After months of declining business, Nigeria’s commercial real estate sector is enjoying a resurgence, following the return of abandoned shopping mall projects in major cities.
The COVID-19 pandemic has severely affected the commercial real estate industry as travel restrictions and social distancing have affected business activities and gathering facilities. The office, retail and hospitality sectors were the most affected market segments.
Despite the disruption of COVID-19, a report by Research and Markets indicates that the commercial real estate sector has seen significant growth, which is driven by the digitization of the workplace, the transformation of physical retail and the transition environmental, social and governance (ESG) considerations.
In fact, the retail industry has faced the challenges of the e-commerce industry and changing customer behavior during the pandemic. Despite these challenges, the sector remained resilient, as e-commerce sales during the pandemic were only 14% of overall retail sales.
According to United Nations Trade Agency (UNCTAD).
Operators in these markets felt the impact as more than 17,500 chain store outlets fell across Britain in the first year of the pandemic. The number of malls that experienced a lull in footfall also increased.
As the pandemic continues to wane, more than 300,000 square meters of new commercial rental space has been completed in countries like South Africa this year, compared to 367,000 square meters in the previous two years combined.
In addition, to meet consumer demand and adapt to the changing business environment, developers are focusing on different strategies, such as renovating shopping malls for multiple purposes, customizing the composition of tenants and the development of new rental models to attract the latest business models.
Essentially, the commercial property sector of the Nigerian economy benefited from significant investment between 2009 and 2015, from local and international investors – developers, who sought to support the development of modern shopping malls in accordance to what is available in Europe, America and South Africa.
The sector has attracted foreign direct investment (FDI) of around $3 billion from a zero base, which has been deployed for the development of around 20 malls and malls in over 10 cities including Lagos , Ibadan, Abuja, Port Harcourt, Kano, Warri, Ilorin, Enugu among others.
Investments in physical department stores were at their peak during these times, when foreign developers like Resilient Africa, ShopRite, ACTIS, ACA and others entered the country. However, many have retired or failed to expand their portfolio due to economic difficulties, while the few in operation are struggling to find tenants.
The results revealed that mall development in major city centers could cost over $4,285 on average per square meter in Lagos, over $4,087 in Abuja and $3,942 in second-tier cities due to the naira/dollar exchange rate crisis and inflationary trends affecting the cost of construction. .
Specifically, among the projects on the course is the Tropicana Mall, one of the components of a huge leisure complex in Akwa Ibom. Others are located in Abuja, Kaduna (Galaxy Mall in Barnawa) and Edo (Edo Mall) which have been idle for a few years are nearing completion with hopes of generating returns for investors.
There is also the 38,000 square meter Purple Lekki, in Lagos, which comprises an upscale 157-unit mixed-use development that combines residential, retail, entertainment, hospitality and coworking spaces from high quality to meet the growing demand for all-inclusive services. living, expected to be completed this year, same for Galaxy Mall in Kaduna
Experts say 5,000 square meter retail outlets and neighborhood malls have risen to prominence as the future of retail sustainability.
A senior official of CBRE Excellerate, Nigeria, Francis Okafor, explained that despite the high demand for commercial space, developers and tenants are adjusting to the harsh economic reality of the country.
Okafor said: “Investors are avoiding the development of larger malls and local players like Ebeano are sticking to two floors and 5,000 rental spaces rather than the big ones. Those who have invested in more than two floors have plenty of unoccupied rental space. Savvy investors keep it simple for the sustainability of their investments.
“Disinterest in the development of larger shopping centers hinges on the inability of potential tenants to recoup their rents, electricity and service charges. Any savvy developer shouldn’t build anything larger than 5,000 or 8,000 square meters.
“Getting tenants has become difficult due to lack of funds as developers mostly ask for two years rent to cover costs. Second tier cities are emerging in terms of mall development but we we don’t have more than 10,000 or 15,000 square meters of shopping centers around.
“There is the challenge of receiving income in foreign currencies, which was the currency used for the initial investment. If I invest with dollars, I will have to recover my investment in dollars, but the challenge is that the developers cannot not get currency.
“What the developers do is they quote the rent in dollars and at the end they collect the naira, which cannot match the investment in dollars. Only local investors can bear the Naira risk as they understand the Nigerian market.
The exit of foreign investors, he noted, has increased the risk of more foreign investors entering the market. However, he said their exit did not scare off local investors in second-tier cities, adding that it was local players who cushioned the degree of that impact.
A shopping center specialist, Mr. Bayo Akintoye, attributed the latest low point in the sector to a drop in economic activities in the country, insecurity, an increase in the inflation rate and a lack of FDI, which which has affected the growth of large shopping centers and abandonment of projects.
He said: “Local investors are the major players in mall development with a focus on communal neighborhood malls which are smaller lettable areas for affordability and deployment of capital needed for development.
“It helps with good management without bringing in a lot of infrastructure for running the mall. The rents will be denominated in naira, unlike international investors who denominate their rents in dollars because they are repatriating their funds.
An official from Purple Mall, Lekki and Tolani Olusola explained that expanding the availability of retail and entertainment facilities can only be positive given the undersupply of the formal retail sector.
He said smaller malls are faster to build and fill, as well as easier to manage, while larger malls require huge amounts of contiguous land, which is increasingly difficult to obtain in areas. urban and well populated.
Olusola said, “Small centers are easier to fit into populated city centers where they can attract large amounts of traffic week after week. We favor a mixed-use approach, as we understand the value of a great location for both residential and commercial segments.
“Town centers present an attractive proposition for mixed-use developments, especially since they can cater to the different types of customers that naturally congregate in town centers. They offer a mix of facilities designed to attract as many people as possible, which is good for retailers and business owners.
According to him, developers in the real estate sector are currently struggling with access to finance and lack of infrastructure, adding that the current global energy crisis is also creating more difficulties for practitioners.
He said this drives up development costs, making it more difficult to invest in the sector.
On how the government should encourage investors in this segment of the market, Okafor and Olusola urged the federal government to encourage foreign investment to build up its foreign exchange reserve in the economy. They also want support for retail businesses in terms of financing and eliminating the double taxation of investors in shopping centres.
They further called for a real estate community regulator in cities like Lagos to protect investors from fraud, which could be replicated nationally.