OBG talks to Nick Lambert, Head of Complex and Emerging Markets, CBRE

Interview: Nick Lambert

What main trends have you observed in real estate investment and property prices?

NICK LAMBERT: Despite a lack of transparency and comparable data in the market, it is estimated that yields for commercial property are around 6-8%; residential property, 5-6%; and retail, 5-6.5%. Demand far outstrips supply across all sectors, particularly for quality space, which is keeping prices relatively high. That will certainly continue over the foreseeable future. “Grade A” space in Lagos is still comparatively expensive, at up to $1000 per sq metre per annum, in spite of numerous new developments. The oil and gas sector is still driving demand for quality accommodation, but Nigeria is under pressure from other countries such as Ghana and Côte d’Ivoire, which offer significantly cheaper costs and are less operationally challenging. With this in mind, Nigeria, and particularly Lagos, is going to have to become more competitive in pricing as stock and vacancy rates increase over the medium to long term.

How much do rising construction costs contribute to high property values?

LAMBERT: Nigeria suffers from some of the highest construction costs in the world, with new build costs of between $1800 and $2200 per sq metre, and fit out costs between $900 and $1400 per sq metre. This is due to a number of factors including the need to import a high percentage of quality building materials, a lack of qualified or skilled local professionals, inadequate infrastructure and power, and fraudulent practices. In Nigeria, material costs make up about 75% of building costs, compared with an international average of 55%.

What risk determinants dampen investor interest in entering Nigeria’s real estate market?

LAMBERT: Historically, real estate in Nigeria has tended to be owner-occupied with few institutional investors paying much interest due to the complexities and risks of investing. That said, a variety of international investors are beginning to show interest in Nigeria as they look to diversify portfolios. They are seeking higher-risk, short-term products and long-term returns. Ownership rights are among the foremost investment risks as the Land Use Act limits “ownership” to between 35 and 99 years, with approval. As this is a relatively new law, no one yet knows what will happen when the first 35-year “leases” come to an end, as property “ownership” could revert back to the state. There are other issues such as security of title, a lack of transparency, excessive bureaucracy, security and corruption that have always been a concern to investors, but with the right advice there are potentially good medium- to long-term investments to be made.

How do you rate the attractiveness of Nigeria’s Real Estate Investment Trusts (REITs)?

LAMBERT: REITs are relatively new to Nigeria, having only been around since 2007. There are only two listed REITs in Nigeria with a total asset value of $2.4bn, way below South Africa’s 43 REITs valued at $24bn. This alone is a clear indicator of the immaturity of the Nigerian real estate investment market and of investors’ mistrust, despite the underlying potential. I believe there are a number of factors that will affect the REIT market in the coming years. Ultimately investors are looking for a product that will give them a good return within a stable environment and a transparent market. Unfortunately, Nigeria falls short on all these aspects.

To what extent do you see secondary demand for real estate assets now and in years to come?

LAMBERT: Currently there is no secondary market to speak of, which in itself is a real issue for primary investors, and particularly REITs, as they will struggle to trade units, especially at prices that will give an acceptable return. The same can be said for the secondary mortgage market. Nigeria has a booming economy but real estate simply has not witnessed a level of investor interest that one would expect, and it needs a few well-respected investors to get the ball rolling.