If there is one city Africa-focused investors cannot ignore, it is Lagos. The continent’s largest mega-city is also Nigeria’s commercial capital, with a population some have estimated in excess of 20 million. The city is also sub-Saharan Africa’s largest economy, recording a GDP of US$ 570 billion in 2014[i]. The stategovernment has made substantial progress in its efforts to clean up the city – in terms of both sanitation and crime – since Nigeria ended decades of military dictatorship in 1999. Governors have made their mark by leading major infrastructure projects and improvements across a wide set of indicators including waste management and tax collection. While few would dispute that much work remains to be done, the net effect for the real estate sector has been an emergence of key developments that are redefining Lagos’ skyline.
A significant portion of Nigeria’s real estate sector is in Lagos, valued by the Central Bank of Nigeria at $45.6 billion or 8 percent of national GDP. Growth has been driven by a decade of steadily increasing GDP, which has enabled the construction of new roads and bridges. Changes to zoning laws have revitalized the sector and given birth to dozens of new projects –some of which are valued in excess of US$ 100 million. From retail to commercial to residential, the city has now become a flurry of activity. Some developments, like the suburban middle-class Lekki Peninsula, have been driven directly by new infrastructure and demand. Others, such as the 10 million-square-meter mega-project Eko Atlantic, are the result of visionary public-private partnerships. From the demand side, Lagos is important because it is headquarters for all major indigenous companies and a growing hub for West African operations of multinational conglomerates. These multinationals will remain and grow in number because of Lagos’ large pool of sophisticated partners and professionals and the strong consumer demand driven by its 20 million inhabitants.
The Lagos property market can be loosely defined by four key areas:
The Mainland, is the center of Lagos and home to the vast majority of Lagosians, but cannot be viewed as a monolith. Key neighborhoods include Ikeja (the seat of state government and the international airport) and numerous commercially strategic areas. It is also the city’s industrial heart. The Mainland sits directly astride the main road axis that connects Nigeria’s largest port to the hinterland.
Apapa, as the ports including Tin Can Island are colloquially known, handles roughly 85 percent of the country’s container traffic and 80 percent of incoming automobiles. The total volume of cargo handled here exceeds 35 million tonnes of cargo annually, including more than 1.3 million containers.[ii]
The Islands, including Lagos Island, Victoria Island and Ikoyi, are Lagos’ core commercial and trading hubs. These areas contain most of the city’s top-end residential, hotel and leisure areas and are where most Class A consumers reside or work.
The Lekki Access, a peninsula on the city’s eastern boundary, has become the residential destination for Nigeria’s rising middle class. It also contains several interesting, if unproven, commercial and industrial developments such as the Lekki Free Zone and the Lagos Deep Sea Port.
With high-grade commercial rents that can exceed $1,000 per square meter per year, luxury residential in excess of $400 and top-end retail at up to $1,100, local and international developers have taken the cue to adequately supply, and oversupply in some areas, for the first time in recent memory. Developer exits have been tracked across a large spread of capitalization rates ranging from 3 percent to 10 percent and beyond. High valuations are common with the city’s growing number of luxury penthouses, while lower valuations can be found with unexciting older buildings that are nonetheless well-managed and fully occupied. For commercially oriented projects, capitalization rates typically range between 6 and 9 percent, with recent movement toward 9 percent.
Private equity firms such as Actis and RMBWestport are have led entry for other international investors. Their model is simple: they seek to build something better than what is available and ensure high occupancy by attracting a mix of new entrants and current tenants away from existing sub-standard projects. This model is increasingly used by local banks, developers and insurance companies, who attach themselves to corporate anchor tenants and partner with top-tier construction firms to build their own Class A assets. While more and more funds are considering new investments, their numbers are small. Even fewer examining the purchase of existing Class A assets. Key challenges remaining for project development are the high cost of borrowing (up to 12 percent for US-dollar loans and above 20 percent for naira-denominated loans), a non-existent mortgage market, and a general lack of market data. Land rights have improved significantly but still come with challenges, as most titles are leasehold with a maximum 99-year tenure.
The rapid changes in the Lagos property market present both opportunities and risks for foreign investors. Trail-blazing private equity firms have proven that the right real estate project can command returns in excess of 25 percent. But the continued lack of data means that to earn those returns, investors need a strong stomach and local knowledge. For investors who are generally interested in Nigeria, the city’s rapid growth, improved services, and increasing standards of living, provide a compelling reason for taking of a closer look.
Jonathan Millard is the Chief Operating Officer of Troloppe Property Services, a leading indigenous commercial real estate services firm. Prior to joining Troloppe, Jonathan undertook a Master’s Degree at the University of Oxford where he wrote his dissertation on Investment in Real Estate in Lagos. He has lived and worked in Sub-Saharan Africa since 2005. Contact: [email protected]
[i] World Bank, 2015 Data
[ii] Industry experts