Low Rate Environment Makes Real Estate Investment Compelling -Report
- Real estate experts have hinted that low interest rate environment has made investment in commercial properties more compelling than ever as the economy opens up.
Estate Intel Limited made the submission in a recent report on the industry, citing the Central Bank of Nigeria (CBN) dovish policy stance.
The firm believes that real estate investment is appearing attractive as other assets classes have underperformed market expectation.
Drawing on the basis of low interest rate environment, real estate investors and properties developers have started betting big in the real estate segment of the economy.
Following persistent weakening of Naira, there have been few investment windows to protect wealth as the fixed income market rates plunges unabatedly.
MarketForces Africa reported that investment banking experts are asking their clients on possible diversification of interest in naira assets as the local currency losing store of value feature.
Due to foreign exchange scarcity, Nigeria’s local currency purchasing power continues to drop following wide gap between official and parallel market rates.
Some pundits think naira is only good for exchange of value as the currency continues to depreciate.
Meanwhile, Estate Intel stated that apex bank has chosen to deviate from their previously hawkish monetary policy strategy, which was largely created to attract foreign portfolio investors (FPIs), keep foreign reserves at healthy levels and reduce pressure on the local currency.
Now in another oil priced linked recession, Estate Intel explained that there is little confidence from FPIs to sustain this strategy.
As a result, the CBN’s new ultra-dovish stance hopes to use lower interest rates to force banks out of government debt securities so they can lend to the real sector, and jumpstart growth through targeted stimulus to critical sectors, the firm stated.
Chief among the CBN’s tools for reducing rates was decision to restrict access to the supply of historically high yielding debt securities.
This has left a large void in the supply of investment instruments available for domestic players, with little change to demand.
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Now with limited investment options, pension funds, insurance companies and other institutional with excess liquidity are investing in what is left, driving demand up and crashing rates to the ground.
According to market date, yields on 1 year Treasury Bills and the 10 year Bond have fallen from 18% and 16% in 2017, to 0.39% and 4.35% in early Nov’ 2020.
“Depending on the sector and quality of asset, average yields from property can range between 6% and 10% and this has remained relatively constant for the last few years”, Estate Intel stated in the report.
The firm said though institutional investors with existing real estate positions appreciate the stability in value and yield from the asset class noted during 2020; the new found allure for property does not sit with the underlying fundamentals.
Instead, it relates more to the weak performance from other asset classes, and an expectation that those return levels are here to stay.
The report stated that conventional property sectors have not fared so well recently.
“The office market in Lagos is yet to fully recover from the large deliveries noted over the past 5 years.
“In 2016, new supply as a percentage to total stock rose to 25%, at the heart of a recession that was right after an election year”, Estate Intel said.
Though a few buildings have pushed towards strong occupancy rates, the report stated that market rents across board have fallen 26%, while market occupancy rates for A Grade Properties currently stand at 56%.
The shallow tenant pool has meant that most transactions are relocations, and only small amounts of new space are truly taken up.
Similarly, the Dollar reliant Nigerian shopping centre and formal retail market is still suffering from the effect of two recessions and multiple Naira devaluations.
Less than 5 years ago, it said retail investors had planned bold 25,000m projects leading to average annual completions of about 45,000m.
But these plans have been suspended or terminated leaving average completions at about 14,000m in recent years.
The report reads that luxury multi-family residential units have been stressed by poor occupancies and low rental yields.
According to Estate Intel, properties that are less than 5 years old, which sold for USD $1 million+ when they were launched are currently unable to achieve a similar or higher resale values.
It also revealed that the delivery of newer competing buildings that are yet to achieve full occupancy and the loss of value in Naira have placed this segment in jeopardy.
As a result, residential investors are evaluating other sub-segments of the space, where there is largely and more consistent demand.
Meanwhile, Estate Intel think new property sectors are gaining traction.
It added that as investors become more creative and look further afield, they are now paying greater attention to the longstanding undersupply and latent demand in less mainstream sectors, which have been typically ignored in the past.
Two decades ago, Estate Intel said office properties were largely owner-occupied, retail was largely serviced informally through Plaza’s and there were only a handful of international hotel brands.
However, interests in these sectors grew overtime due to market fundamentals accredited to Nigeria’s exciting macroeconomic growth story, surging demand and insufficient supply.
“Nigeria’s macroeconomic growth story might have slowed down but there are investors still in search of market segments to deploy capital.
“We suspect alternative sectors which are in the same state conventional sectors were 10 – 15 years ago could come to the rescue”, the report reads.
Low Rate Environment Makes Real Estate Investment Compelling -Report
