Hard times ahead for real estate as COVID-19 leaves sector with more losers

Hard times ahead for real estate as COVID-19 leaves sector with more losers, less gainers

There are strong indications that hard times lie ahead for the real estate sector in Nigeria as a result of the harsh and crippling impact of coronavirus (COVID-19) pandemic on the local and global economy.

The sector in Nigeria, still smarting from its fragile recovery from 16 straight quarters of recession, has been hard-hit by the deadly virus, leaving it with more sub-sectors on the losers table than gainers.

A survey by BusinessDay shows that retail, hospitality, and conference/event centres are top on the list of sub-sectors that have been affected the most since February when Nigeria reported its first case of coronavirus. The gainers are few and they include logistics or warehousing, land banks, small-unit apartments, and homebuyers with cash, especially foreign currency.

The implication of this worrying situation is that, short to medium term, supply will shrink as new investment in the sector may be little, if at all people are going to commit money into the sector, especially in the sub-sectors that have been badly hit by the pandemic.

Investors are going to hold back, as many have already started doing, and those of them who took bank loans to do developments may be under immense pressure by their creditors to pay back. This may lead to distress-sales that will leave them worse off, just as it will affect market stability and profitability.

BusinessDay findings show that the extremely low occupancy rate and reduced revenue from events and conferences, and zero revenue from business travels due to movement restrictions have combined to make the global and Nigerian hospitality industry a shadow of its former self.

It was also discovered that, while grocery shops and food supermarkets have not been largely affected by COVID-19 due to their exemption from the five-week lockdown that ended on May 4, 2020, the retail market has suffered from the pandemic as retail outlets report a significant reduction in footfall, pushing retailers to request for rent relief and incentives, and to downsize their space.

“Retail has taken a hit. It is one of the big losers, followed by the hospitality industry. Whereas the social distancing rule has reduced occupancy rate to 60 percent of the full mall capacity, footfall (shoppers traffic) has also gone down because consumer purchasing power has also dropped, Gbenga Olaniyan, CEO, Estate Links, confirmed.

He added that some retailers are closing shop while those still resilient enough to tag along are reducing their space such that those that had been occupying 1,000 square metres have downsized to 500 square metres, taking the rest of their stock to warehouses.

Fabian Ajogwu, chairman, Novare Africa Real Estate, developers of the Novare Lekki Mall, agrees, pointing out, however, that the problem is not of Covid-19 per se, but what he called “the reactionary measures that have come from governments across states and regions” on commercial real estate.

Ajogwu, a professor and Senior Advocate of Nigeria, explained that what the government measures had done was to shut down demand.

“When you shut down demand, then there is a drop in footfall in the mall and we witnessed a 30 percent drop in the first three weeks of the lockdown measures,” he said.

Investors in conference and event centre facilities have also taken a bashing from the deadly virus. Their case seems to be worse because the social and physical distancing rule has put a lid on all forms of social gathering including conferences, seminars, marriages, etc, giving way to virtual meetings and webinars.

“Though it is difficult to quantify, the loss investors have incurred in this sub-sector is substantial,” noted Paul Onwuanibe, CEO, Landmark Africa Group.

Onwuanibe estimated that operators of event centres may have lost over N800 million in the last three months of the pandemic.

Estate developers are also another group of losers who, according to Adetokunbo Ajayi, CEO, Propertygate Development and Investment Company, are challenged in many fronts.

“Apart from lack of credit from the banks, you cannot even go to site and where you can, you cannot do development because you cannot import your materials,” Ajayi said.

He added that even those whose houses, especially luxury houses, are already on the market cannot find buyers.

“But there is a market for affordable small-size family housing units. Investors in this house-type are part of the few gainers in the sector at the moment,” he noted.

Ayo Ibaru, director of research at Northcourt, shares this view, adding that healthcare is leading the pack of gainers and is likely to continue to do so. 

“Infrastructure investment is upbeat and foreign donors/VC firms are more open to investing in the sector,” Ibaru said.

According to him, last-mile warehousing is considered by industry analysts as the favoured child of the logistics/warehousing family. He explained that the closer that segment of the warehousing sector is to the heart of the city, the better, “although the sub-sector is moderated by income and employment numbers.

The interest in warehousing is driven by online sales which is gaining much traction now as people avoid physical contacts. The sellers need spaces to keep their goods. Again, retailers at malls who have decided to reduce their space are moving their goods to warehouses.

Land values remain resilient and are rising in some areas. In the highbrow areas of Banana Island and Ikoyi in Lagos, land prices have gone up by close to 10 percent amid the pandemic. In Banana Island, prices have gone up from N500,000 per square metre to N580,000 per square metre while Ikoyi has moved from N350,000 per square metres to N420,000 per square metres, said Olaniyan of Estate Links.  

Another group of gainers in the market are property buyers with cash.

“It is a buyer’s market. Today, cash is king and anybody with cash can go to the market and get a good deal. Developers who are exposed to bank credit are ready to sell at a generous discount. So, buyers are also gainers,” Adeniyi Akinlusi, president, Mortgage Bankers Association of Nigeria (MBAN), said.

It is a tough time for the real estate sector but, according to Olaniyan, in the midst of all the hills and valleys occasioned by Covid-19, no investor, especially developers, has filed for bankruptcy unlike their counterparts in developed economies where many real estate firms have gone bankrupt, declared so and closed shop.

“But the situation here is different; it is a reflection of our culture; firms here don’t go out of their way to file bankruptcy even when they are overtly bankrupt. It is a different ball game here. So, there is no firm in the sector now that has declared bankrupt and I doubt if there will ever be,” he said.

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