Report links slow office rental growth to oversupply

A Knight Frank report has stated that office rental growth across Nigeria was affected by an oversupply of office space.

“Notably, the prime offices’ occupancy levels in Lagos and Abuja stand at over 80 per cent. Despite this return in demand, office rental growth across Nigeria is being tempered by an oversupply of office space, especially in Lagos.

“For instance, the completion of Centrepoint (Famfa Towers) and Trinity Towers, located in Ikoyi and Victoria Island, respectively, have together added 30,000 sqm of new office space to the Lagos office market. Consequently, tenants remain firmly in the driving seat when it comes to lease negotiations. Monthly prime office rents have held steady for the third quarter in a row at c.US$ 50 psm,” it noted.

It added that disruptive economic policies, and currency demonetisation in 2023 contributed to weakened growth in retail real estate development in Nigeria.

The report stated that the continuous rise in inflation in the country, which climbed to a 15-year high of 33.2 per cent in March, had curbed consumer spending and retail footfall.

“Over the past 12 months, some prominent retailers, such as South Africa’s Mr Price and Shoprite, have exited the market, citing macroeconomic volatility, the depreciation of the naira, and weakened consumer purchasing power.

“In the wake of their departure, retail developers have turned their attention to expanding small-scale neighbourhood malls to drive growth and footfall,” it indicated.

According to the report, political instability in parts of Sub-Saharan Africa, including contested elections and conflicts in countries like the Democratic Republic of Congo, Ethiopia, Somalia, and Sudan, adds yet another layer of complexity to the real estate sector. Recent coups in Niger, Guinea, and Gabon raise concerns about the setback of reforms and potential disruptions in property markets.

It added that increased conflict and violence in the Sub-Saharan region were further hampering economic activity, while also dissuading real estate investors.

“Finally, high levels of national debt leave little room for fiscal manoeuvring among central banks, which is creating challenges for those seeking real estate financing. Debt service ratios are continuing to rise, with public investments, including infrastructure development, emerging as casualties.

“The shift from concessional borrowing to private creditors is increasing the vulnerability of regional economies to economic shocks, which we believe is constraining the real estate market’s growth potential,” it noted.

The report stated that commercial and residential markets faced a resilience test amid various macroeconomic risks.

It added, “Inflationary pressures from the removal of petrol subsidies and the floating of the naira have introduced economic uncertainties. Elevated capital costs have ensued, with the residential, retail, and office markets being marked by a slowdown in requirements.

“In the luxury residential leasing market, a nuanced challenge has emerged, driven by the escalating impact of inflation on construction costs. To navigate this, build-to-rent developers are adapting their pricing strategies with a preference for dollar-denominated rents.

“This shift is particularly pronounced among landlords servicing dollar-denominated loans and those procuring construction materials internationally. Ultimately, these costs are being transferred to tenants in the form of escalating rents. Currently, the average monthly rent for a 4-bedroom home in Lagos is c.US$ 5,000, an increase of 4.2 per cent since 2020.”

.Mirroring other African nations, most businesses had made a full return to the office, the report noted.