office market outlook - Cluttons

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Lagos Office Market Outlook Spring 2015. Economic growth to deliver ... reflective of the lower grade stock generally av
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LAGOS, SPRING 2015 cluttons.com

OFFICE MARKET OUTLOOK Backdrop The slide in global crude prices has, as expected, put hydrocarbon dominated economies under pressure, including Nigeria. Compounding matters has been the recent BP forecast of the United States achieving energy-independent status by 2035, which will further dampen the prospects of any rapid turn-around in oil prices. BP expects this to be driven in part by an acceleration in shale oil production, but also due to a gradual plateauing of domestic US demand. This, coupled with an ongoing weakness in global requirements, means that there are clearly challenges ahead, with OPEC member states likely to be corralled into a fundamental reassessment of long-term global oil needs and the way their economies are structured.

65/barrel late last year for its 2015/16 fiscal budget. However with prices remaining at, or near the psychological US$50/barrel mark, the government has been forced to concede that it will run a budget deficit this year. The declaration comes despite previously announced emergency income generating tools, such as fiscal spending cuts and dipping into the Excess Crude Revenue Account, underscoring the pressure of reining in spending levels in the face of a near 60% plunge in oil prices over the past six months.

Crude oil price performance (OPEC basket price)

1,000

$120.00

Source: Cluttons

Annual rent (US$ psm)

$40.00 $20.00

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0

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$0.00 2004

PSM average annual office rents in Ikeja and Apapa during Q4 2014

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PSM average annual office rents in Ikoyi during Q4 2014

$80.00

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US$

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910 157

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US$/barrel

In Nigeria, the government has responded by reducing the forecast price of oil for 2015 on two separate occasions; first from US$ 78/ barrel to US$ 73/barrel, before a further final reduction to US$

Source: OPEC

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12% 10%

Annual rent (US$

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2015

Ikoyi

Victoria Island

Lekki

Lagos Island

Ikeja

Apapa

Forecast GDP growth

Q4 2014 office rents by submarket 1,000

$120.00 12%

900

Forecast

$100.00 10%

Annual rent (US$ psm)

800

US$/barrel

8%$80.00 6%$60.00 4%$40.00 2%$20.00

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World

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Nigeria

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0% $0.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Cluttons

Ikoyi

Victoria Island

Lekki

Lagos Island

Ikeja

Apapa

Source: Cluttons

45,000 growth to deliver long term increase Economic 40,000 activity in occupier The government has already lowered its GDP forecast to 5.5% 35,000 for 2015, 30,000after the economy expanded by 6.2% last year. The IMF however is forecasting a higher annual average GDP growth rate of 25,000 just over 7% between 2015 and 2019. It is still our view that the 20,000 ongoing emergence of Nigeria on the world stage and its position 15,000 as the business gateway to West Africa will mean that there is likely 10,000 to be a steady rise, in the medium to long term, of the number of 5,000 international occupiers looking to enter the Lagos market. sqm

2017

2016

0

2015

2014

600

The extent to which the rise of other business segments compensates for any loss of economic activity underpinned by a shrinking hydrocarbon sector remains to be seen.

12% Ikoyi retained its position as the city’s most expensive submarket, with annual rents holding at US$ 910 psm. OfficeForecast space in the 10% vicinity of Murtala Mohammed International Airport in Ikeja, along with8% Apapa, on the other hand, remains the most affordable, with annual rents almost a sixth of those in Ikoyi (US$ 157 psm). This is 6% reflective of the lower grade stock generally available in these areas. 4%

Supply pipeline continues to strengthen 2% flat rents, developers are taking a longer term view and Despite see opportunities in the market. As a result, they are mobilising on 0% several sites Lagos, with2013 multiple new schemes 2009 across 2010 2011 2012 2014 2015 2016 2017expected 2018 2019to complete in the near to medium term. World Nigeria

This is expected to be further bolstered by home grown expansion plans as occupiers scale up operations in line with the strong economic growth, underpinned by the ongoing diversification of an economy that has been heavily reliant on the hydrocarbon sector traditionally. That said, the extent to which the rise of these other business segments compensates for any loss of economic activity underpinned by a shrinking hydrocarbon sector remains to be seen and is still too early to assess, particularly as the threat of deep water oil project delays or cuts in Nigeria grows. Office rents stable An upturn in requirements driven by strong growth and more diversification is however yet to materialise and has likely been hampered by the softening global outlook and disappointing economic data from China and the EU. As a result, there has been very little change in office rents across the main submarkets in Lagos during 2014.

Civic Centre Towers is rapidly approaching completion and now dominates the skyline on Victoria Island

Annual rent (US

US$/bar

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Cluttons $20.00 Lagos Office Market Outlook Spring 2015

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Ikoyi

Victoria Island

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Lagos Island

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Apapa

LEED certified building in Nigeria when complete and we anticipate rapid 12%take up when the scheme is brought to market.

Lagos office supply pipeline 45,000

Forecast

40,000

The10% result of the projected rise in churn activity on the wider Lagos office 8%market is likely to be a decline in rents for schemes that are poorly maintained, offer inadequate parking provisions and are 6% in what are perceived to be more secondary locations. The located new schemes on the other hand are expected to take their place 4% as the most sought after space in Lagos, delivering new prime benchmark rents for the city. 2%

35,000 30,000 sqm

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0% 2017

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Nigeria

World

Source: Cluttons

During 2015 alone, we expect close to nearly 41,000 sqm of office space to be delivered to the market. This will be spread across the US$ 64 million 14-storey Heritage Place (15,600 sqm) in Ikoyi, where asking rents stand at US$ 1,100 per annum, Kanti Towers (6,500 sqm) and the Civic Centre Towers (11,350 sqm), all of which are located on Victoria Island. We also anticipate Nest Oil’s new HQ – Victoria Island Towers – to complete this year (7,500 sqm). Looking ahead, we anticipate three major schemes to complete in 2016: EKO Towers II (Victoria Island), which has been fully leased by TOTAL; the 27,000 sqm The Wings Towers (Victoria Island), one of which will house Oando plc’s new HQ; and The ACA Building (formerly Kings Tower) in Ikoyi (~11,350 sqm), which will be home to ACA’s new HQ. 2017 will see the delivery of the twin towers scheme, Landmark Heights (15,000 sqm), at Landmark Village in Oniru, according to the latest information available from the developer. Most of the new office supply is slated for Victoria Island, where we forecast demand levels to remain the strongest as the area further cements its position as Lagos’s primary central business district. That said, Alfred Rewane Road (formerly King’s Way Road) in Ikoyi has seen a rise in the number of office schemes getting underway this year and depending on the quality of stock delivered, this part of Lagos may challenge Victoria Island’s dominant position in the future. New supply likely to drive wave of relocation activity The expanding number of high quality office options available to occupiers will of course impact on the relative stability the office market has enjoyed for a number of years. While it remains to be seen, it is our expectation that the vast majority of new supply outlined above will fall in to the Grade A category, if developers deliver on their promise of high quality space. In a market that is generally short on high quality space, this is most likely to translate into a wave of relocations, with a number of international tenants likely to be enticed by these more modern buildings. We believe the costs associated with any potential move to Grade A space will deliver lower utility and maintenance costs in the long run. Heritage Place in Ikoyi for instance, will be the first

Victoria Island Towers will house Nest Oil’s new HQ when it completes this year

For further information, please contact Erejuwa Gbadebo CEO Cluttons Nigeria [email protected] +234 701 999 9290 Leslie Orr Chief operating officer Cluttons Nigeria [email protected] +234 701 999 9289 Ian Gladwin Head of international [email protected] +968 9280 8434 Faisal Durrani International research & business development manager [email protected] +44 20 7647 7166

© Cluttons LLP. 2015. This publication is the sole property of Cluttons LLP. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

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