Development activity across the commercial real estate sector in Lagos declined by 14% in 2022 compared to 2021 amidst heightened election uncertainty, ongoing currency challenges and rising inflation, according to the latest 2023 Lagos Real Estate Development Pipeline Report by real estate research and data company, Estate Intel.
According to the report, the office sector recorded a decline in development pipeline to 16% of total stock from the 25% recorded in 2022. However, the sector has continued to remain resilient in terms of occupancy rates despite pandemic headwinds and leasing activity still being driven by relocations.
Tilda Mwai, Insights Lead, Estate Intel noted, “Interestingly, office demand remains within the premise of either quality or affordability. Notably the office market continues to exhibit varying levels of occupancy across different grades. The B+ grade segment appears to have the highest occupancy level at 78.36%, while the A and B+ grade segments have 71.35% and 75.35% occupancy levels respectively. However, the A+ office market currently has an occupancy level of 54% and this is due to the recent completion of Famfa Oil Tower which has added 18,500 sqm of leasable A+ space into the market.”
On the other hand, the retail sector remains relatively subdued. While the sector recorded the second largest share of the development pipeline (33%),approximately 60% of the projects remain on hold with only 23% under active construction. This has mainly been attributed to currency devaluation, a shallow tenant pool, rising construction costs and diminishing disposable incomes.
“The momentum that began in 2021, was sustained throughout the year with a slow and steady return to construction and real estate activity. However, currency challenges and longer-term trends such as the evolving landscape of consumer purchasing power in the retail sectors continue to impact occupancy levels and achievable rents especially in the grade A malls.” Mwai explained.
Notably, the hotel sector also had one of the largest development pipeline accounting for approximately 36% of estimated total stock. Interestingly, the sector’s outlook remains positive and has emerged as one of the best performing real estate sectors, with its RevPAR recovery against 2019 outperforming key global hubs such as Dubai, London and Hong Kong.
Commenting on this performance, Trevor Ward from W Hospitality noted that, “For 20+ years people have been forecasting oversupply in Lagos, it has never happened, nor do I believe it will, at least not in the short to medium term. The headwinds for new hotel development are severe right now, and it’s anyone’s guess as to when they will ease off. So, investment in new build is being delayed, but there are opportunities in acquisition of existing hotels, and potentially there should be scope to pick up uncompleted projects at a discount…”
Still, bright spots remain in other sectors such as healthcare. With a relatively small pipeline, at approximately 3.1% of total stock, the sector remains an exciting opportunity for investors. In addition, with the housing deficit in Lagos estimated at 2.3 million units, the residential development pipeline estimated at 25,000+ units falls short of meeting demand pointing to an exciting opportunity for developers especially in the mid-low end segments of the market
While commenting on this, Tilda Mwai, Insights Lead, Estate Intel, noted, “Despite the volatility in the macroeconomic environment, the real estate market has remained resilient with bright spots emerging across sectors such as residential and healthcare. Rapid infrastructure development too, has also ushered in new opportunities for developers and investors in Lagos and its neighboring states such as Ogun as highlighted in this report.
“This will no doubt present new opportunities for developers especially in the industrial sector. Although in its niche stages, it remains one to watch out for, buoyed by the rapid infrastructure developments and demand from the agriculture and manufacturing sectors. Still, promulgation of the new government could usher in new policies such as fx convergence which could in turn impact on institutional investor confidence” Mwai concluded