Lagos Real Estate Report Highlights Investment Trends

MCORE TM A Project Finance Company
International perspective, local expertise

Lagos, Nigeria Q3: July - Sept 2012
Real Estate Investment Report

TABLE OF CONTENTS Page

1 EXECUTIVE SUMMARY................................................................................................. 1
1.1 Q3 2012 Economic Trends.............................................................................................. 1

2 NIGERIA ECONOMIC OVERVIEW................................................................................. 2
2.1 The Nigerian Economy.................................................................................................... 2
2.2. Money Markets................................................................................................................ 2

3 REAL ESTATE OVERVIEW........................................................................................... 3
3.1 Funding............................................................................................................................ 3
3.2 Land Price Movements.................................................................................................... 4
3.3 The Commercial Office Market........................................................................................ 5
3.4 The Retail Market............................................................................................................ 5
3.5 The Residential Market.................................................................................................... 5

4 ABOUT US...................................................................................................................... 6

1. EXECUTIVE SUMMARY

Dear Sir/Madam, we present our Q3 2012 Real Estate Investment Report. The report is addressed to
investment managers, investors, financiers, developers, sponsors and other parties seeking to benefit
from investment in Nigerian real estate. The report covers the Nigerian economic environment with a
specific focus on the Lagos Island area which is arguably the most vibrant location for real estate
investment and development in Nigeria. The report identifies the latest trends in the real estate market
from an investor/financier perspective with the aim of providing you with a practical and insightful
decision making tool that assists you in the investment process. We welcome feedback to ensure that
this report consistently meets your investment needs and if you are happy with the report we ask that
you forward it to your clients and colleagues that are interested in Nigerian real estate investment
opportunities.

An Interview Session on CNBC Africa’s Closing Bell based on this report can be found at;
http://www.abndigital.com/page/multimedia/video/closing-bell/1433954-Report-on-Lagos-Real-Estate

1.1 Q3 2012 ECONOMIC TRENDS

 The Nigerian Stock Exchange has risen by 25.41% year to date and up by 20% within the last
quarter alone. Investment portfolios are showing improved returns and this has reduced risk
aversion and improved the overall perspective on investment activity.

 Foreign fund flows (estimated at +70% of NSE trading volume) have re-entered the market to
take advantage of the growth in the stock market. Alternative asset classes (real estate et al) can
only benefit from the familiarity gained by foreign investors from investing in the local stock
markets.

MCORE / Real Estate Investment Report Page | 1


 The high cost of local finance continues to constrain development projects. However,
international investor interest provides an alternative means of financing projects at low rates for
attractive schemes.

 Nigeria continues to grow in the awareness of the international community as an attractive
frontier market destination for inward investment.

 On the local scene, the tight monetary supply continues to constrain property demand leading to
illiquid markets, few transactions and a supply overhang.

2. NIGERIA ECONOMIC OVERVIEW

2.1 THE NIGERIAN ECONOMY

The Nigerian economy continues to take one step forward and one step back with the slow pace of
reforms particularly in the oil sector which accounts for over 90% of the country’s export earnings.
One area that has been showing promise is the reforms going on in the power sector with the ongoing
bid process towards the privatisation of the distribution and generation companies. The security
situation continues to cause unease. However, there appears to be a greater sense of purpose by the
Federal Government to halt the incessant loss of lives and disregard for law and order. The pace of
reform could be a lot quicker but the level of stability appears to be enough to attract international
investor interest in the country.

This enhanced pace of inward investment into the country can only bode well for economic growth
and job creation. The economy is gradually picking up although the boom years ending in 2009 are
definitely over for now. GDP growth for Q2 2012 stands at 6.28% which is a slowdown compared to
7.72% growth in Q2 2011. Current GDP growth is attributed to growth in the building and construction
sector – one of the fastest growing small sectors in the economy and growth in the manufacturing
sector attributed to improvements in the level of power generation.

In the 3rd quarter, the official exchange rate dropped to N155.78 while inflation stood at 11.7%. Also,
the cost of funds in the interbank money markets moderated downwards by 500 basis points. These
improvements facilitated inflows of foreign exchange which prompted the nation’s external reserves to
rise to US$41.9 billion from US$36.77 billion in the second quarter. The nation’s capital market also
recorded strong growth with market indices growing by more than 20%. Market capitalisation closed
the third quarter at N8.282 trillion while the all share index rose by 20.43% or 4,412.07 basis points to
close the quarter at 26,011.64 points from 21,599.57 at the start of the third quarter.

Overall improvement in these economic metrics
is attributed to a number of factors including the
measures introduced by the CBN in the second
quarter to further tighten the money supply, the
inclusion of Nigeria in the JP Morgan
Government Bond Index-Emerging Market
(GBI-EM) and renewed interest by foreign
investors in the Nigerian capital market as a
growing frontier market

2.2 MONEY MARKETS



The Central Bank of Nigeria’s focus on bringing down inflation currently at 11.7% for the month of
August 2012 (National Bureau of Statistics) has led to an increase in Banks capital reserve ratios,
rising interest rates (MPR at 12%) and attendant monetary tightening. All this is gibberish to the
tomato seller at the roadside but what it does mean in layman’s terms is that there is very little money
in circulation. It also means that the real economy (the economy of producing goods and services) is
suffering due to a lack of lending by Banks. I had mentioned this in my Q2:2012 Report but the fact
still remains that with sovereign bonds yielding circa 15%, Banks are in no hurry to lend to the real
economy and where they do, lending rates are in the region of 20% and above to cover the additional
risk above the risk free rate of buying bonds.

With falls in the rate of inflation, this may ease pressure on local interest rates and lead to a fall in
bond yields ultimately causing banks to re-enter the market and lend to the real sector in order to
generate profits.

3. REAL ESTATE OVERVIEW

Over the last few years and specifically since the transfer of power to the current president, Nigeria
has become more stable politically, economically and socially. The power, agriculture and oil and gas
sector reforms are continually awaited but there is a belief that slow progress is better than no
progress at all. Reflecting this, the flow of foreign investment into the country has been on the
increase. Interest in commercial real estate has continued to grow, with private equity investors
pushing billions of naira into the development of commercial property in major Nigerian cities. Recent
investors include Rand Merchant Bank in conjunction with RMB Westport and the International
Finance Corporation.

The local market, driven by local investors and local consumers of property has been negatively
impacted by the tight monetary supply brought on by the CBN’s policy of reigning in inflation. The lack
of money in the local economy has led to an oversupply of real estate assets mainly land and
residential property and stagnation in the development of new stock. This has led to an attendant
weakening in pricing. Now is a good time to enter the market and seek acquisition opportunities with a
focus on discounted deals from cash constrained and motivated sellers.

3.1 FUNDING

The tight monetary supply, structural inefficiencies in the market, high cost of doing business and
attendant investment risks have kept bank lending rates above 20%. This remains in the face of
falling inflation. Net interest Margins (NIM), the measure of the difference between the interest income
generated by banks and the amount of interest paid out on depositor funds continues to remain very
high. The painless returns banks make by holding government securities, is often a disincentive for
them to lend to the real sector. However, if medium-term inflation continues to fall with an attendant
fall in yields from sovereign bonds, banks will hopefully re-enter their traditional market of core lending
to the real sector in order to maximise returns.



Traditional borrowers of funds are currently very wary of the high interest rates charged by banks, of
up to 25% and above inclusive of fees and are seeking alternative means of financing projects.
Equally, international investors are seeking higher returns than can be achieved in their local markets
where interest rates and returns are at historical lows. International banks with a local presence in the
market have been able to position themselves as conduits, matching international investment funds
with well packaged viable local investment opportunities while taking a healthy margin to act as
bearers of local risk.

Stand alone international funders/packagers of funds have also started to seek to gain a foothold in
the market by seeking to fund local transactions with a high profit margin that can mitigate against
local risks. This bears well for the local economy, with the most viable projects able to attract
international funding at single digit rates while at the same time providing increased completion and
pressure on local banks to seek the means to reduce the lending rates or see their lunch eaten by
foreign players.

3.2 LAND PRICE MOVEMENTS

Victoria Island, Ikoyi, Banana Island, Oniru & Lekki 1 price per m2– 12 Months (October –
September 2012)

Lagos Island Land Price Movt. (Oct - Sept 2012)
350,000.00

300,000.00
-6%
250,000.00
Land Price psqm

14% VI
200,000.00 IKOYI
+51%
150,000.00 BANANA ISL
-4% ONIRU
100,000.00
LEKKI 1
+28%
50,000.00

-
OCT NOV DEC JAN FEB MAR APR MAY JUNE JULY AUG SEP

With a full year’s range of land price data from October 2011 to September 2012, we can now review
the movement of Lagos Island land prices to date. Banana Island has topped our price movement
table with an impressive showing of a 51% appreciation in land value over the year from N132,000
per m2 at the start of the year to N200,000 ($1,289) per m2 currently. This is a very attractive return



for any asset class in a current market where asset appreciation is hard to come by. Lekki 1 comes
second with a strong performance of 28% over the year from N90,000 per m2 at the start of the year
to N116,000 ($747) per m2 currently.

Lekki 1 now matches Oniru in pricing, Oniru having traditionally retained a premium due to its
proximity to Victoria Island is now matched by Lekki’s price premium due to its forth coming proximity
to Ikoyi. Lekki 1 continues to grow in desirability, gradually turning into a buzzing commercial hub of
small to medium business offices with a growing commercial service sector to service its upwardly
mobile demographic including bars, restaurants, hotels, gyms, private clubs and other hospitality and
leisure facilities. We see additional room for price appreciation in Lekki once the full impact of the
Ikoyi / Lekki Link Bridge comes into effect. Ikoyi prices have been stagnant through much of the year
but have rallied by 14% over the last 3 months alone to currently stand at N235,000 ($1,517) per m2.
Victoria Island, the most desirable land in Lagos is currently priced at circa N272,000 ($1,753) per m2
having fallen by 6% over the year.

3.3 THE COMMERCIAL OFFICE MARKET

Commercial Office property continues to be an area with low competition due to the high financing
barriers to entry, the increased level of sophistication to develop office property with a higher
specification and the expertise required to let property to tenants of good standing. Traditionally,
commercial property has been developed by corporates building for owner occupation. This is
gradually changing as institutional investors including Actis, CAPIC and RMB Westport eye up the
sector as a means of deploying deep balance sheets for strong returns.

Our research appears to suggest that the commercial office sector is still under pressure with rents
still soft and quality tenants not easy to come by. International corporates seeking office space are
few and far between and this has led to a weakening in rents for office space priced at the top of the
market. Victoria Island and Ikoyi remain the most prestigious office destinations with average rents
priced at circa $540 per m2. Rents formally priced at the top of the market at $1000 per m2 and
above have now softened to circa $800 per m2. International tenants that could have afforded such
rents have pulled back expansion plans in order to consolidate on their home markets leaving
formerly desirable rents of circa $1000 per m2 and above unattainable for now for commercial office
landlords.

3.4 THE RETAIL MARKET

Interest in commercial real estate has continued to grow, with private equity investors pushing billions
of naira into the development of retail malls in major Nigerian cities. Actis Nigeria and African Capital
Alliance are among investors that have taken the lead on local investment in retail property. Actis has
invested $100 million in the development of the Ikeja City Mall while Capital Alliance is presently
executing a N5 billion joint venture project with former GTAsssure (now Mansard) to deliver an ultra-
modern mall in Victoria Island, Lagos.

New players in the institutional retail investment space include the International Finance Corporation
(IFC) and Artee Group. IFC, a member of the World Bank Group, along with IFC African, Latin
American and Caribbean (IFC-ALAC) Fund, a private equity fund, managed by IFC Asset
Management Company (IFC-AMC), is backing Persianas Group, an indigenous real estate
development firm, with $124 million for the growth and promotion of commercial real estate in Nigeria.

IFC’s $124 million investment in the Persianas Group is aimed at supporting the group’s growth
strategy in the rapidly expanding and underserved retail and commercial property market in Nigeria,
and the investment package consists of up to $74 million in equity, provided by IFC and IFC-ALAC
Fund, and $50 million in debt, provided by IFC.



Artee Group, owners of SPAR and Park & Shop, is planning to open 100 shopping outlets in Nigeria
in the next six years and the proposed outlets will come as hyper format units comprising between
400-500 shops located within the outlets.1

3.5 THE RESIDENTIAL MARKET

The residential market continues to bear the brunt of the structural tightening programme currently
being run by the CBN. The lack of vibrancy in the market is aggravated by the lack of a mortgage
market which would have made it easier for consumers to acquire ownership of property over a period
of time by making regular payments while in secure employment. Even with the challenging economic
situation, there are still stirrings in the market place that suggest that pressure is once again building
based on consumer demand.

The mid range (N25M – N40M / US$167 – US$250K) bracket is consistently showing activity with a
number of new estates currently in development along the Lekki-Epe expressway and brisk sales for
high quality developments built by developers with a track record of delivery. The ongoing (slow)
development of the Lekki-Epe Expressway continues to open up access to the area beyond Ajah and
is already having a very positive impact on estate developments along this axis.

The Luxury / Super Luxury Residential Market (N100m+ / N160m+) is also showing evidence of
activity which is evidenced by the completion of formally moth-balled developments in the expensive
areas of Ikoyi and additional developments breaking ground in Ikoyi, Victoria Island and Lekki. Even
in the challenging environment, penthouse prices for the most prestigious apartment blocks continue
to break new pricing barriers showing that there is money at the top of the market even in the
currently challenging economic environment.

4. ABOUT US

MCORE is engaged on a daily basis with players in the investment marketplace. We have our finger
on the pulse of what is going on in the Real Estate market. MCO Real Estate under its new MCORE
title has diversified its services in addition to real estate, towards support services for the energy,
construction and infrastructure sectors. MCORE is now able to provide project management, project
finance, cashflow modelling, targeted research, feasibility and market studies and investment advice
across these sectors. In addition to real estate, we can also finance myriad assets ranging from
offshore support vessels to heavy construction machinery.

Our re-branding exercise based on our wider financing remit is symptomatic of the growth in the wider
economy in areas such as construction, infrastructure development and energy – power and the
advent of the local content law in particular which seeks to increase indigenous participation in the
Nigerian oil and gas industry by prescribing minimum thresholds in relation to the utilization of local
services and goods in the award of contracts for projects in the Industry.

MCORE is focused on two main areas;

(A) Acting as an intermediary to sources financing for those seeking funding to develop projects
in the areas of real estate, construction, infrastructure, energy and commodity sectors.

(B) Introducing investment opportunities to equity investors and lenders seeking viable projects in
the areas of real estate, construction, infrastructure, energy and commodity sectors.

1 th
Courtesy The Guardian Newspapers Monday 27 August 2012



MCORE focuses on providing strategic investment advice, funding and operational know-how to
develop projects. Our strong relationships with all the major lending banks and specialist equity
providers both locally and offshore enables us to source finance at the best terms on the market. We
believe that by partnering with MCORE, we will afford you a level of expertise, experience and
operational know-how that will offer you a much greater probability of success. You can contact us via
email at info@MCORealEstate.com or via our website at www.MCORealEstate.com for further
information.



5. Contact Us

Munachi C Okoye
Managing Director
MCO Real Estate Limited
5th Floor Mulliner Towers,
39 Alfred Rewane Road
Ikoyi, Lagos, Nigeria

Tel: +234(0)806 924 5688
BB: 285DC6A8
Email: info@MCORealEstate.com
Web: www.MCORealEstate.com

Important Risk Warnings and Disclaimers

This document is based on information obtained from sources which MCO Real Estate Limited
(‘MCORE’) believes to be credible but which it has not independently confirmed. MCORE, its
advisors, directors or employees do not make any assurances, guarantees, representations or
warranties as to its accuracy, reasonableness or completeness and neither MCORE nor its advisors,
directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss
howsoever arising from the use of this document or its contents or otherwise arising in connection
with this document. The opinions presented in this note may be changed without prior notice or
cannot be depended upon if used in the place of the investor’s independent judgement.


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