Development starts for mega residential projects in Ikoyi, Victoria Island and Oniru have grown consistently in spite of high vacancies in the luxury segment. Along the Bourdillon-Alexander-Gerrard (BAG) Road Stretch, 2 mega residential developments were recently completed, 5 are currently under construction and 3 are in the conceptual/early development phase. Here is a side by side comparison of these 10 projects, which are bringing over 290 new units onto the market.
Number 4 Bourdillon, a 25-floor residential development, which was completed and sold out earlier this year, proves to some extent that there is latent demand for the ultra-luxury product. It is regarded as one of the most luxurious multi-family residential developments in Lagos by many and achieved sale prices ranging between $1m and $3m per apartment on average. This, however, is not representative of the entire market. Here are a few brief points to note:
The quality of stock is poor relative to pricing
For many other project sponsors who proceed to develop luxury apartments, they do so in spite of a large number of unoccupied apartments on the market, because they expect their product to ‘redefine the existing standard of luxury in Lagos’. Most of the time, this is not the case as many developments only have location as their asset. They typically lack the generous apartment sizes, high-quality finishing and the full suite of amenities and facilities required to demand a luxury rental rate or sale price. Focusing specifically on the quality of finishing in the luxury segment, part of the problem is the shallow supply of well-trained contractors and artisans. Where there is quality however, not all developers are willing to pay. Speaking more broadly, poor building regulations and a broken maintenance culture worsen things. The result is a market segment left with an unusual number of low spec apartments with high and inflexible pricing.
Resale values are terrible
Most slightly older high-rise luxury projects that sold for $1m+ when they were launched (Tango Towers for example) are unable to achieve a similar resale value years after. There are a number of forces working against the apartment owner including currency devaluation, ridiculously fast asset depreciation and the speed at which new supply is coming onto a market with limited occupiers and buyers. If owners decide to sell, properties that were bought with a million US Dollar price tag years ago are only able to achieve the Naira equivalent at the time the apartment was purchased. If the transaction was concluded in US Dollars over 5 years ago, that represents a loss of over 55% at least. Potentially worse in a few months.
Developers are building to sell, not rent
As we pointed out in this case study on UPDC’s REIT portfolio, residential yields are low compared to other sectors, usually ranging between 5-6% on average. This means developers typically aim to sell to make healthier profits. In other words, their main objective is to get the property sold to buyers (owner-occupiers or buy to let investors) who then take on rental risk. Though high vacancies in the luxury segment make it difficult to convince buyers, there are always individuals in Nigeria willing to buy luxury apartments. In the ultra-luxury space with prices north of $1.5m, it is easy to imagine that buyers are either purchasing for themselves or as a store of value. However, a few units that have been put up for lease in 4 Bourdillon indicate that this is not always the case.
In contrast, there are still a handful of developers exploring and executing new affordable 50 – 200 unit projects that focus on studios and 1 beds. This is in response to demand from young professionals that will choose proximity to city centres over large spaces or luxury amenities. Key focus locations for these projects so far are Yaba, FESTAC, Lekki Phase 1, Oniru and other regions that are not too far along the Lekki Corridor. We will unpack this in a different note.
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