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Factors That Influence Short-Let Market in Lagos

• Posted by Opeyemi Quadri in Nigeria Property Market
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Short-term let is a new sub-sector in the real estate industry and it has grown exponentially in the last three years by 263% a new report says.

Though short-let is a seasonal tenancy business, its growth particularly in Nigeria’s commercial city is unprecedented in areas like Ajah, Ikoyi, Ikeja, and Victoria Island among other short-let hubs across former Nigeria’s capital city.

This post explores factors that are influencing the short-term apartment investment in Lagos, according to the latest report by Estate Intel.

The report reveals that the market witnessed unprecedented growth due to the pandemic, the return to normalcy has seen the sector prone to the seasonal nature of demand as well as other external influences. Some of the factors include:

Excess Supply

Because of the high demand for short-let apartments, research has shown that supply is gradually growing exponentially. If the high regulatory standard is not brought into the market, it may be flooded with substandard units.

Apart from compromising standards, the market has seen growing studios, a bed and 2-bed apartments which is likely to spur more than 1,975 apartments to the market.

This trend may bring about a fundamental economic principle that is set when the supply of goods or services is more than the demand, leading to a fall in price.

But when demand exceeds supply, prices tend to rise. Judging by the number of people trooping into Lagos every day, it means potential lodgers will have access to many apartments to make the best choice.

General Insecurity

The unpalatable security reports from across Nigeria which isn’t mentioned by Estate Intel team of researchers should not be something that should be ignored.

For instance, a recent report revealed that a terrorist group threatened to attack some states in which Lagos is among. Though security operatives in the state said they have all measures in place to secure the populated southwestern city.

The fact that Lagos is mostly the first point of contact for foreign investors may pose a threat to real estate investment and the lucrativeness of short-term tenancy.

Indisputably, insecurity poses a threat to the property community. But we hope that the security operatives in Lagos are on top of their game to prevent any form of attack.

Rising inflation

In June 2022, data from the National Bureau of Statistics (NBS) shows the inflation rate in Nigeria increased to 18.60% on a year-on-year basis. It shows 0.84 per cent points higher compared to the rate recorded in June 2021, which is 17.75 per cent.

It is the highest since January 2017 when it was 18.72%. As one of the measures, Nigeria’s apex bank increased the interest rate.

Though the present inflation is a global phenomenon, because of the fire brigade approach by Nigeria’s authority, the rising diesel prices is having a direct impact on the maintenance cost of short-let operators in Lagos.

“Our interaction with market players indicates that the increase in diesel prices is set to result in an additional cost to operators by up to NGN3.6 million per annum due to monthly diesel costs of approximately NGN300,000 per month,” this is an additional expense that will reduce returns.

It further says:

“For example, for a 1-bed apartment in Ikoyi renting at ₦5 million and recording daily rates at ₦70,000, this additional cost would potentially reduce the short let premium on regular rents from 180% to approximately 60%.”

Imbalance in the Market

Another factor that may influence short-term tenancy in Lagos is the unstable patronage of the business. The market for short-let usually peaked during festive periods, especially between October and December.

The report observes that occupancies recorded up to 100% between the 10^th and end of the year, running through January while the market begins to experience draught between March and July “that have seen occupancies recorded at low levels of up to 54% in areas such as Lekki.

This means that daily rates fluctuate based on the season and the operator, thereby creating an imbalance in the market.

“For example some market operators indicated that peak season rates can be recorded at ₦220,000 per night for a 3-bed from the benchmark rate of ₦170,000 for a 3-bed apartment in Victoria Island,” it says.

Property Regulation

Real estate is one of the biggest sectors that turn in billions of naira in revenue every year in the commercial city. Unfortunately, the number of building collapses that the state witnessed in the last three years is alarming.

The biggest building collapse recently was the November 2021 collapse of a 21-storey building under construction Ikoyi area, leading to the death of more than 40 people including the owner of the building.

The calamity prompted the state governor Sanwo-Olu on February 7, 2022, to sign into law the Lagos State Real Estate Regulatory Authority Bill at the speed of light.

Now, the Real Estate Regulatory Authority Law 2022 (“the Law” or “RERAL”) are in place plus the Lagos State Real Estate Regulatory Authority (LASRERA) is now charged to be more effective in its responsibility.

Enacting a law is not enough, how effective the laws and the regulatory agencies are will impact the trust people have in the integrity of apartments that are used for short-term tenancy.

Conclusion:

With what seems like challenges to the short-term tenancy in Lagos, the market has actually come to stay.

The fact that more people are coming into the short-let market, we hope, will bring healthy competition into the market.

Reference:

• Featured image by Ralph (Ravi) Kayden on Unsplash