Real Estate Vacancy Factor Index rise in March

1. 1
Real Estate Vacancy Factor Index Increases in March
This is the pioneer edition of our real
estate vacancy factor index (VFIX) for the
Lagos metropolis. It is a measure of the
strength of the real estate rental market
in the Ikoyi, Victoria Island and Lekki
neighborhoods. The base month for this
index is January 2015, which was just
before the historic election that saw a
change in government. It was also the
month prior to the last exchange rate
adjustment from 186 to 199/$. The VFIX
is a useful tool of analysis for developers, agents, tenants, landlords and policy makers.
Lekki Anomaly- high rents despite supply glut
In March 2016, the index increased only marginally to 165 from 160.7 in January, having
climbed substantially in earlier months. What this tells you is that the number of properties that
were vacant in March 2016 was 65% higher than in the base month in January 2015. Vacant
properties were higher in Lekki (64%) followed by Victoria Island (35%) and Ikoyi (24%).
Admiralty Way in Lekki has the highest vacancy ratio which is not surprising giving the
challenges that businesses face in the current macroeconomic environment; most properties
on the street are offices and commercial spaces. Nevertheless, rental prices of vacant
properties in these high-end locations have remained sticky downwards. For example, an office
space in Lekki phase 1 costs N30,000 per sq.m in TBC building. To rent a 1,250 sq.m house in
the same area will cost you about N8- 10 million per annum on Admiralty Way and N5-6 million
per annum in other Lekki streets.

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The link between money laundering and property development
Empirical evidence reveals that approximately 90% of Nigerian investors hold real estate as an
asset class in their portfolios. The locations of their real estate investments are principally in
Lagos, London, Dubai, New York, Atlanta and Accra. There is however a dearth of data, analysis
and information about the Nigerian market. The sector has become enigmatic because of the
strong correlation between the investment, money laundering and public sector corruption.
This is why rents remain stubbornly high even when there is a supply glut.
In dollar terms, Lagos is not that expensive
Meanwhile, premium properties across the globe have remained high. The 2016 Knight Frank
wealth report reveals the 10 most expensive cities in the world of luxury properties in 2015.
The table below shows how many square meters can be purchased with $1mn in the most
expensive cities in the world. In Monaco, the most expensive prime property area in the world,
0
20
40
60
80
100
120
140
160
180
Vacancy factor index (VFI)
VFI
Source: FDC
Research

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$1mn can purchase 17sq.m. In Cape
Town, Africa’s most expensive prime
property zone, $1mn can acquire
255sq.m. Limited supply of land and
houses in cities such as Monaco and Hong
Kong drive up prices of expensive real
estate properties.
Though Lagos is an expensive city, $1mn
can secure 1,250 sq.m of prime property
in Churchgate and FF Towers in highbrow
commercial buildings in Victoria Island. In
essence, prime property is generally five
times more expensive in Cape Town than
in Lagos. Persistent macroeconomic
headwinds in recent times have led to
lower demand for prime properties in
Lagos. Stock broking firms, investment
banks, insurance companies, airlines and oil companies that usually rent these properties for
office space or residential use are experiencing a business downturn.
S/N Countries $1mn-(sqm)
1 Monaco, France 17
2 Hong Kong 20
3 London, Great Britain 21
4 New York, US 34
5 Singapore 39
8 Shanghai, China 48
19 Cape town, South Africa 255

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In macroeconomics, there are three types of indicators: leading, lagging and coincident
indicators. A leading indicator is an indicator that changes before the economy changes; a
lagging indicator changes after the economy has changed; a coincident indicator changes at
approximately the same time the economy changes.
The VFIX is a lagging economic indicator. This means that real estate spikes or declines only
after the business cycle has moved. In other words, if there is a boom in economic activity, the
real estate sector will follow with an expansion, lower vacancy factors and higher housing
starts. This is because businesses invest more, hire more people and rent additional office
space.
An example of a lagging indicator is the 2008 global economic meltdown, which led to the
subprime lending crisis. This meltdown was engineered by a decline in the U.S. federal funds
rates in 2001, which indirectly reduced the mortgage rates at the time. Subsequently, a period
of excess liquidity created excess demand in the housing market, resulting in higher housing
prices. Some homeowners took out more mortgages against this added value to use for
17 20 21 34 39 48
255
1250
0
50
100
150
200
250
300
350
400
450
Monaco,
Paris
Hong Kong London,
UK
New York,
US
Singapore Shanghai,
China
Cape
Town, SA
Lagos,
Nigeria
Square metres per $1mn
£1mn-sq.m

6. 6
consumption, creating a housing bubble. The collapse of the housing bubble preceded a high
default on subprime loans.
Residential and Commercial Sub index
In March 2016, the VFIX for residential and commercial properties was 177 and 148
respectively. The year to date comparison shows that the indices have increased significantly by
77% and 48% respectively, compared to January 2015.
The indices remained flat compared to
February 2016. This is possibly due to the
lagging effect of the VFIX. Supply of units
has increased in excess of demand.
Residential VFIX is much higher than
commercial VFIX because of the rigidity of
costs incurred by businesses; it is not easy
for business owners to find alternative
options in the short term. Also, the
commercial index has been stagnant from
January until March. The likely outcome of
this rise in vacancy factor is a situation in
which developers wait on the side line in
anticipation for improved economic
conditions before embarking on new
projects. This is because upon completing a building, these developers become landlords and
join the rental market.

7. 7
Month/year VFIX Residential Index Commercial Index
January 2015 100 100 100
February 2015 93.6 92.3 96
March 2015 94.2 96.2 91
January 2016 160.2 169.2 148
February 2016 165.3 176.9 148
March 2016 165.3 176.9 148
Source: FDC Research
To Let/For sale ratio
The “to let/for sale ratio” in March 2016 was 2.3:1. This suggests that for every property that
was put up for sale, 2.3 properties were available for rent. This ratio reveals that the economic
severities have had limited impact on property owners. However a sustained slowdown in the
economy would drive up the “for sale” side of the ratio. Looking from a different angle,
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Vacancy Factor Sub-Index (VFI)
Vacancy factor index (res)
vacancy factor index (Com)
Source: FDC Research

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individuals in the Nigerian economy have faced a number of economic issues reducing their
cash flow.
Impact of Macro-economic on the VFIX
VFIX and inflation
The jump in the inflation rate from 8.2% in January 2015 to 9.6% in December 2015 has
reduced the purchasing power of individuals within the economy. As a result, the value of
individual incomes has declined both in nominal and real terms. Given that this research
focuses on luxury areas, a decline in income is expected to reduce the demand for housing.
Following, the real estate industry is used as a hedge against inflation. This is because real
estate assets are long-lived assets that adjust to inflation, which explains the increased supply
of housing. Specifically, inflation increases the value of the housing property, which provides
incentives for new initiatives in the real estate market.

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10. 10
VFIX and unemployment
The increasing trend of the VFIX is in tandem with the unemployment rate, which increased
from 7.5% in Q1’15 to 8.2% in Q2’15. The effect of unemployment on VFIX should take about 9
months before realized as the adjustment process takes time. Specifically, the unemployed
cannot afford to pay for the current housing and will most likely move out to cheaper options,
or in some extreme cases back into parents’ homes.
VFIX and exchange rate
The official exchange rate rigidity in the face of imminent devaluation is discouraging investors
from taking final investments decisions. Thus in aggregate, is reducing the demand for both
residential and commercial properties. The potential investments will naturally lead to demand
for office space and commercial properties.
4.00
6.00
8.00
10.00
12.00
0
20
40
60
80
100
120
140
160
180
VFI/Inflation
VFI
Inflaton
Source: FDC Research

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VFIX and stock market
The Nigerian Stock Exchange (NSE) index has fallen by 13.94% YTD, reducing the returns to
investors’ and stockbrokers. This fall in returns has reduced the attraction for international
investors, thereby reducing the demand for office spaces and housing, and increasing the
current VFIX. This is because the status of the market affects the psychology of investors. If
investors notice that the downturn in the market is as a result of lack of government policy, the
level of uncertainty in the market increases. Therefore investors would rather hold on to their
money, which puts the real estate market in a state of disequilibrium.
Outlook
Looking forward, with the 2016 budget that has been passed officially, we should see a trickle-
down effect in the real estate sector. This should reduce the VFIX in the second quarter.
However, given that the index is lagging, the effect may only be seen from June. We should also
expect a decline in house prices if the economic headwinds persist. Specifically, we should also
expect a switch in real estate pricing from dollars to naira, as landlords now realize the effect of
0
50
100
150
200
250
300
3500
20
40
60
80
100
120
140
160
180
VFI/Exchange rate
VFI
Parallel mkt
rate
Source: FDC Research

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the economic challenges faced and will be forced to change if they want to remain profitable.
Therefore, the VFIX today is expected to affect the development and leasing decisions in the
second quarter.
The unemployment figure for
Q4’15 was at 10.4%, a 0.5%
increase from the previous
quarter. We expect to see the
lagging effect on VFIX to be
realized in Q3. This means a
rise in the VFIX in future
quarters.
The NBS recently released the
inflation figure for March 2016
as 12.8%. This is the highest
rate so far year-on-year since
July 2012. With persistent
inflation in the economy, we
expect to see a rise in the VFIX
in the second quarter. This price increase will most likely reduce the ability of individuals to pay
their rents, thereby reducing the demand for housing.
Regardless, we predict that the increasing VFIX is a transient phenomenon in the Nigerian
economy that is likely to fall, as there is a light at the end of the tunnel.

13. 13
Appendix
Methodology
The VFIX is computed by measuring the number of houses that are vacant (unoccupied) in the
three select locations mentioned above. These locations are prime areas in Lagos for residential
and commercial properties. The base month and year are set at January 2015, representing an
index of 100. The first step in computing the VFIX is the collection of data on vacant or
unoccupied properties via primary research from residential and commercial properties. The
vacancy rate is then calculated by dividing the number of vacant units for each category by the
total number of units counted and then multiplying by 100. The resulting rate for the month is a
weighted average of both commercial and residential VFIX.
A decrease in the VFIX from the base month index is a positive outcome for the economy,
meaning that more people are able to afford costly housing. This suggests an increase in the
wealth effect, which is a case where individuals perceive themselves to be richer. An economic
boom usually drives the decline in the VFIX, where disposable incomes have increased, hence
boosting the demand for housing. On the other hand, an increase in the VFIX above 100 implies
that more people are moving out or selling houses due to a downturn in the economy.
The VFIX has been divided into two separate indices: the Residential and the Commercial Index.
The table below shows the types of housing under each category. This breakdown is to provide
a better understanding of which type of housing is in higher demand.
Residential Commercial
Stand alone houses Office buildings
Town houses/Terraces Warehouses
Flats Convenience stores
Bungalows Shopping Malls
Duplex Markets
Source: FDC Research