…as major CEOs are scaling down on large office spaces
By AYOOLA OLAOLUWA
Nigeria’s convalescing real estate sector is in danger of slipping into another recession as more businesses and individuals adopt strategies to survive the crushing effects of Covid19 pandemic, Business Hallmark findings can reveal.
According to findings, the pandemic and the resultant survival strategies been employed by affected individuals and businesses is forcing the shutdown of spaces upon which the real estate industry relies to survive.
While several offices in most Nigerian towns and cities are still under lock, despite government easing of lockdown, those opened for business are operating skeletal services, with many workers still operating from home in obedience to government’s social distancing regulations.
It would be recalled that before the outbreak of the disease in Nigeria and the eventual lockdown, the real estate sector was one of the hard hit sectors during the 2016 recession that hit the nation, shrinking by -0.86% in 2016. And it has not fully recovered from the shock.
According to the most recent Gross Domestic Product (GDP) report, the sector posted a negative growth – 2.36% in 2019, lower than the negative 4.74% reported in 2018. Further checks revealed that the performance of the real estate sector has been lacklustre with the sector recording just one positive growth (0.93% in Q1 2019) over the past 16 quarters (Q1 2016-Q4 2019).
The weak demand for housing is evident in the growing number of unoccupied houses in high-brow locations across the country, particularly in Apapa, Lekki, Ikoyi and Victoria Island, all in Lagos, Maitama, Asokoro and Wuse in Abuja, Port Harcourt, Ibadan, Calabar and many other states.
A real estate expert, Architect Lanre Bhadmus, while speaking with our Correspondent in Lagos, said that owing to the vacant status of the properties, real estate developers have been unable to recover their investments in existing properties, a condition that has hindered further capital spending in new properties and buildings. He warned that shocks from the pandemic will worsen the already dire situation.
A just released survey conducted by Philips Consulting for 100 Nigerian business leaders, titled: ‘CEO Report’ obtained by BH, painted a more gloomy future for the real estate industry.
According to the report, about 84% of Chief Executive Officers (CEOs) in Nigeria agreed that real estate industry in Nigeria is plagued due to the COVID-19 pandemic, especially companies in the business of office rentals.
The Philips Consulting CEO Report further stated that 83 per cent and 55 per cent of CEOs had adopted a ‘Work from Home Strategy’ and ‘Standby Model Strategy’ respectively, and were beginning to question the need for large office spaces.
“Only 46 per cent CEOs are considering retaining their current offices, while others will seek smaller and cheaper offices, shared offices, or adopt an entirely virtual working model,” added the report.
It noted that in commercial cities like Lagos, Abuja, Port Harcourt and several others where massive high-rise office complexes are commonplace, real estate players must be ready for a shift in demand. The report recommended that in order to survive, businesses should repurpose their buildings or provide new services to suit the new mode of work.
The CEO of Philips Consulting, Rob Taiwo, said that some industries, like the IT sector experienced a surge in the wake of the pandemic as a result of the shift to remote working. According to him, Nigeria was no exception as the survey showed that 86 per cent of CEOs reported that the pandemic led to them improving the IT infrastructure of their organisations.
He however disclosed that most CEOs were caught off guard by the pandemic and its effects, as only six per cent of them reported that their organisations were prepared for the pandemic.
“That is why it didn’t come as a surprise that 55 per cent of Nigerian businesses were operating below 50 per cent of their operating capacity. Results from our survey showed that the Nigerian government and business leaders should pay close attention to the post-COVID-19 policies and strategies of the United Kingdom, China, and the United States of America as these will have the most profound impact on the Nigerian business environment,” Taiwo said.
He added that what all stakeholders should be concerned with now is how to prepare for the future that is full of unknowns.
BH gathered that apart from small retail and restaurant businesses that may be forced to permanently vacate their commercial spaces because they can no long afford them, a growing number of corporate firms are also unwilling or unable to pay their rent.
A staff of one of the biggest estate firms in the country who did not want his identity revealed told our Correspondent that an airline with an office space at the Eko House on Allen Avenue Lagos has indicated its intention to vacate the space at the end of their lease in November.
“They even gave us an instruction to look for a smaller and cheaper space for them within the Allen Avenue/Opebi axis. As you can see, less than half of the building is unoccupied. The situation is that bad”, he said.
Meanwhile some real estate practitioners who spoke on the development pointed out that the scale of the disaster for the real estate sector is unimaginable, noting that not only landlords, but also tenants would be affected.
They maintained that though the industry might not feel the full effect now, the impact would be felt by the end of the year when rents are due for payments.
“Due to the effects of lockdown, most businesses are in serious financial crisis. Some have even totally collapsed and filed for bankruptcy. Businesses in the hospitality industry like hotels, airlines, eateries nightclubs, as well as others like schools and construction are badly hit.
“While some companies have not been making enough income to sustain them, their workers have been placed on half salaries or not even getting at all.
“Commercial real estate owners, brokers and landlords have collectively collected billions of naira as rents in advance. It is when the rents are due for repayment by the end of the year or thereafter that the true picture of the problem will be out for all to see.
“Is it a worker that has lost his job or not being paid regularly that you will ask to pay you as at when due? Even businesses will find it difficult to renew their rents/leases due to months of inactivity and paucity of funds.
“To state the obvious, extracting rent from nearly anyone right now will be problematic. And it will get worse by the end of the year, given the soaring numbers of both laid-off and underpaid employees”, declared Poju Davies of Poju Davies and Company, a real estate firm in Gbagada, Lagos.
Another real estate practitioner, Gbenga Ismail, also explained that the impact of COVID in real estate would be felt later, because of the tenancy/rent structure of the sector.
Ismail, who is the Vice President, Lagos Chamber of Commerce and Industry (LCCI), said unlike what is obtainable in other climes like the United Kingdom (UK) and the United States of America where rents are renewed on a monthly or quarterly basis, Nigeria may not feel the pressure now, as rents are paid in one or two years advance.
According to the real estate expert, most people that have either lost their jobs or whose salaries are slashed are likely to have paid their rents in advance before the virus, and that could still ease the tension for now, at least till the end of the year.
“Right now, what happened is that by the period of the lockdown, you won’t feel anything but by the third or fourth quarter of the year you start feeling it; then, we will see how it has affected Nigeria.
“By then, people won’t be able to pay rents or buy houses as planned. We are not sure of where the monetary issues are going now and not sure if lending will continue into the real estate sector. We are yet to see some of these things going on.
“Even in inventories, where developers have put houses out for rent, the concern is who is going to rent them? Before COVID-19, we wait six months before houses get rented or leased but now it may not be less than 12 months. The immediate impact would soon start to reveal itself, ” he warned.
Ismail added that tenants would likely plead for a moratorium because businesses may have been affected and some might have lost their jobs.
“Those, who have mortgages and possibly in the risk areas of losing their jobs will definitely have discussions with their lenders if that happens. I think the mortgage firms have to listen and think of how to help them because the COVID-19 situation is a force majeure, which nobody expected. People are being forced to make decisions that they did not plan to make,” he added.
Most business owners who spoke with our Correspondent noted that being forced to work remotely has awakened them to the possibility of incorporating more remote work into their processes.
“We had all at one point or the other questioned whether remote work will impact business continuity. We never imagined that it is possible to use tools like WhatsApp, Google Sheets, Microsoft Team, Zoom, and other tele-conferencing/telecommuting trends effectively.
“But since we experienced it first hand, we have not skipped a beat. There could be something to be said for having less office space and allowing staff who commute from far to not have to be in the office every day”, said Alfred Igbinoba, a production executive with a publishing house in Lagos.
Another business owner, Peju Ogunsanya, said she is seriously thinking of switching permanently to working remotely from home.
“Before now, I and my 10 staffers converge daily at my garment sewing shop. But with the outbreak of Covid19, we started operating from our different homes. While I take orders from customers, our dispatch rider delivers them to my workers who work on them. When the jobs are ready, our dispatch rider then goes back to pick them and deliver to my place. After I have certified them okay, the dispatch rider will then deliver to our customers.
“This new method has saved cost. Even the rider is on contract. He gets paid based on the jobs he delivered for us. The huge cost of commuting between our homes and the shop is also no longer there. Thankfully, the rent for my shop expired in April. And after waiting for two months at home with restrictions still in place, I decided I no longer have a need for the shop.
When my landlord called me for rent, I just paid for the months of May and June and told him to rent it out to any interested party. This is September; I learnt the shop has not been taken.
“I think remote work has come to stay. After being forced to embrace it, people like us are now stuck with it”, said Ogunsaya.