Economic Downturn: Vacancies In Lekki, VI, Ikoyi Properties Rise 72% In 18 Months

The number of vacant properties
in the upper class real estate
neighbourhoods of Lekki,
Victoria Island and Ikoyi has
risen by 72 percent over the last
18 months, a report by the Financial Derivatives Company
Limited (FDC) has stated. The
FDC’s Vacancy Factor Index
(VFIX) for 2nd Quarter June
2016 report attributed the rise in
the number of vacant properties, based on the housing stock as at
January 2015, to a combination
of rising inflation, GDP
contraction, falling consumer
confidence and increasing
unemployment rates contrived to lower demand for housing.
“Our urban real estate vacancy
factor index increased for the
second consecutive quarter as
aggregate demand and supply
forces remain in disequilibrium – a dynamic that continues to
persist in the real estate market.
“The VFIX indicates a
paradoxical phenomenon
where supply continues to trend
upwards but effective rents remain stubbornly high,” the
company stated.
Specifically, the report stated that
there was a 6.6 percent increase
in vacant residential properties
in the second quarter. “The residential VFIX has increased by
6.6 percent from 177 in March to
189 in June 2016. Commercial
VFIX on the other hand has
remained flat at 148.
The huge gap between both indices is due to the fact that
residential properties have a
higher sensitivity to economic
downturn. A residential property
can easily be vacated without
the tenant incurring a huge cost. Business, however, will face high
costs for moving and so the
decision is not made as quickly.
For example, companies will face
switching costs like changing
addresses on business cards and will most likely lose some
customers as a result,” the report
Economic indicator
“The rise in the index was not
surprising, when you consider the 0.36 percent contraction in
GDP in the first quarter. A further
contraction of 1.5 percent is
expected in the second quarter
thus putting the economy into a
recession. As a lagging economic indicator, the housing
sector is likely to remain flat until
the stimulus has transmitted
through the system. Our
expectation is that a point of
inflexion of the index will be evident in the first quarter of
Typically, high vacancy rates
imply increased supply, which
should translate to lower rents.
However, rents in these areas have remained inflated above
fair value and continue to be
responsible for the high rate of
delinquency and
The report further stated that Lekki suburb, with the largest
number of residential
developments, recorded the
highest vacancy rates, while
Ikoyi, an elitist suburb area
famed for its overpriced properties – mainly new
apartment blocks compared to
stand-alone houses, has the
lowest vacancy rate amongst the
three selected locations due to
the many derelict lands that exist within the area.
The FDC report asserted that a
drop in the vacancy factor will
only occur when there is an
expansion in GDP and the PMI
(or Purchasing Managers’ Index, an economic indicator derived
from monthly surveys of private
sector companies), an increase
in the hotel occupancy rates,
inflow of foreign portfolio and
foreign direct investment as a result of the new flexible
exchange rates, growing
consumer confidence and most
importantly, the flow of state and
federal spending.
Outlook FDC projects an outlook of
further decline in demand for
housing until probably the last
quarter of the year, when
economic activities are expected
to pick up. “Given the economic conditions currently faced, we
do not expect a quick recovery
of the VFIX, as there is a time lag
for the market to return to
We expect demand for housing locally to shrink further initially
due to lower disposable income
and a move from prime areas to
more affordable locations. We
also expect, in the short-term,
new developments under construction. This will increase
the supply of properties. From
fourth quarter 2016 onwards,
we project a pickup in activities
as the economy gradually
recovers mainly through demand for housing by
expatriates,” it stated.