves in the Niger Delta, which led to the much-needed increase in the nations crude oil output, amongst others.

However, we capped 2017 with a fuel crisis whose echoes still linger. Also, government has continued to borrow heavily to finance budget deficit

Though 2017 may have opened with one too many uncertainties, a 0.55% GDP growth in the second quarter of 2017 was a sufficient score line to declare the nation free from a 5-quarter long recession.

The announcement seemed to spark a renewed confidence as both individuals and corporates gradually began investing in residential and retail real estate. The equities market closed at 42% annual returns, the highest since 2013. GDP would grow by a further 1.40% in the third quarter.

In the course of 2017, some weighty projects were announced; projects like the Mambilla Power Project, the Nationwide Housing Scheme and the rehabilitation of over 25 major highways

In what can now be described as the most recent boom years of Nigeria real estate (2012 – 2014), prices rose to very high and perhaps irrational levels. But in 2016 pushed by the recession, many analysts concede that there was a correction.

In 2017, the real estate market stood corrected. Prices, yields and other performance indicators stayed stagnant, declined or ascended very mildly.  As this was not the year for supernormal profits, it was also not the year of bankrupting losses.

This position is seen also in the construction and real estate contributions to GDP, which moved marginally from 3.09% to 3.12% and 7.17% to 6.79% respectively.

Real estate not showing as much improvement being a reactionary sector with a lag of one or two quarters vacancy rates have gradually started to reduce across the residential, retail and office uses, thanks to improved economic prospects by the third quarter of 2017.

Many private developers have returned to site on both small and large projects even as construction costs stabilized in comparison to the volatile periods of the past year. Many more completions are foreseeable in 2018.

Bare land remained the real estate sub-class of choice as prices and yields continued to appreciate in most locations, in contrast other use classes, which have been impacted much more adversely by economic headwinds in recent years.

Land prices in 2017 showed appreciation in most areas. Ikoyi and Lekki Phase 1 saw growth rates of 10.83% and 15.25% respectively while Magodo GRA showed signs of recovery later in year after declining in the first half of 2017. Ibeju Lekki on the other hand has witnessed a 500% increase in the prices of properties in the last five years due to the developments moving towards that area.

Prices in places like Agungi, Abraham Adesanya and Ikeja increased moderately benefitting from increased population and demand. Victoria Island on the other hand declined by 29%.

Land reforms bordering on land accessibility and titling have long been a topic of much discussion between the Government, Real Estate Professionals, the Academia and Private Individuals. Working from the Ease of Doing Business plan, steps were taken in resolving land transaction bottlenecks starting with Lagos State which earns over ₦20.7Bn in Land fees.

A key objective was to reduce the number of days required to register property from over 77 days to 30 days. To achieve this, the need for a sworn affidavit as a procedure for conducting a Title search at the Land Registry was made redundant.

The requirement for stamping Deeds of Assignment was then merged with the final registration process for lands owned by the State Government. Again, the re-constructed Lands Registry Service centre was commissioned to improve customer service. Still, time required for Governors consent continues to exceed that of countries with similar laws and consequently will hinder the development of the real estate sector in Nigeria if it continues to rear its ugly head this year.

Again, 2017 saw the revitalization, commencement and continuation of more than a few infrastructure projects; many of which are critical not only to opening up new real estate hot spots, but also driving key economic investments in the country as a whole and 2018 will hopefully be no different.

For Lagos state, the city has been enjoying an increased level of infrastructural development which is evident in the quality and quantity of projects they’ve undergone and possibly completed in the past two years. The Ajah and the Abule-Egba bridges were completed in 2017

Service charge pricing and collection is increasingly a contentious issue in many of the gated estates and multi-tenanted developments. Landlords could manage with nil increments in rents but found it difficult running their facilities due to defaults in service charge payments. Ten there is this issue of the new land use charge bill that was passed recently. The controversial land use charge bill remains a topic of heated discussion

Port Harcourt had the highest vacancy rates compared to Lagos and Abuja, averaging at 12%, like Lagos and Abuja, this is also down from 13.75% at the mid-point of 2017 and 13% at the end of 2016. The market has been described as not vibrant and Landlords have dropped rents marginally to maintain existing tenants.

“To Let” boards are fast becoming a major feature in the city especially in mid to high-income localities. Purchasing power has dropped and tenants are choosing to maintain their current locations by negotiating favourable rents.

There is a clear lull in the demand for luxury apartments of all sizes. The effect of the gradual improvement in the economy is yet to influence spending in the city. To help curb the financing challenges of housing, the Mortgage Warehouse Funding Limited (MWFL) was launched in the third quarter of 2017 to provide short-term pre–financing in local currency to Mortgage Banks to strengthen their mortgage origination capacity.

As rents reduced and stabilized, more firms were better positioned to lease some space in Grade-A buildings. In particular, companies bound by international standards were compelled to negotiate leases in A-rated buildings to maintain company policy.

To attract tenants, Landlords continued to deploy incentives such as rent-free periods, flexible lease payments, fit outs and the provision of soft furnishing. But the rents look good to be stabilized in 2018.

Ikeja with its access to major nodes in Lagos currently ranks as the most active market for industrial space as areas originally used for manufacturing are being converted to warehousing use.

The next most demanded area for space is the Isolo Industrial area where mostly smaller spaces were leased in 2017 and this trend may continue in 2018. Private firms with many employees are increasingly converting warehouses to office use to avoid the costs of conventional office space.

The recent murderous activities of Fulani herdsmen and continued misguided attacks perpetrated by Boko Haram in some parts of the country means that 50% of the country’s land area is undesirable for commercial real estate activities or significant investments.

Property prices either stayed constant or declined in most locations, only rising in select areas where quality and location induced growth. Significant increase in properties put for sale either at market value or below market value owing to dire need for liquidity.

Last year, land prices were also stagnated in some locations due to the lower buying power of consumers owing to high inflationary trends in the country, although some locations witnessed marginal increases on the Island and Mainland locations.

Investment in land seemed being the best form of real estate investment considering the high cost of developing property. Implementation of the whistleblowing act also had far reaching consequences on the real estate sector and sadly they are not positive.

Land grabbing law was signed in Lagos State. This was done in an attempt to curb the nefarious activities of the Omo-Oniles, ease business transactions, improve competitiveness and attract both local and foreign capital. Survey fees were also increased in locations across the state thereby threatening homeownership. Subsequently. it was vehemently rejected by stakeholders

That said, there is no denying that the country has significant housing and infrastructure deficits, which are inextricably linked to the growth of the economy and the quality of life of the citizenry.

As the current administration prepares to run for another term, many will be looking over the last four years for actual evidence of success.