broll.com

Quarterly Market Report Q3: 2017

COMMERCIAL BROKERAGEBabafenwa OmoniyiE: obabafenwa@broll.com.ng

INVESTMENT BROKERAGEBolaji EduE: bedu@broll.com.ng

RESEARCHERSNnenna AlintahOpuda SekiboAmaka Ajaegbu

RESEARCHNnenna AlintahE: research@broll.com.ng

SUB-SAHARAN AFRICA RESEARCHElaine WilsonE: ewilson@broll.com

NIGERIA OFFICE 6th Floor, ED Building, 47 Marina Lagos Island, Nigeria | Telephone: +234 1 270 1892-4 | Email: nigeria@broll.com

OFFICE AND RETAILMARKET REPORT

Source: Central Bank of Nigeria Source: Central Bank of Nigeria; Aboki fx

Economic Viewpoint

Macroeconomic fundamentals improved in the third quarter with reduced inflation, positive GDP growth, increased foreign exchange (FX) supply and further accretion in external reserves. FX reserves grew 7% to US$32.49bn, mainly attributable to a 15.8% increase in oil prices (Brent Crude) in the global market. On the domestic front, oil production also increased by 8.4%.

With the fairly consistent intervention in the FX market of approximately US$3.5bn by the Central Bank of Nigeria (CBN) in the third quarter, there was further convergence in the interbank and parallel market rates. The Investor-Exporter Foreign Exchange (IEFEX) window which appreciated 0.8% in the quarter continues to mitigate the likelihood of a speculative attack on the naira.

Market Viewpoint

295

305

315

325

335

345

355

365

375

Central Bank rate Parallel Market rate

03-Jul

17-Jul

31-Jul

14-Aug

28-Aug

11-Se

p

25-Sep

Nai

ra/U

S$

Foreign Exchange

29,0

29,5

30,0

30,5

31,0

31,5

32,0

32,5

33,0

Billi

on U

S$

03-Jul

17-Jul

31-Jul

14-Aug

28-Aug

11-Se

p

25-Sep

Nigeria Foreign Reserves

1 | Office & Retail Market Report 2017

Source: National Bureau of Statistics Source: National Bureau of Statistics

The pass-through effect of a more affordable naira is putting downward pressure on inflation as seen by the consistent decline in headline inflation over the last three months. Year-on-year inflation is down to 15.98% in September from 16.25% in July.

Similarly, the economy has recorded its first quarter of positive growth in 2017. The economy grew 0.55% after five consecutive quarters of negative growth. This trend reversal is attributable to recovery in both the oil and non-oil sector. The Nigerian Stock Exchange All Share Index expanded 7.4% in the quarter to 35,378.89 points. However, a degree of uncertainty still exists in the markets especially with regard to current market policies.

Market Viewpoint

15,94%

15,96%

15,98%

16,00%

16,02%

16,04%

16,06%

Jul-17 Aug-17 Sep-17

Consumer Price Index

-2,50%

-2,00%

-1,50%

-1,00%

-0,50%

0,00%

0,50%

1,00%

Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17

GDP Growth

28 000

30 000

32 000

34 000

36 000

38 000

40 000

03-Jul

10-Jul

17-Jul

24-Jul

31-Jul

07-Aug

14-Aug

21-Aug

28-Aug

04-Sep

11-Sep

18-Sep

25-Sep

Source: Bloomberg

Nigerian Stock Exchange All Share Index

1 | Office & Retail Market Report 2017 2 | Office & Retail Market Report 2017

Occupier Viewpoint

The frequency of completed transactions in the office market has slowed this quarter relative to other time periods. Although the trend of the relocations to A-grade buildings from B-grade and standalone buildings by corporates persists, general activity has decreased due to a supply glut which resulted in high vacancy rates.

Nonetheless, there were notable occupations of A-grade spaces with favourable lease conditions to account for the oversupply in the market. However, these transactions were restricted to smaller sized spaces of 200m² to 500m².

A number of existing tenants in prime grade buildings in Ikoyi and Victoria Island are taking advantage of current market

conditions by seeking renegotiations of lease agreements for more favourable conditions.

In Abuja, the appeal of naira rents resulted in activity, however, demand is growing at a much slower pace relative to supply.

Market players in the ICT, consulting, FMCG, marine, oil and gas, shipping and logistics and finance sectors were the most active during the third quarter. Regional relocation of administrative staff by corporates, from the Niger Delta sub-market to the Lagos and Abuja sub-markets was also prominent.

Market Viewpoint Office Market Report

₦46,000Lekki

₦28,700Lagos Island

₦51,500Abuja

₦47,500Ikeja

US$390Victoria Island

US$410Ikoyi US$710

US$640

A-gradeRegion

Average Asking Rental (Net/m²/annum)

B-grade

Landlord Viewpoint

The office market is currently regarded as a tenants’ market and as such, landlords have become innovative with incentives in order to retain tenants in a market with high vacancy levels. Some of the incentives include rent concessions, longer rent-free periods, more flexibility in frequency of rent payments and in certain locations, rent rebasing to naira rents.

During this period, average asking rentals for A-grade spaces across the core markets of Ikoyi and Victoria Island declined. In Ikoyi, rentals dropped approximately 7% to US$710/m²/annum down from US$765/m²/annum, while rentals in Victoria Island dropped 7.8% to US$640/m²/annum down from $690/m²/annum.

Source: Broll Research

US$550

Mixed-use Kingsway Towers (12,000m2) in Ikoyi, Lagos

2 | Office & Retail Market Report 2017 3 | Office & Retail Market Report 2017

Office Market Report

Retailers’ Viewpoint

Outlook

While general activity in the market remained sluggish, there was an increase in enquiries and demand from international retailers from the Far and Middle Eastern countries. Over the past 12 to 18 months the macroeconomic challenges that faced the country resulted in reduced demand from US and European retailers. As these retailers adopt a wait and see approach, retailers from China and Turkey have intensified their interest in the Nigerian retail sector.

Increased interest in some cases have translated into active negotiations as well as concluded leasing transactions. Miniso provides a case in point as one such retailer from the Far

East looking to establish a firm presence in the retail market. Miniso commenced trading in the third quarter in a number of shops across core locations, taking up close to 4,000m² of retail space with plans to open additional stores in other secondary markets.

From a local perspective, existing retailers continued to remain cautious given their experience in the market. Many continue to reassess their strategies, halting expansion plans into newer schemes, simultaneously consolidating operations in the best performing locations and malls in which they have a presence.

We expect that the ongoing positive trend in the macro-economy will persist and is likely to have spill-over effects on the office sector. The consistent intervention by the Central Bank of Nigeria (CBN) in the Foreign Exchange (FX) market has reduced speculative pressures on the naira resulting in Nigeria’s retention in the MSCI frontier index and improved investor confidence. Oil prices are expected to remain relatively stable for the remainder of 2017, which could help sustain the CBN’s ability to fund the FX market. In light of the fairly positive sentiment, we are likely to see a gradual upward shift on the risk curve of investors towards assets such as real estate.

The existing oversupply of space will remain in the short to medium term which may put further downward pressure on asking rentals. An additional 21,000m² of office space is expected in the final quarter of 2017 from the delivery of Alliance Place, Kingsway Tower and Desiderata Tower. Trinity Towers and Cornerstone Tower are anticipated for delivery in 2018, adding an additional 23,000m² of space into the market.

Source: Broll Database

24,000

23,000

22,000

21,000

20,0002017 2018

m²

A-grade Development Pipeline Victoria Island and Ikoyi

Asaba Mall, Delta

4 | Office & Retail Market Report 2017

Office Market Report Retail Market Report

Landlord Viewpoint

Outlook

In order to remain competitive, maintain and drive up occupancy levels in malls, most landlords across the market have continued to utilise concessions to stay attractive. This has especially been the case in recently opened malls that have increased the supply of retail space across the market. Concessions which are typically geared towards reducing retailers’ initial capital outlay are adopted differently by landlords and continue to be extended on a case by case basis. They range from lower rents and longer rent free periods to lower and fixed exchange rates. These tend to offer more certainty around rents which are usually stated in US dollars but payable in naira. Some landlords have also been willing to consider different rent structures including payment in instalments and stepped rentals.

Vacancy rates have dropped from 58% to 30% and 41% to 38% in core and secondary locations respectively. It is important to note that this reduction in vacancy levels has come on the back of longer negotiation periods and the willingness of landlords to consider and extend concessionary leasing conditions.

Already established schemes such as Palms Lekki and Ikeja City Mall continue to benefit from first mover and locational advantages, commanding the highest rents and recording near 100% occupation levels.

Average asking rentals for spaces between 100m² and 200m² are currently around US$44/m²/month and US$30/m²/month in core and secondary locations respectively.

The retail sector continued to face some challenges despite the recovery recorded in wider macroeconomic indicators. The effects of a fairly stable naira, reduced inflationary pressure and the economy’s emergence from recession are yet to have significant ripple effects on the retail sector.

We expect that developers who are keen to commence new projects will adapt their plans given the realities of oversupply, a shallow tenant pool and slower leasing activity in the market. Mall sizes are likely to be smaller than previously seen, incorporating a wider range of uses in their concepts and designs.

Over the next 3 to 6 months around 28,000m² of retail space is anticipated to be supplied across the market. 80% of this supply is expected in core location with the delivery of Gateway Mall and the retail element of Central Office Park in Abuja. This will fuel the existing oversupply in the market hence putting further pressure on rentals.

30Secondary locations**

44Core Locations*

Net Average Asking Rent (US$/m²/month)

Note: Rental figures are for 100m² to 200m²Source: Broll Database *Lagos & Abuja; **Rest of country

Source: Broll Database

25,000

20,000

15,000

10,000

5,000

0Core Market Secondary Market

m²

Development Pipeline for A-Grade Retail Space(6 - 12 months)

5 | Office & Retail Market Report 2017

DisclaimerBroll Property Group has taken every care in the preparation of this report. The sources of information used are believed to be accurate and reliable, but no guarantee of accuracy or completeness can be given. Neither Broll Property Group, nor any CBRE company, nor any director, representative or employee of Broll Property Group, accepts liability for any direct or consequential loss arising from the use of this document or its content. The information and opinions contained in this report are subject to change without notice. No part or parts of this report may be stored in a retrieval system or reproduced or transmitted in any form or by any means, electronic, mechanical, reprographic, recording or otherwise, now known or to be devised, without prior consent from Broll Property Group.