RETAIL MARKET UPDATE NIGERIA - Q2 2015

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1 RETAIL MARKET UPDATE NIGERIA - Q Highlights Growing uncertainty in the economy due to a slow start from the new administration. The Nigerian economy is under inflationary pressure due to Central Bank of Nigeria s (CBN) restriction of the foreign exchange market, devaluation of the Naira and fuel shortages. The 14,000m 2 Delta Mall was delivered in Q2 increasing the retail offerings in 2 nd tier cities. Jabi Lake Mall, Circle Mall, Festival Mall, Owerri Mall and Maryland Mall expected to be delivered over the next two quarters adding an estimated 64,500m 2 of retail space to the market. In Q2, core markets rents were stable at $65/m 2 /month with 2 nd tier markets ranging between $32 - $45/m 2 /month Increasing development pipeline likely to encourage competition between landlords, which should result in softening of rents in the medium to long term. Disclaimer This report is published for general information only. Although high standards have been used in its preparation, no legal responsibility can be accepted by Broll Nigeria for any loss or damage resulting from the contents of this report. As a general report, this material does not represent the view of Broll Nigeria in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior consent from Broll Nigeria

2 $2, ,000, % 238,000 85% GDP Per Capita Population Prime Yield Total Stock Occupancy Rate Economic Overview Following his inauguration in the middle of last quarter, President Muhammadu Buhari has set little or no concrete policy initiatives in motion. This slow start ushered low but significant levels of uncertainty into the economy. This uncertainty has been compounded by dwindling global oil prices, the devaluation of the Naira, and the restriction of foreign exchange to importers which have persisted. The Nigerian Stock Exchange index which hit a peak of 35,728 basis points at the start of the previous quarter when Buhari was declared winner of the election has since fallen by 8%. There is also renewed inflationary pressure on the economy. Amongst other macroeconomic factors, incessant fuel shortages and increased reliance on the parallel market (Bureau De Change) from importers have fueled inflation with the CPI at 9% compared to the 8.5% recorded at the end of last quarter. These shaky fundamentals have had an adverse effect on the investment decisions of local and international businesses who have become increasingly worried about the uncertainty in economic policy. Real Estate Overview Despite the impending challenges facing the economy, activity in the retail market has persisted. Sustained interest in 2nd tier cities gathered momentum as investors sought to benefit from first movers advantage in these relatively untapped markets. Resilient Africa s investments in Delta (opened Q2); Owerri (2015 Q4), African Capital Alliance s Onitsha Mall (2016 Q2) and Grand Towers Minna Mall (2017 Q2) present strong prospects for the near future. In these new markets, the observation is that investors are opting for smaller, more conservative projects of less than 10,000 m 2. EXISTING RETAIL SPACE Warri Port Harcourt Abuja Kano Enugu Kwarra Ibadan Lagos - 20,000 40,000 60,000 80, ,000 Lagos Warri In the more established cities such as Lagos and Abuja; there is increasing competitive pressure on existing schemes with new mall offerings coming to market in the short to medium term. Though the retail market has continued to function as a landlord s market, with immediate demand outstripping supply, this trend is expected to change with the supply of new malls. Another strong theme observed during the quarter was the restriction to the foreign exchange market on the provision of forex for particular items including clothing, furniture and more. Value retailers that hinge their business operations on large scale importation bore the brunt of these policies. With the increased reliance on rising rates offered on the parallel markets, such retailers have seen their margins squeezed as their costs have increased significantly. However we see other retailers such as Shoprite being less affected as they stress that a considerable number of their products are sourced locally. Following the controversy that surrounded rental invoicing, the practice of payments in Naira pegged against the dollar exchange rate is being accepted. Despite the push back from some tenants, landlords

3 (many of whom are international investors) still require the security that dollar related payments give against the volatility of the Naira. SECTOR DEMAND FOR FORMAL RETAIL SPACE Core Markets In core retail markets like Lagos and Abuja, demand has been driven predominantly by international retailers and complemented by increasing interest from local brands seeking out the best schemes. As such, prime retail centers in Lagos like The Palms and Ikeja City Mall have maintained 100% occupancy rates with rents remaining stable at $65 per m 2 per month. Interest from international brands has been recorded with both luxury watchmaker Tag Heuer and Christian Dior beauty expressing a desire to take up space at Jabi Lake Mall. Local retailers that have made an entry into Jabi Lake mall include indigenous jewelry and other fashion accessories brands. Nonetheless, interest from local brands is still comparatively lower than that of international retailers looking to make an entry in to the Nigerian retail market. Nodal Overview Sub Market With retailers and investors pivoting to locations that have little formal retail offerings, existing schemes like The Palms, Ilorin have continued to perform satisfactorily recording a 78% occupancy rate in the last quarter. The recently delivered Delta Mall, currently in its first phase of opening recorded a pre let rate of 96% and is achieving rents around $40 per m 2 per month. Overall, rental levels in the sub markets such as Ilorin, Enugu, Port Harcourt and Kano have achieved a range of $32 - $45 per m 2 per month. Average net rental 1 (net average per month/m²) Nigeria N $ Lagos 12, Abuja 10, Port Harcourt 9, Enugu 7, Warri 7, KANO Kano 6, KWARA ABUJA IBADAN Investment Appetite LAGOS ENUGU DELTA OWERRI PORT HARCOURT CORE 2 ND TIER Investment into the retail sector continues to be driven by South African property funds and international private equity firms intent on expanding their investment 1 $1=N197 (Central Bank of Nigeria, 4/8/2015)

4 footprint to Nigeria. Indigenous funds and investors like UPDC, Purple Capital and African Capital Alliance have also made recent investments in shopping centres of 10,000 15,000m 2. More investment is expected from international and local investors as the Nigerian retail market matures. Additionally, the on-going development of the Eko Atlantic city could see further investment into the retail sector. Investment yields currently hover around 9.5%, however, uncertainty from recent central bank policies is causing investors to be cautious. Outlook and Pipeline In the medium to long term, a significant increase in supply is expected across the retail market. The completion of Owerri mall, expected over the next two quarters, will lead to an additional 9,000 m 2 of retail space to help meet the demand and requirements of retailers interested in submarkets. In Lagos, the completion of Festival Mall in Festac, Circle Mall in Lekki and Maryland Mall over the next two quarters will see an additional 29,000 m 2 of retail space brought to market over the next six months. Jabi Lake mall in Abuja, due for completion in 2015 Q4 is expected to experience strong occupancy level and command above market rates at around $62 per m 2 per month. Still in Abuja, the Asokoro mall is expected to be delivered 2017 Q4 further increasing supply by 28,000m , , ,000 50,000 0 DEVELOPMENT PIPELINE UNDER CONSTRUCTION** 6 MONTHS 12 MONTHS 18 MONTHS Core 2nd Tier **Cumulative In total an estimated 172,000 m 2 (0.7 x the current stock) of retail space is expected to be added to the retail market in the next 18 months. This significant increase in supply is likely to drive competition between landlords. It is expected that with the pool of tenants growing at a slower pace compared to the supply of malls; specification, location, tenant mix and other unique selling points will emerge as key determinants for successful, fully occupied projects going forward. Completions (2015) Name Size (m 2 ) Delivery Location Delta Mall 14,000 Completed Q2 Warri Jabi Lake Mall 25,000 Q4 Abuja Owerri Mall 10,500 Q4 Owerri Circle Mall 11,000 Q4 Lagos Festival Mall 11,000 Q4 Lagos Maryland Mall 7,000 Q4* Lagos In our view, the increase in supply is unlikely to result in an immediate reduction in rents. We believe this will be a gradual process in core locations like Lagos and Abuja due to the high demand for retail space. *Estimated

5 RESEARCHERS: Nnenna Alintah Dolapo Omidire Muyideen Dosumu Opuda Sekibo FOR MORE RESEARCH: Nnenna Alintah E: FOR RETAIL LEASING AND CONSULTING: Gavin Cox Obiajulu Uzoigwe E: FOR SUB SAHARAN AFRICA RESEARCH: Elaine Wilson E: ABOUT US Broll Property Services Ltd., (Broll), is a subsidiary of Broll Property Group South Africa (Pty) Ltd., Africa s leading commercial property services group, founded in 1974 and now with offices throughout South Africa and a growing number of African countries including Nigeria, Ghana, Kenya, Malawi, Rwanda, Mauritius and Namibia. Established in 2004, Broll Nigeria offers commercial brokerage, retail leasing and management, research, advisory, asset management, project management, facilities management and other corporate real estate services in Nigeria. In addition to being a subsidiary of the largest pan-african real estate group, with access to resources across most of sub-saharan Africa, Broll is also affiliated with CBRE, the largest property services company in the world as quoted on the New York Stock Exchange. This partnership provides Broll with the added ability to give our clients the comfort of knowing that Broll s execution on its behalf will be carried out in an ethical manner, and with international standards and best practices kept firmly in view. HEAD OFFICE Nigeria 3rd Floor, The Octagon, 13A AJ Marinho Drive, Victoria Island, Nigeria Telephone: