Q1 2014 Lagos Real Estate Investment Report

MCO Real Estate Limited 5th Floor, Mulliner Towers 39 Alfred Rewane Road, Ikoyi, Lagos, Nigeria. Tel +234 (0) 1462 3411 x511 Mob +234 (0)806 924 5688 Email: [email protected] Web: www.mcorealestate.com

International perspective, local expertise

Lagos, Nigeria

Real Estate Investment Report

Q1: 2014

HIGLIGHTS

   

Central Bank policy of quantitative tightening continues Strong demand for modern retail schemes Corporate Office supply pipeline very strong Launch of the Nigerian Mortgage Refinance Company

TABLE OF CONTENTS

1. 2. 3. 4. 5. 1.

Introduction Nigeria Economic Overview Real Estate Overview Real Estate Financing About Us

INTRODUCTION

As an outcome of the recent GDP re-basing exercise, Nigeria’s economy is now the largest in Africa. It is hoped that the added exposure will lead to greater inward investment and subsequently a greater improvement in the living standards of those at the bottom of the pyramid. The economy continues to thrive and following on from the re-basing exercise, it is heartening to see greater diversification in the economy away from oil and gas to new market sectors including entertainment, telecommunications, agriculture, real estate & construction and manufacturing. Our area of interest is the Nigerian real estate market in general and the Lagos market in particular with an investment driven focus. The market continues to grow, innovate and adapt. Retail remains a current area of attraction with strong demand driven by the rising disposable income of a growing young urban demographic group. There is considerable supply coming on tap in the commercial office market segment with multiple cranes across the Lagos skyline. The Nigerian Mortgage Refinance Company has been created to focus on the development of the residential mortgage market that will enable renters own their own homes. The market is vibrant and ever changing and requires an expert eye to get it right. We hope you enjoy this report and that it assists your decision making process in relation to investment in Lagos within a wider Nigerian context. We ask that you kindly forward this report to your in-house real estate team or to any colleagues involved in the real estate investment market with a particular focus on Lagos, Nigeria. 2.

NIGERIA ECONOMIC OVERVIEW

The Nigerian economy continues to grow and expand following on from its emergence from the economic meltdown of 2009-2012. The National Bureau of Statistics estimated Gross Domestic Product (GDP) in Q4 2013 grew at 7.67 per cent, an increase on Q3 2013 which recorded a growth rate of 6.81 per cent and which was also higher than Q2 2013 growth at 6.18 per cent. GDP has also increased from a year ago where the corresponding Q4 rate for 2012 was 6.99 per cent. Growth sectors include agriculture, wholesale and retail trade and telecommunications. Inflation continues to retain its downward trend although with a slight uptick of 7.8 per cent in March compared to 7.7 per cent in February. However, the broader trend is one of a reduction in inflation with the current rate of 7.8 per cent comparing very favourably to the 8.6 per cent figure recorded for March 2013. External reserves have continued to come under sustained downward pressure with a decline from US$42.85 billion at the end of December 2013 to US$38.1 billion as at the end of April 2014. The downward pressure on the country’s external reserves have been largely driven by the increased funding requirement to support the Naira exchange rate which is under pressure due to various macro-economic factors.

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International perspective, local expertise

Nigerian stocks had a poor showing in the first quarter of 2014 with a fall of 6.25 per cent over the first quarter to March 2014 ending. The market capitalisation at N12.446tn also fell by N780bn or 5.9 per cent over the quarter. The primary reasons for the fall were twofold and included the improved macro-economic situation in the advanced economies leading to capital fight out of the local market coupled with the withdrawal of market liquidity in the Nigerian economy and the potential risk of Naira devaluation evidenced by the continuing external reserve depletion. REAL ESTATE OVERVIEW

LAGOS REAL ESTATE MARKET OVERVIEW

The Central Bank of Nigeria’s ongoing monetary tightening policy coupled with a flight of international capital out of Nigeria, means that there is less money in the economy. This equates to rising interest rates from the few banks willing to lend out scarce capital that is in high demand. There is also a reduction in foreign direct investment as the economies of the west continue to improve and start once again offer improved risk adjusted returns. Reductions in FDI also mean that there are fewer international corporates seeking new office space to expand their investment frontiers. However, the long term picture for the Nigerian economy remains very attractive. International corporates with a long term perspective are investing in the country, there is a rising consumer class leading to a need for modern retail space, commercial office space and residential housing. The market is very much driven by a growing local economy as opposed to one driven by international requirements. Lagos continues to improve its infrastructure and service offerings. Pockets of affluence continue to rise up not only on the Island but also on the mainland. This is reflected in rising land costs fundamentally driven by the demographics of a growing and more affluent consumer base and improved existing and new infrastructure. PRIME LAND PRICE MOVEMENTS

Lagos Island Prime Land Prices (Apr 2013 - Mar 2014) 450,000 400,000

+56%

350,000

NGN Values / m2

3.

+24%

300,000

+8%

250,000

+0%

EKO ATLANTIC IKOYI

+37%

BANANA ISL ONIRU

200,000 150,000

VI

+18%

100,000

LEKKI 1

50,000 APR

MAY

JUNE

JULY

AUG

SEPT

OCT

NOV

DEC

JAN

FEB

MAR

The increased demand for prime land for commercial office development is reflected in the 56 per cent increase in land values in Victoria Island within one year alone from N244,000 per square metre as at April last year to N381,169 (US$2,242) per square metre as at March this year. A two tier market has also developed between the prime areas of Victoria Island, Ikoyi, Banana Island and Eko Atlantic, all with land values above 1,000 per square metre and the residential areas of Lekki Phase 1 and Oniru at prices still below US$1,000 per square metre. Lekki Phase 1 with its ongoing transformation into a mixed use commercial/residential district and its proximity to Ikoyi via the link bridge is finally showing positive price movement with land values appreciating by 37 per cent over the year.

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International perspective, local expertise

THE RESIDENTIAL MARKET

In our current economy characterised by a moribund stock market and Central Bank intervention to keep inflation low by removing excess liquidity from the system, developers appear to be shying away from the luxury end of the market characterised by single and multi-family developments from N100m (US$600,000) and above and moving towards the less risky mid range market characterised by properties in the N15m – N70m (US$90,000 – US$400,000) sales price range. The long lead times taken to sell luxury residential properties is in sharp contrast to the much shorter time frames (sometimes sold out off-plan) required to sell well located good quality units in the mid range markets with a much wider pool of prospective buyers able to provide a deposit and pay the balance over either one year or via access to the developing mortgage markets. The low income sector of the housing market continues to remain the unattainable holy grail of the residential sector. Demand is huge while supply of low income housing of any decent standard remains a trickle. The key to this sector of the market is affordability. The low income buyer has to initially find a deposit of 20-30% of the property value and then subsequently has to pay down the mortgage at rates in the region of 20% per annum over a short time frame such that even for a low house price, affordability is still a major hurdle to surmount. In order to address the issues of the development of the mortgage market and affordability for income earners, the Nigerian Mortgage Refinance Company a public private partnership arrangement between the Federal Government of Nigeria and the private sector has recently been created. The company was incorporated on the 24th of June 2013 with the principal objective of addressing the long-term funding constraints hindering the growth of the primary mortgage market, and reducing the costs of residential mortgages and available housing to working Nigerians. Stakeholders include the commercial banks, primary mortgage banks, insurance companies, private equity investors the World Bank/IFC and various Federal Ministries including the Ministry of Finance. THE COMMERCIAL OFFICE MARKET

Victoria Island with circa 290,000 square metres of leasable institutional office space of 7 floors and above followed by Ikoyi with circa 55,000 square metres of leasable space are the primary commercial office hubs in Lagos. After a number of years of very little supply of Class A office space, there is currently a growth spurt of commercial office development with an additional 130,000 square metres or 45 per cent of the existing institutional office space under development in Victoria Island and an additional 51,500 square metres or 95 per cent of the existing institutional office space currently under development in Ikoyi. With current vacancies in the prime commercial office markets of Victoria Island of 30-40 percent albeit lower in Ikoyi, the strong supply pipeline does suggest the importance of securing pre-lets as opposed to building speculatively. THE RETAIL MARKET

Nigeria remains the most favourable destination for retail in Africa driven by the fundamentals of an increasing population, rising real wages from increase in GDP per capita and growing urbanisation. The modern retail shopping centre revolution has now spread from Lagos to multiple secondary cities where a young and populous consumer base, lower competition compared to Lagos and access to large expanses of land has led to increased ability to deliver and increased supply of modern retail in these cities. However, Lagos remains the largest retail market in Nigeria and with an estimated 1 mall for 1,700,000 people compared to Johannesburg with 1 mall for 49,000, according to a Stanlib Q3 2013 report. Lagos does appear to have a strong case for additional modern retail shopping mall supply. The modern retail drive is also strongly supported by retail tenants and none has a greater case for supporting shopping mall growth than Shoprite which is currently the anchor tenant of choice across Nigerian malls. Prime Rents Commercial Office (Class A) Retail (Enclosed Mall) Residential (Apartment Tower) 4.

US$ per annum 750-1000 400 - 800 120,000

REAL ESTATE FINANCING

With the recent Central Bank policy of quantitative tightening in order to keep inflation under control accompanied by the policy of Naira stability via among others the use of high interest rates to attract and retain foreign capital (hot money), the local real economy continues to reel from high interest rates of 20 per cent and above. Sectors requiring high up-front capital MCO Real Estate Investment Report Q1 2014

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International perspective, local expertise

expenditure including real estate and manufacturing continue to suffer. On the flip side, the wider context of a growing economy and rising consumer income means that there is increased pressure for good quality housing, an improved retail experience and improved commercial office space. However, capital can be always be found to fund good projects with attractive risk adjusted returns. Funding is still available from lenders able to access international markets and tap into lower cost capital including well capitalised local banks, international banks with a local presence and Africa focused funding institutions such as the African Development Bank and Afrexim Bank. Local developers unable to access dollar denominated loans are increasingly using equity to fund investments. This is most common via the use of joint ventures between the developer and the land owner. Where there is demand and profit to be made, the market will continue to innovate to ensure that it provides the supply to meet the demand requirements. 5.

ABOUT US

MCO Real Estate Limited ('MCORE') is a real estate investment and advisory firm that provides real estate finance, strategic investment advice and operational know-how to our clients in the delivery of large scale investment opportunities across the real estate and infrastructure sectors. Our services include the packaging of investment proposals, the sourcing of finance and the provision of advisory and research services. We believe that by partnering with MCORE, we will afford you a level of expertise and experience that will avail you a much greater probability of achieving success. 1.

Contact Us

Munachi C Okoye Managing Director MCO Real Estate Limited 5th Floor Mulliner Towers, 39 Alfred Rewane Road Ikoyi, Lagos, Nigeria Tel: +234(0)806 924 5688 Email: [email protected] Web: www.MCORealEstate.com

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International perspective, local expertise

Important Risk Warnings and Disclaimers This document includes information obtained from sources which MCO Real Estate Limited (‘MCORE’) believes to be credible but which it has not independently confirmed. MCORE, its advisors, directors or employees do not make any assurances, guarantees, representations or warranties as to its accuracy, reasonableness or completeness and neither MCORE nor its advisors, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from the use of this document or its contents or otherwise arising in connection with this document. The opinions presented in this report may be changed without prior notice or cannot be depended upon if used in the place of the investor’s independent judgement.

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