When you think about the most expensive offices space in the world, cities like New York and London,with their reputations as global financial centers, spring to mind. However, when it comes to pricing, Lagos, the commercial capital of Africa’s largest economy has managed to find a comfortable spot among them.
Rentals for prime office space in Lagos (Ikoyi) is up to $90 per sq. ft per annum this year, above those seen in Midtown Manhattan in New York where rents are closer to $76 per sq. ft per annum, according to new data by CBRE, Broll and JLL, real estate firms. They are also trailing the $96 per sq. ft rents seen in the City of London and more than four times higher than prime office rents in Illovo, Johannesburg.
For yield-seeking real estate investors, the Lagos opportunity might appear attractive at first glance. But the factors behind the numbers are worth digging into.
Gross inadequacy of real estate supply has acted as a major driver to high rents in the past decade. Less than 650,000 sq. ft. (60,000 sq. meters) of prime office space in fewer than 10 high-rise office buildings in Victoria Island and Ikoyi existed in Lagos prior to 2010. Other office towers did exist in the old Central Business District, but their glory days laid in the late ‘80s and ‘90s.
As age and congestion began to set in and landlords refused to refurbish, corporates relocated to residential office conversions in Victoria Island. Consequently, demand began to outstrip supply, allowing the few owners of prime office space get away with seemingly ridiculous rentals.
Even though there is currently up to 1.9m sq. ft. (180,000 sq. meters) of office space to be completed over 24 months, investors are still checking to see if there’s room for more.
The historically low supply and opportunity to demonstrate what real prime grade quality office space is like has created interest from global and domestic institutional real estate investors in recent years. Actis, an emerging market private equity firm, launched the first sub-Saharan Africa private real estate fund at $154 million and have a handful of real estate interests in Lagos and Abuja. The most relevant is a 15,600 sq. meters office development that is slated for completion before year-end.
The $165 million CAPIC fund by African Capital Alliance also followed and they have successfully completed a prime office development in 2012 with Mansard Insurance (now part of the AXA Group). Even the world’s richest black woman, Modupe Alakija, executive chair of the Day Spring Property Development Company is getting in on the real estate business in Lagos. The company recently completed a 12-floor mixed use development, with 3 floors of office space included probably to cash in on the lucrative market.
High running costs–but no guarantee of quality
Developers in Lagos have traditionally been able to get away with poor service management and inadequate parking provisions in a city where no robust public transport schemes are in place. In most cases, finding parking in Lagos is a cutthroat ordeal. This means most of Victoria Island is doubled parked during working hours.
High land prices, construction and financing costs also stand tall among the most prominent factors behind Lagos’ high rentals. Other underlying drivers — like double-digit interest rates, inadequate supply of suitable development sites and the need to import materials for construction — keeps development related costs very high.
Then there’s the lack of reliable power which means generators are a must-have. This becomes a quarterly or annual service charge, an additional cost that can be as high as 25% of rent annually. Similar charges in other developed markets can be 10% lower.
For some context on the power situation – Nigeria, with a population of 170 million generated an average of ±4,000MW in 2014 and South Africa whose population of over 54 million has a generation capacity of over 45,000MW. What’s worse, power generation in Nigeria fell to an all time low of 1,327MW in May 2015.
A growing economy
It might be easy to conclude that Lagos’ high rents are a product of the city’s infrastructure problems. But the economic fundamentals and demographics make Nigeria a very attractive destination for real estate investment. This already bulging megacity is set to benefit from Nigeria’s strong expected growth as global investors scramble to make their bets. GDP growth rates, which have averaged 6.8% in the past decade and a rapidly urbanising population that is set to surpass that of the US by 2050, means it’s not that difficult to imagine a near guaranteed return on investment.
All together, it is possible that relocations to better quality space, growth from domestic firms and international firms expanding, could sustain high rentals. However, as competition grows, with more parties looking to invest in the sector, it could lead to a cooling of the market. What’s clear, Lagos’ response to the large addition of office space coming on is critical, because it will define the future of rents in this peculiar but still lucrative real estate market.