February 2016 Spotlight on Lagos
2 Introduction The Nigerian economy has grown significantly over the last decade and it supplanted South Africa in 2014 as the largest economy in Africa following a rebasing of their gross domestic product (GDP). 2015 was however a challenging year for the Nigerian economy as it was negatively affected by the sharp fall in the oil price and a change in investment sentiment towards emerging markets. The oil and gas sector is an extremely important industry in Nigeria as it accounts for approximately 90% of government revenues. Therefore, with oil prices currently at 12 year lows and predicted to stay lower for the foreseeable future, the economic outlook for Nigeria in 2016 is uncertain if not negative. The acute shortage of dollar inflows and the specter of currency devaluation, increasing inflation and rising interest rates are primary short-term concerns for domestic and foreign real estate investors alike. That being said, the sheer size of the Lagos metropolitan population, its burgeoning consumer markets, rapid urbanisation and the renewed focus on developing its infrastructure underpins the significant long-term real estate potential of this dynamic city. We highlight the following 4 themes that we believe will be of particular interest to real estate occupiers, developers and investors as they navigate the Lagos real estate market in 2016. Naira Blues Infrastructure Boom? Riding the Cycle Nigeria Lagos Gateway Status 4 KEY THEMES FOR REAL ESTATE INVESTORS IN LAGOS
3 Riding the Cycle The dramatic changes to both the Lagos skyline and shoreline bear testament to the rapid urban development that has taken place over the last decade. This wave of development, particularly office towers in the new CBD s of Victoria Island (VI) and Ikoyi was driven primarily by the acceleration in oil and gas activity and the petro-dollars that flowed from it. Given an acute lack of stock, office rents peaked in 2010 in the region of USD1,200/sqm (per annum) resulting in a surge of new and often speculative development, as well as the reclamation of 10,000 ha of land along the VI waterfront for the hugely ambitious Eko-Atlantic scheme. By 2014 prime rents in VI and Ikoyi appeared to be stabilizing at around USD800 1,000/sqm. However, the turning of the economic cycle in 2015 followed by the sharp correction currently playing out in global commodity and financial markets will be cause for concern for developers of the numerous office schemes that are still under construction or nearing completion. Our experience in frontier and emerging markets suggests that the first property cycles in these markets may be significantly amplified by the economic cycles. The Lagos office market is a case in point and is in the midst of its first cyclical downturn. Pressure on office rents will constrain new development until such time that the economy stabilizes and reverts to its growth path. Once the cycle turns there will likely be a strong recovery in leasing activity and office rents given the compelling fundamentals of Nigeria s long term growth trajectory and market scale. On the retail front, there has been a similar surge in the development of shopping malls in recent years, particularly along the Lekki corridor where there are currently four schemes under construction or nearing completion (in total > 100,000 sqm GLA). With consumers coming under increasing pressure, some retailers may reduce the scale and pace of their store rollouts while also being more selective about where they will trade until consumer confidence returns. Painful as they are for some, these downturns often present opportunities for both investors and occupiers. Those investors exposed to well-let, long-dated and defensive assets will be strongly positioned to ride through the short term uncertainties.
4 Naira Blues The interbank NGN-USD exchange rate is officially pegged at around 200 but with Naira risks escalating, economists are anticipating that the official interbank rate could move beyond 250 this year as the Central Bank of Nigeria (CBN) implements aggressive expansionary fiscal policies to shore up economic growth and address the gaping infrastructure deficit. As has been the case in many other nascent African real estate markets over the last decade, corporate occupiers and retailers in Nigeria have been subjected to dollar-denominated leases by international developers and investors that have predominantly dollar-financed a wave of new office buildings and shopping centres. This currency risk and the parallel dollar market, together with the acute shortage of dollar liquidity and the imposition of capital controls is weighing on retailers, corporate occupiers, developers and investors alike. With the Nigerian consumer becoming increasingly stretched, retailers are struggling to grow their naira-denominated sales to keep up with inflation, and once adjusted for the exchange rate their turnover growth is often negative in dollar terms. Mall owners are having to accommodate their tenants cash-flow constraints to keep them in business, resulting in measures such as sharing currency risk by accepting rents in Naira, waiving rental escalations, and collecting monthly instead of quarterly rental payments. Similarly in the office market there appears to be a trend towards acceptance of rents being paid in naira by multi-national corporates given the more restrictive exchange controls and acute dollar shortages. Infrastructure Boom? The recently appointed Nigerian cabinet is drawing up plans to launch a highly expansionary fiscal policy as a means of economic stimulus, which will be anchored around a massive infrastructure program for transport, roads, housing and power. In her recently issued blueprint for economic recovery, the Finance Minister stated that infrastructure development is one of the four pillars of an ambitious stimulus plan that is to be financed through a combination of deficit spending and the raising of USD4-5bn from multiple external sources. This would be encouraging news for the property sector if the plan materialises, and it will be closely watched by developers keen to unlock new opportunities, particularly given the congestion and inefficiencies within Lagos.
5 Gateway Status Lagos has in recent years consolidated its position as the gateway and commercial capital particularly for Anglophone West Africa. Accra may have been a challenger at a time when setting up in Lagos was comparatively more expensive, risky and challenging, only to fall out of favour as Ghana slipped into an economic downturn in 2011. As an ever increasing number of multi-nationals and retailers look to expand their footprints and distribution channels into Anglophone West Africa, Lagos and Accra will compete with each other for that coveted gateway status. Lagos is the clear winner in terms of population, market scale and economic potential. However, for of ease of doing business, simply getting to and from the airport, and the cost and quality of life, Accra is likely to be favoured. Over the last few years, Ghana may have progressed further down the path of economic reform than Nigeria, and Accra has substantially lower rental and living costs than Lagos. In addition, the Tema Port in Accra is undergoing a USD1.5bn expansion which will make it the largest port in West Africa. This together with its convenient airport location and superior infrastructure will position Accra as a regional distribution hub for Anglophone West Africa whereas Lagos is proving to be extremely congested and bureaucratic. There may be little that the Lagos State authorities can do about the broader economic challenges facing the country, but addressing key infrastructure and some of the inefficiencies of conducting business in the city may be enough to cement Lagos as Anglophone West Africa s gateway for the foreseeable future. Conclusion The long term investment case for the Nigerian real estate market and Lagos in particular, remains underpinned by the vast economic potential of Africa s largest population, rapid urbanisation, compelling demographics and gateway status. However, investors will need to be increasingly selective and discerning to identify development and investment opportunities that offer sustainable and defensive returns through the cyclical downturn that the Nigerian market is currently experiencing.
Contact us JLL Nigeria: 7th Floor, Mulliner Towers 39 Alfred Rewane Road, Ikoyi, Lagos www.africa.jll.com http://blog.africa.jll.com Chinwe Ajene-Sagna Head of West Africa Corporate Solutions Tel: +234 (1) 448 9261 chinwe.sagna@eu.jll.com JLL Sub-Saharan Africa: Anthony Lewis Director, Capital Markets Sub-Saharan Africa Tel: +27 71 860 7926 anthony.lewis@eu.jll.com Fadheelat Noor Mohamed Associate, Research Sub-Saharan Africa Tel: +27 76 204 1562 fadheelat.mohamed@eu.jll.com COPYRIGHT JONES LANG LASALLE IP, INC. 2016. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.