Rory Roriston, director of real estate investments, corporate and investment banking at Standard Bank, shares some of the lessons he has learned about Nigeria's property sector.
Why is property in Nigeria among the most expensive in the world?
This doesn't apply to the whole of Nigeria. It is generally restricted to Lagos and is as a result of the age old theory of supply and demand. This is particularly prevalent in the Victoria Island, Ikoyi and Lekki areas in Lagos. Apart from Lekki, which is an enormous land reclamation, the islands were previously residential areas. They have now become sought-after areas for commercial offices, especially Victoria Island. Ikoyi is still mainly residential but commercial development is happening at a rapid pace. I however don't believe the transformation will be as extensive as Victoria Island and it will be limited to the main arterial roads. Lagos Island is an older mixed-use node but has deteriorated and become extremely congested.
The lack of large tracts of land on the islands has been a contributor to the high costs. Another contributor is the shortage of high-grade office space demanded by international operators that have recognised the opportunities that Nigeria present. This is not a short-lived demand where market rentals tumble every time a major development comes on stream. The rentals are sustainable for the long-term and in fact every major development seems to set a new benchmark.
What would you say are the main risks involved when investing in Nigeria's property sector?
The main risks are around land ownership, regulatory approval processes, hidden transfer costs and problems that come at you from unexpected quarters. With just about every property we have purchased there have been problems which have delayed development.
Sale agreements are very simple and don't contain protection clauses for the purchaser. Payment occurs on signature of the sale agreement after which the purchaser has effective use of the property. However, it is the responsibility of the purchaser to perfect title, which can be a fairly drawn-out process with costly hurdles.
It is good practice to partner with local shareholders that are knowledgeable of the risks and know how to mitigate them.
Please elaborate on some of the major issues involved with land ownership.
Land is held under what is known as a Certificate of Occupancy (CoO) which is essentially a leasehold title. The current land registry was only instituted in the 1960s. Some land owners however saw this as the government trying to take their land and did not register. So very often, even in the main metropolitan areas you will come across land held under what is termed traditional title. This title has to be rectified to cover any land security. Also, the plot is not always identifiable and survey documents can vary. Generally it is identified by the local community who will confirm the rough boundaries of the owner's property.
I have seen different surveyor general diagrams for a single site held under normal title. I've also been held to ransom by a petition that was submitted to the local authority that cannot process plans until the petition is resolved, by an adjacent occupier looking for “go away money”. The basic rule is to make sure that the seller is in fact the owner of the land by conducting proper due diligence.
Another major issue is if the owner is from another state. It is possible that the state tax authorities will levy a wealth tax on him and title cannot be perfected until the tax is paid which the purchaser normally ends up paying just to perfect the title.
Another aspect to be very wary of is the add-on costs to a land purchase, particularly the commission and fees. This also applies to leased accommodation. Agents always demand 10% commission and the seller will demand 10% legal fees. There is almost no legal work required by the seller and you can probably negotiate this fee down to about 2%. The agent will normally settle for between 3% and 5%. And so I can go on, every time you buy another piece of land you will find a new problem.
Tenants of both residential and commercial real estate often have to pay upfront for the entire lease term; why is this?
Upfront payment creeps into every aspect of life in Nigeria. I think part of the problem is trust and making the tenant commit to the full term. Another reason could well be the issue that debt is expensive and that the developer needs cash for the development activities. In many cases maintenance is non-existent during the term of the lease and you don’t see the landlord again until lease renewal.
What are the major mistakes made by investors new to property development in Nigeria?
The culture of proper evaluation of a property investment by Nigerian developers is lacking. There is no full investment analysis, sometimes resulting in the developer running out of money part way through the construction with his cash tied up in a non income-producing asset. It seems that developers procure a piece of land and just start construction without pre-letting or ensuring adequate funding is in place. Another mistake I have seen is that developers often have unaffordable grandiose ideas instead of developing at an affordable pace.
As far as non-Nigerian investors are concerned, I think we have all paid our “school fees” and now exercise extreme caution in any dealings. I think this has led to a certain amount of over-caution. I do however believe this caution is not misplaced. It is necessary to understand that you are operating in a different environment with unique rules of engagement, and believe me, no one knows all the rules. I think working with joint venture partners is the best way to get into the market.
Taking into account all the problems you’ve encountered along the way; are you still positive about Nigeria’s property market?
I think the demographics of Nigeria speak for themselves. The country has a total population of around 150 million with the number of people living in Lagos estimated at 17 million. Nigeria’s wealth has spawned a large and still rapidly growing middle class. This bodes well for a sustainable long term growth in the property sector.
There is no doubt that the commercial market is moving in a direction of increased sophistication. It still has a long way to go but there is no lack of stimulation by regulatory bodies. The Lagos State government has developed a very comprehensive regulatory framework which is being rigorously applied.