3INVESTONLINE – We introduce the insightful Q4 LAGOS Real Estate Investment Report by MCORE.

1. INTRODUCTION 

Our Lagos Year to Date Real Estate Investment Report wraps up activity in the Lagos Real Estate Market over the year 2013 and sets the scene for 2014. The Lagos real estate market has finally recovered from the lows of the global credit crunch and is showing increasing strength entering into 2014. Interest rates remain high, however the trend is towards falling inflation rates setting the scene for a potential reduction in bank lending rates come 2014. Economic reforms instituted by the government over the last few years are starting to take effect and along with positive macroeconomic fundamentals across Africa are drawing increasing inward investment into Africa in general and Nigeria in particular.

MCO Real Estate Limited (‘MCORE’) is a real estate investment and financial advisory firm with a focus on the provision of finance, strategic investment advice and operational know-how to our clients in the delivery of large scale real estate and infrastructure opportunities. We believe that by partnering with MCORE, we will afford you a level of expertise and experience that will avail you a much greater probability of achieving success.

We hope you enjoy this report and that it assists your decision making process in relation to investment in Lagos within a wider Nigerian context.

2. NIGERIA ECONOMIC OVERVIEW

The Federal Government is driving far reaching reforms aimed at transforming the economy. Reforms cut across transport (rail, airports, road and ports) power, agriculture, pensions, the electoral system, civil service and the judiciary. Reforms have resulted in airports being refurbished for the first time in decades, privatisation of electricity distribution and generating assets after various previous attempts and improvement of more than 1,664 kilometres of key roads. The electoral system is now more credible, trains are running again for the first time in decades, the banking sector is financially stable and increased infrastructural investment is taking place across the country.

The National Bureau of Statistics states that Gross Domestic Product (GDP) grew by 6.81 per cent in Q3 2013 an increase on Q2 which recorded a growth rate of 6.18 per cent. GDP has increased from a year ago where the corresponding Q2 rate for 2012 was 6.39 per cent. Growth sectors include agriculture, real estate, telecommunications, air-lines, hotels & restaurants and building & construction sectors. In the oil sector, crude oil production has declined both on a quarterly and an annual basis. The decline in crude oil production which was caused by production and export leakages was the major cause of the fall in GDP and continues to be a major threat to Government revenues and level of foreign reserves.

The Central Bank of Nigeria’s (CBN) tight monetary stance has had a positive outcome in that inflation declined from 12 per cent in December 2012 to 8 per cent in September 2013. Inflation has fallen to single digit rates through 2013 at an average of 8.7 per cent since the start of the year compared to an average inflation rate of 12.24 per cent for 2012. The current rate of 8 per cent for September is the lowest rate of inflation since early 2008.

The Nigerian Stock Market continues to make up for lost ground sustained during the global credit crunch at which time international capital flows exited the Nigerian stock market. The All-Share Index (ASI) increased by 36 per cent from 28,078.81 on December 31, 2012 to 38,293 on November 12, 2013. Market Capitalization (MC) increased by 36.34 per cent from N8.97 trillion to N12.23 trillion over the same period. Gains made in the stock market are often ploughed into real estate and the recovery of the stock market bodes well for further gains in real estate asset valuations.

3.   REAL ESTATE FINANCING

With the CBN’s focus on pursuing an anti-inflationary agenda, a number of monetary tightening policies have been put in place which have brought inflation down to 8 per cent but have had the knock-on effect of leading to an increase in bank lending rates. CBN policies including the requirement for banks to hold a Cash Reserve Ratio of 12 per cent for customer’s deposits and 50 per cent for public sector deposits has led banks to reduce their lending portfolios in order to ensure they have the liquidity to meet these requirements.

Other policies negatively impacting the bank’s ability to lend include a 30 percent liquidity ratio (the ratio of liquid assets a bank must have) and a reduction in commissions and fees banks are able to charge customers. In addition, in August, the banks committed to a 0.5 per cent contribution of their total assets and another 0.5 percent of 33 percent of their off balance sheet items to a sinking fund of the Asset Management Corporation of Nigeria (AMCON).

The upshot of the monetary tightening policies being driven by the CBN is that lending rates continue to remain resolutely high with a starving of capital to the real economy. Large scale real estate projects are now the sole preserve of developers able to access single digit international funding prior to attracting local funding from well capitalised local funders that have the capacity to tie down funds over the mid to long term.

4.   REAL ESTATE OVERVIEW

LAGOS REAL ESTATE MARKET OVERVIEW

 

Following on from the mothballing of multiple real estate projects through the years of the economic crisis of 2009 to 2011, the Lagos real estate market has picked itself off the floor and is powering forward. Evidence of the buoyancy of the market can be found in reduction of voids in the choice areas of Ikoyi, sales prices of luxury apartments reaching new highs and the number of new commercial developments in Victoria Island and along the Kingsway Road. A good proxy for tracking the buoyancy of the construction sector is cement sales which are rising faster than nominal GDP growth rates. Construction is being driven by government spending on infrastructure along with private investment at the lower end of the market.

PRIME LAND PRICE MOVEMENTS

The graph below covers prime Lagos Island land price movement over a 2 year period from Q3 2011 to Q3 2013. Over this period, Victoria Island (VI) has remained the most expensive land on the Island. VI has recently crossed the US$2,000 per square metre mark with values currently averaging US$2,049 (N312,596) per square metre. VI is closely followed by Ikoyi at an average price of US$1,700 (N257,208) per square metre. Banana Island values which are similar to prices at Eko Atlantic have appreciated by 17 per cent over the last year and by 79 per cent over the last 2 years showing the strongest price appreciation among its peers. Lekki Phase 1 has shown the least price appreciation over the past 2 years, falling by 4 per cent since September 2011. A reason for the lack of price appreciation in Lekki Phase 1 is the continued availability of cheaper parcels of land further away from the core Phase 1 areas around the Admiralty Road.

The most expensive road on the Lagos Island is Adeola Odeku Street where plot prices can go as high as US$3,213 (N533,333) per square metre. This is closely followed by Kingsway Road with plot prices as high as US$3,012 (N500,000)  per square metre.

THE RESIDENTIAL MARKET

Luxury Apartments

Range: US$600,000 (N100m) +

 

The Luxury Apartment segment is defined as apartment towers of six floors and above with sales prices of US$600,000 and above. Ikoyi has the highest concentration of such properties followed by Victoria Island and then Lekki Phase 1. Over the period 2009 to 2012 this segment of the market experienced numerous challenges characterised by high voids and unsold properties due to the poor economic environment. In recent times, this segment of the market has bounced back with renewed vibrancy evident in the construction of new developments, sales prices breaking new highs and reduction in rental voids.

Current average 3 bdrm sale prices in Ikoyi stand at US$1,246,000 (N206m) and rents at US$69,000 (N11.4m) per annum, in Victoria Island at US$563,000 (N93m) and rents at US$49,000 (N8m) per annum and in Lekki Phase 1 at US$361,000 (N60m) while rents stand at US$22,000 (N3.6m) per annum. The weakening of the Naira over the past few months has made dollar denominated rental prices less affordable in the local market.

 

 

Mid Range: Gated Housing Estates

Range: N30m – N100m (US$180,000 – US$600,000)

 

New housing estates continue to be launched particularly along the Lekki-Epe Expressway from Chevron Toll Gate towards outer Lagos where large tracts of land are still available at an affordable price. The ongoing development of the new international airport and the free trade zone also make this axis an attractive destination for future development. A 4 bedroom detached house in a gated estate along this axis stands at an average price of US$305,000 (N50m).

Low Income Housing

Range: N3m – N10m (US$18,000 – US$60,000)

A prime reason for the dearth of affordable housing in Nigeria remains the continued lack of a vibrant and sustainable mortgage market. The Nigerian housing deficit estimated at circa 17 million units is said to grow at the rate of two to three million units a year. In taking concrete steps to address structural issues causing the housing deficit, the Federal Ministry of Finance in collaboration with the Central Bank of Nigeria, the World Bank Group, Department for International Development (DFID) and mortgage banking institutions is setting up the Nigeria Mortgage Refinance Company (NMRC).

As the name implies, the NMRC will refinance mortgage banks. It will do this via the purchase of mortgages from mortgage banking institutions, packaging them as securitised instruments and selling them on the secondary market. The NMRC will enter into existence with an initial capital base of N20 Billion (circa US$120m). The additional liquidity provided by the institution is expected to enable sustainable mortgage lending by mortgage banks via the NMRC standing in as an off-taker of mortgages in the primary market. The NMRC is projected to set in motion a growth process that will deliver 75,000 houses per year and generate and sustain at least 300,000 direct and close to half a million indirect jobs over time.

 

THE COMMERCIAL OFFICE MARKET

Victoria Island remains the primary Central Business District of Lagos and continues to attract new office developments to the area despite the pressure on road and drainage infrastructure that leads to flooding, traffic congestion and bad roads. Victoria Island holds approximately 3 times as many office towers as Ikoyi with average rental prices standing at US$570 (N94,000) per square metre compared to US$500 (N82,500) per square metre for Ikoyi commercial office space. Prime office rents stand at US$1,000 per square metres with new developments currently in the pipeline expected to set new rental highs at US$1,200 psqm and above.

 

THE RETAIL MARKET

The retail sector continues to offer strong opportunities for institutional investment returns based on the demand for consumer goods from the emerging Nigerian emerging middle class, the demand by international retailers for world class retail space in order to access a market of 160 million consumers and the attractive return on investment figures generated by existing malls.

Opportunities for retail development abound with only two international standard malls in operation in Lagos (The Palms, Lekki and Ikeja Mall) and two in the pipeline (Festival Mall by UACN Property Development Company (UPDC) and Falomo Shopping Centre redevelopment by Hiers Holdings in conjunction with Lagos State Development Property Corporation (LSDPC). The re-development will also include commercial office space and luxury residential apartments. Prime retail rents currently stand at US$1,800 per square metre.

THE HOSPITALITY MARKET 

Lagos branded hotel room rates are very high with standard rooms averaging US$385 per night. Majority of the international brands are already well represented including Sheraton, Golden Tulip, Protea, Intercontinental, Sun International, Radisson, Best Western and Ibis. In addition, Marriott Hotels has very recently announced the acquisition of Protea Hotels which operates a number of hotels in Lagos. The purchase of an Africa focused hotel operator by an international chain is evidence of the significant untapped potential for travel and tourism driven by Africa’s emerging middle class in general and a rapidly growing market of young sophisticated travellers in particular.

Important Risk Warnings and Disclaimers   This document includes information obtained from sources which MCO Real Estate Limited (‘MCORE’) believes to be credible but which it has not independently confirmed. MCORE, its advisors, directors or employees do not make any assurances, guarantees, representations or warranties as to its accuracy, reasonableness or completeness and neither MCORE nor its advisors, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from the use of this document or its contents or otherwise arising in connection with this document. The opinions presented in this report may be changed without prior notice or cannot be depended upon if used in the place of the investor’s independent judgement.

 

2013-12-03