Investors and developers of prime commercial office space in the property market are seemingly unperturbed by the credit squeeze in the economy and low tenant pool, leading to the glut and veiled competition in the market.
Purely for macro-economic reasons, along with the tragedy at the international oil market, the international oil companies (IOCs) and corporate organisations who are major consumers of prime real estate products, including commercial office space, have buckled, leaving the market with a low tenant pool and competition for those available.
Again, lending to the construction industry, especially to real estate, has come down significantly and lenders, particularly banks, are increasingly selective in the kind of projects they give credit to. The economic recession which also hit the banks, with many of them laying off workers, almost dried up credit facility for real estate. Adetokunbo Ajayi, MD/CEO, Propertygate Investment Company, estimates that lending to the construction sector dropped by over 50 percent by the close of 2016.
But construction activities continue at various project sites in highbrow locations in Lagos and other prime locations across the country. Unlike many residential real estate project sites, where activities have nose-dived, the cranes are still rising and falling at many commercial office building sites, such as the Alliance Place, a 13-floor office tower that will be delivering 6,670 square metres to the market.
Investors are still pushing on with developments. Though work is currently on hold on the 18-floor Dangote Head Office in Ikoyi and the 17-floor Greystone Tower in Victoria Island, for undisclosed reasons, construction activities are upbeat on Kingsway Towers in Ikoyi, Madina Towers in Victoria Island, Atlantic Resort in Oniru, Trinity Towers also in Oniru, World Trade Centre in Abuja, which will rise 15 floors, 15 floors, 16 floors, 26 floors and 22 floors respectively.
“Yes, there is a glut in the Grade A office market”, confirmed Tolu Sokenu, a Principal at Actis, a private equity investment firm, in an interview. Sokenu explained that there was a boom in the economy and every developer rushed to the market to try and create products. “But the question is, do you have the right amenities, especially adequate parking, to attract the right tenants. Some of these developments got stuck and what we have seen is that demand has fallen off, leading to the existing vacancy”, he added.
Expectedly, achievable rents for completed buildings have dropped significantly in the last 12 months. A recent report by Broll Property Services says average asking rents in Ikoyi are on downward trend, averaging US$600 – US$850 per square metre per annum, which is about 2 percent lower than Q2 2016. Achievable rents are 8 percent to 15 percent below asking rents.
Similarly, average asking rents in Victoria Island has dropped by 6 percent to US$780 per square metre per annum. Achievable rents are 10 percent to 20 percent below asking rents. “This situation may worsen, as it is expected that over the next 12 to 24 months, approximately 98,960 square metres of office space is expected to come into the market with 63,640 square metres of that space intended to have been added to the market by Q4 2016”, said Emeka Eleh, an estate surveyor and valuer.
Heritage Place, a 14-floor prime office building, strategically located at the intersection between Lugard and Kingsway Roads in Ikoyi, remains firm with its strong value proposition. “This is the only Leadership in Energy and Environmental Design (LEED) certified building in Nigeria, with 16,097 square metre Gross Lettable Area”, Sokenu said.
The building’s energy mix is the best in the industry and that explains why tenants are assured of energy cost that is about 20 to 30 percent lower than what obtains elsewhere. The security here is top-notch, which is why, in spite of oversupply in the market, the building is about 70 percent occupied with high profile tenants, including Actis, British Petroleum, BBC, HP, Visionscape and others.
As regards the funding of the ongoing projects during a credit squeeze in the economy, Sokenu explained that contract for their funding had been signed before the recession, with tenure commitments. He reasoned that much of the funding also comes from off-shore institutional equity investors, backed by pension funds and real estate investment trusts (REITs).
“The contracts for a lot of these projects were signed before recession. Many of them were meant to be funded by equity. Many of the projects have money budgeted for them with tenures of commitment. Many have agreements signed on how to fund the equity, trusting that the developer knows what he is doing. And don’t forget that real estate is seen as a haven for storing wealth. A lot of people invest in it as way of safe-keeping their money. This, in my view, could be a potential source of funding for these projects”, he said.
CHUKA UROKO
