Calling all consumers: Retail space seems primed for growth

Driven by rising incomes and steadily increasing consumer sophistication, Nigeria’s retail real estate market is poised for considerable expansion over the course of the coming decade. While the country’s formal retail sector is still in its infancy, the potential for future growth is clear, given the large size of its 170m-strong consumer market along with the steady expansion in headline indicators and the rising level of domestic consumption. A number of new international-standard retail centres have been completed in recent years and, according to a recent report published by Knight Frank, a UK-based property consultancy, many more are in the pipeline. According to Broll Nigeria, as of early 2013 more than 10 new retail projects were under way, with an estimated 180,000 sq metres of space expected to come on-line before the end of 2016.

PROSPECTS & POTENTIAL CHALLENGES: While the long-term prospects are promising, given that the country is virgin territory, local mall developers face a number of challenges. The cost of construction in Nigeria is high, and property financing is hard to come by, particularly from the local financial services sector. The country’s legal code strongly favours tenants, which poses a challenge for management companies charged with overseeing hundreds of mall tenants in a large-scale retail development, for example. Finally, while demand for high-quality retail space is rising rapidly, Nigeria’s large informal market – which by most estimates is two-thirds the size of the formal economy – is still widely considered to be a hurdle to widespread growth.

DEMAND DRIVERS: Despite these challenges, the market has grown considerably in recent years. Retail activity is concentrated in the nation’s urban centres, namely Lagos, the commercial capital; Abuja, the capital city; and, to a lesser extent, Port Harcourt, the heart of the oil- and gas-producing Niger Delta region. According to the Knight Frank report, retail activity in all of the country’s major cities “appears to be on the cusp of significant advancement with the increasingly rapid construction and uptake of Western-style retail and leisure malls.”

The recent expansion of the retail market can be attributed to a handful of key growth drivers. Chief among these is the rapid expansion of Nigeria’s burgeoning middle class, which is primarily made up of young professionals in urban areas, particularly Lagos. According to a recent study by the African Development Bank, in 2008 around 34.5m Nigerians, or just over 20% of the population, fell into this middle-income bracket. Over the past decade the country’s GDP has nearly quadrupled, from around $67.7bn in 2003 to $262.6bn in 2012, according to data from the World Bank. Despite considerable population growth, gross national income on a per capita basis nearly doubled over the same period, from $1320 in 2003 to $2420 in 2013. This jump in income, while not evenly distributed across the country, has resulted in increased consumer spending for a substantial percentage of the population, and particularly the middle class. According to a 2011 study by Renaissance Capital, a Russian-owned investment bank, around half of Nigerians plan to purchase microwave ovens, washing machines or dishwashers before 2015. “As people begin to earn more money, we are seeing their spending shift to the formal economy,” Michael Chu’di Ejekam, a director at Actis, a multinational property investment firm with retail holdings in Nigeria, told OBG. “People are realising that a high-quality mall or shopping complex does not always mean expensive or overpriced goods. This bodes well for the entire economy.”

RAPID DEVELOPMENT: With this unmet demand in mind, a number of developers have launched retail properties in recent years. The Persianas Group, a UK-Nigeria joint venture, established the country’s first international-standard mall – The Palms Shopping Centre – in Lagos in December 2005. At the time of launch the mall had around 20,000 sq metres of retail space and 69 tenants. Since then Persianas has embarked on a new 180,000-sq-metre expansion project, which is currently under way. Anchor tenants include Game, a subsidiary of Massmart, a South African supermarket chain that was acquired by the US-based retail giant Walmart in 2011; and Shoprite, a South Africa-based retailer. In the years since the development of The Palms, Persianas has launched a number of other retail properties, including the Polo Park Mall in Enugu State, which opened in September 2011; and two properties that are currently in development, namely Kwara Mall in Kwara State and Ibadan Mall in Oyo State.

In mid-2012 the International Finance Corporation (IFC), the private sector investment arm of the World Bank, announced that it planned to invest $87m in ongoing and future Persianas projects. The funding, which consists of a $50m loan and $37m in equity financing, will initially be put towards the projects listed above, though according to IFC documents, Persianas plans to develop additional retail venues as well. “The Palms proved that there was considerable latent demand for international-standard retail projects in Nigeria,” Ejekam told OBG.

Actis has played a major role in the development of the $100m Ikeja City Mall, which opened for business in Lagos in December 2011. The property, which includes 28,500 sq metres of leasable space, was jointly funded by Actis; RMB Westport, a real estate subsidiary of the South Africa-based Rand Merchant Bank; and Paragon Holdings, a Nigerian conglomerate. Stanbic IBTC Bank, a local financial institution, provided debt financing for the project. As of mid-2013 Ikeja Mall was fully occupied with 93 retailers, including anchor tenants Shoprite, KFC and Silverbird Cinemas. According to Actis’s Ejekam, the mall averaged around 650,000 visitors on a monthly basis during its first year of operation.

OTHER CENTRES: While Lagos remains the focus of most international retailers in Nigeria, a handful of new malls have also been established in the country’s other urban centres in recent years. In June 2012 the 10,000-sq-metre Grand Towers Abuja Mall opened for business in the capital. Financed and developed by Novare, a South Africa-based investment firm, the mall boasts 42 shops, including anchor retailer Shoprite. Other retail centres in Abuja include Ceddi Plaza, a 10,000-sq-metre property launched in 2005; and the Capital Mall, a 21,500-sq-metre complex currently under construction as part of the $1.2bn World Trade Centre Abuja project. Upcoming developments elsewhere include the Ado Bayero Mall in Kano State; the Gateway Mall in Ogun; and the Artee Mall, the River Jewel Mall and the Silverbird Mall, all of which are located in Port Harcourt.

BRAND BOOST: The rapid pace of mall development in recent years has resulted in steadily increasing interest in Nigeria from a variety of foreign brands. Prior to the launch of The Palms in 2005, few foreign retail brands had ventured into the country, due primarily to logistical challenges and a lack of availability of high-quality retail space.

Since then, however, the market’s rapid development has attracted foreign retailers, restaurants and other lifestyle brands – ranging from US-based fast-food chains such as KFC, Domino’s Pizza and Johnny Rockets, to various European fashion brands, including LVMH – in part thanks to the expansion of dedicated formal retail space.

Nigeria’s high-income population also represents a major untapped market. Indeed, many wealthy Nigerians currently do much of their shopping abroad as coveted brands are not available at home. According to Global Blue, a UK-based retail services firm, in 2011 Nigeria was the fourth-largest contributor to overseas tax-free shopping in the UK, behind China, Russia and the Middle East (see Retail chapter). In addition to high-street shops such as Marks & Spencer and Debenhams, Nigerian consumers spend a considerable amount of money on high-end branded clothing, perfume, shoes and other apparel, much of which is largely unavailable in Lagos and elsewhere in Nigeria. According to a recent report by the consultancy McKinsey, by 2020 Lagos is expected to have consumer spending of more than $25bn, a level in line with spending in Mumbai, for example.