A property market crash in Nigeria offers opportunities for brave investors betting that Africa's most populous nation will deliver high returns when it climbs out of recession.
Investing in Africa's largest economy requires a willingness to navigate opaque land laws, corruption and the prospect of having money held up in the bank due to currency restrictions.
The central bank has made it difficult to repatriate profits as it seeks to avoid a collapse of the naira due to a slump of oil revenues, which has pushed Nigeria into its first recession in 25 years.
But Nigeria has a fast-growing population that will require more housing and shopping malls in the long-term, and some investors believe the time is right to step in, particularly as banks are reluctant to grant loans to other potential buyers in the midst of the downturn.
Some private equity funds, mostly from South Africa, are investing in Lagos and the capital Abuja, betting the spending power of the country's 180 million people will grow.
"We believe Nigeria has massive potential in the retail area," said Jan van Zyl, head of Nigerian property development at South African fund Novare Equity Partners. "The sector is in its infancy and will only continue to grow from a very low base."
Investors face the risk of being caught in another devaluation as the central bank seeks to end a 30 percent spread to the black market -- a goal it failed to achieve when it allowed a 40 percent depreciation in June.
But investors can take advantage of their purchasing power as the country is desperate for dollars to replace oil revenues which account for almost all the hard currency income it needs to fund food and other imports.
"What you are offering as an investor is liquidity. In the country itself, there is no liquidity," said Jonathan Millard, Lagos-based chief operating officer at Troloppe Property Services. "If you're looking at this on a five to 10 year cycle there are tons of opportunities."
He said there were also opportunities in residential property, whose rents had, in dollar terms, fallen by up to 70 percent since 2009, which was driving down prices. "Vacancy is about 30 to 40 percent," he said.
BUILDING BOOM
The southern megacity of Lagos has seen a building boom in the last few years -- real estate is a favourite destination for those who get their hands on oil money. Two shopping malls were completed within the last three months, bringing to eight the total of such retail hubs in the city.
With the central bank imposing hard currency curbs and construction activities slowing in a dollar-starved economy, foreign capital flows into Nigeria fell by 61 percent, year-on-year, in the second quarter.
Some investors have shifted their focus to other West African countries with a more favourable immediate outlook, such as Ghana, which has agreed a further loan tranche of $116 million from the IMF. Its power supply improved last year while Nigeria endures frequent blackouts.
Ivory Coast and Senegal are also seen as attractive investment destinations, property analysts say.
Property consultant Cluttons estimates that Lagos retail yields stand at around 7.5 percent, compared with 8 percent in Johannesburg, 9 percent in Accra and 10 percent in Nairobi but have the potential to rise once the economy improves.
In the last few months it has become common for retailers and service sector tenants, squeezed by the economic downturn, to negotiate lower rents with landlords who are keen to sustain occupancy levels. Lower rents have pushed down yields in Lagos.
Lagos office yields have dropped to around 8 percent from 9 percent in 2014, making them the same as in Johannesburg and Nairobi, but less than the 10 percent found in Accra.
But investors say Nigeria's size, with one of the world's fastest growing populations, means it has better long-term prospects than the rest of Africa.
Lagos has a population of around 21 million, whereas Ghana's entire population is 26 million. The Nigerian city is vastly under-served by shopping malls, experts say.
"For now, we are aware that investors are still showing an interest in retail investments, driven purely by the strong demand-supply mismatch," said Erejuwa Gbadebo, who heads Cluttons' Nigeria office.
Novare was behind the construction of a mall that opened in upmarket Lagos district Lekki in August - an $83 million project with 22,000 square metres of retail space. Construction on two projects in Abuja - a mall and an office park - began this year.
"We are continuing to build in the downturn so that we have malls that are open by the time the economic environment improves in late 2017 or early 2018," said van Zyl, adding that the fund had reduced its debt component, using more of its capital, as a short term measure during the downturn.
NO SHORTAGE OF RISKS
Funke Okubadejo, real estate director for Actis, another South African private equity fund, said Nigeria provided "a compelling market opportunity".
Actis has completed two shopping malls in Lagos, another was completed in Abuja in December 2015 and construction is scheduled to begin on a fourth, in Lagos, early next year.
A grade-A office building was completed in the last few months and Actis also raised more than $500m earlier this year for its Africa Real Estate Fund 3.
Anglo-South African financial services firm Old Mutual and Nigeria's sovereign wealth fund in August signed an agreement to set up a $500 million fund to invest in real estate, mainly office towers and commercial real estate.
There is still no shortage of risk in a country famous for corruption. Nigeria's land laws are opaque, with landlords in dispute with tenants often bribing police and local officials to demolish buildings.
And while a small number of funds -- taking a long-term view -- are unfazed by the difficulty in repatriating profits in Nigeria's current climate, local businesses they hope will populate their malls and offices are struggling to stay afloat.
The FX restrictions mean retailers who cannot access the dollars needed to import a wide range of goods are closing.
Many that survive would struggle to pay the rent for a mall unit and companies across the service sector are laying off staff intended to populate offices.
(C) Reuters News
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