Despite a significant improvement in macroeconomic fundamentals as reflected in reduced inflation, positive GDP growth and increased foreign exchange (FX) supply, landlords of prime office space still have to worry about rents that dropped 7 percent to $710 per square metre per annum in the third quarter of this year.
The new rent, which prevails in the Ikoyi sub-market in Lagos, came down from $765 per square metre per annum in the previous quarter. Rents in Victoria Island dropped 7.8 percent to $640 per square metre per annum, down from $690 square metre per annum.
Another source of worry for the landlords is the attitude of existing tenants who are taking advantage of the supply glut and high vacancy rate in the market by seeking renegotiations of lease agreements for more favourable conditions.
In Ghana, Nigeria’s next-door neighbour, the narrative is also the same, save for the volume of transaction and size of the market. A new report by Broll Property Services notes that the prime office market in that West African country remained sluggish in the third quarter of this year, despite the country’s strong economic growth.
Ghana´s economy grew 9 percent year-on-year in the second quarter of 2017, above a 6.6 percent rise in the previous period. It is the country’s highest growth rate since the third quarter of 2014, mainly boosted by 188 percent jump in the oil and gas sector.
On a quarterly basis, the economy expanded 2 percent. GDP annual growth rate in Ghana averaged 6.84 percent from 2000 until 2017, reaching an all time high of 25 percent in the first quarter of 2012 and a record low of -3.80 percent in the first quarter of 2014.
In spite of all this, the office space market remained under pressure. Enquiries remained steady, though there were minimal transactions with interest mostly for spaces between 60m2 to 200m2. “Prime monthly rental declined further to an average of around $33 per square metre although rents ranged between US$30 per square metre to $35 per square metre,” says Elaine Wilson, Researcher, sub-Saharan Africa, at Broll.
The new report by Broll, which spotlights the performance of the real estate sector in the third quarter of the year, reveals that in Abuja, where rents were charged in dollars before now, the appeal of naira rents resulted in some level of activity, but demand was still growing at a much slower pace than supply.
“The frequency of completed transactions in the office market has slowed this quarter relative to other time periods. Although the trend of the relocations to A-grade buildings from B-grade and standalone buildings by corporate persists, general activity has decreased due to a supply glut which resulted in high vacancy rates,” says Nnenna Alintah, head of Occupier Services at Broll
Alintah notes, however, that there were notable occupations of A-grade spaces with favourable lease conditions to account for the oversupply in the market, but these transactions were restricted to smaller sized spaces of 200 square metres to 500 square metres.
Munachi Okoye, chief executive of MCORE Limited, had, in an earlier report by his company, noted that the new prime Ikoyi/Victoria Island space commanded rents as high as $750 per square metre, but rents for Class B space formerly classed as A space have fallen from a high of up to $900 per square metre a couple of years ago to as low of $450 per square metre in order to remain competitive.
To sustain their business and continue to earn income from their investment, landlords have become innovative with incentives in order to retain tenants in a market with high vacancy levels. Some of the incentives include rent concessions, longer rent-free periods, more flexibility in frequency of rent payments and in certain locations, rent rebasing to naira rents.
It is hoped that the market will turn the corner as the economy continues to improve. “We expect that the ongoing positive trend in the macro-economy will persist and is likely to have spill-over effects on the office sector,” Alintah affirms, adding, “in light of the fairly positive sentiment, we are likely to see a gradual upward shift on the risk curve of investors towards assets such as real estate.”
But the existing oversupply of space will remain in the short to medium term, which may put further downward pressure on asking rentals. An additional 21,000m2 of office space is expected this year in from the delivery of Alliance Place, Kingsway Tower and Desiderata Tower. Trinity Towers and Cornerstone Tower are anticipated for delivery in 2018, bringing an additional 23,000 square metres of space into the market.
