RETAIL MARKET UPDATE NIGERIA Q2:2016. broll.com/research. Highlights

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1 RETAIL MARKET UPDATE NIGERIA Q2:2016 Highlights Sustained macroeconomic headwinds caused by renewed unrest in the Niger Delta and deregulation of the oil downstream sector. Sustained inflationary pressure hitting a six-year high of 15.6% in May A total of 19,000m² of retail space was added to the core and secondary markets in Q2:2016 with the opening of Onitsha Mall and Maryland Mall. A vacancy rate of approximately 47% across core and secondary markets reflect slow take-up rates and lower trading densities. The adoption of a market-driven exchange rate system by the Central Bank of Nigeria caused an initial 43% devaluation of the Naira to a more realistic market value. Push back from tenants on dollar based rentals is expected to gain momentum given the constraints facing the retail sector. South African retailer, Pick n Pay announced their entry into the Nigerian market through a joint venture with Lagos-based AG Leventis, an established local retailer. Developers such as Novare, Resilient Africa and Artee Group are going ahead with planned schemes in their development pipeline despite economic challenges. 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 % broll.com/research $3, million ~9% 301,780m 2 57% GDP per capita Population Prime Yield Total Stock Occupancy Rate Market Drivers The trend of uncertainty continued into the second quarter with additional headwinds facing an already weakened economy. Challenges caused by dwindling oil prices and tight forex controls were exacerbated by renewed unrest in the Niger Delta and the deregulation of the oil downstream sector. Whilst the former saw oil output decline by around 50% the latter saw a 49% increase in the pump price of petrol. Inflationary pressure in the economy continued unabated with the Consumer Price Index (CPI) hitting a 6 year high of 15.6% in May 2016, a significant breach of the Central Bank of Nigeria s (CBN) target range of 6% to 9%. Retailers felt the effects of the weakening economic climate with their margins shrinking further as operational costs increased. Consumers also faced a decline in real wages, putting downward pressure on their purchasing power. Amidst the uncertainty, the CBN s decision to adopt a market-driven exchange rate system gave some respite in a deteriorating economic climate. After a prolonged period of bad results, the reaction to this decision was most apparent on the capital market. The rise in market capitalization to N10.1 trillion on the Nigerian Stock Exchange and the 7.4% appreciation of the All Share Index following the new directive, demonstrated an immediate resurgence in confidence from portfolio investors. CPI Nigeria Stock Exchange All Share Index 16% 35,000 8% 14% 12% 30,000 25,000 20,000 6% 4% 2% 10% 8% 15,000 10,000 5,000 0% -2% -4% 6% 0-6% Source: CBN Index Points % Change Source:NSE

3 N broll.com/research The consequent 30% depreciation of the Naira from N197/$ to N282/$ on the first day after the policy came into full effect showed a more realistic reflection of the value of the Naira as determined by the market. Exchange Rate (N/$) Core Market The opening of Maryland Mall in Lagos saw the retail space in the core market increase by 7,000m². The mall, developed by Purple Capital Partners, is anchored by Shoprite Usave (a subsidiary of Shoprite Holdings) which made its maiden entry into the Nigerian retail market. Currently leased to a considerable number of indigenous retailers, Maryland Mall is set to benefit from the large number of consumers in its catchment area on the Lagos mainland. Source: CBN Nodal Overview The prevalent economic conditions continued to adversely affect the retail sector in the second quarter. The reality of a shallow tenant pool in the retail market continued to bear down on the sector with respect to leasing activity and take-up rates. Push back from tenants and the demand for Naira based rentals and more favorable leasing terms gathered momentum resulting in landlords considering the extension of existing concessions to tenants on a case-by-case basis. Although established malls in core markets continued to record strong performance due to first movers advantage, newer malls across core markets faced serious challenges as market conditions took a turn for the worse. Recently delivered malls recorded low trading densities and a slower take-up rate as tenants found it difficult to complete fit-out and commence trading. Vacancy rates, although the lowest in Nigeria, stood at approximately 8% and 9% in Lagos and Abuja respectively. Average asking rents remain the highest in Nigeria for spaces between 10m² to 1,100m² (excluding anchor tenant spaces) at $68/m²/month and $55/m²/month in Lagos and Abuja respectively. Although no new mall construction started in the second quarter, the quarter saw the opening of a number of new malls across core and secondary markets. Secondary Markets The second quarter saw the opening of Onitsha Mall, increasing the overall mall space in secondary

4 locations by 12,000m². This increase in retail space was met with slowing activity across the secondary market which has persisted through previous quarters. The shallow tenant pool in the overall retail sector as well as the unfavorable market conditions continued to hit secondary markets particularly hard. With diminishing levels of interest from retailers to expand into the secondary market, lower take-up rates and lower trading densities continued to materialize, culminating in a considerably higher vacancy rate at approximately 30%. 800, , , ,000 0 Source: Broll Database Existing Retail Space and Development Pipeline (m²) Existing Retail Space Core 2nd Tier Landlords remained uncompromising with respect to downward rental reviews despite the push back from tenants and were more willing to extend concessions in other forms on a case-by-case basis. Average asking rents continued to range between $35 and $50/m²/month. Investor Appetite The announcement of Pick n Pay s entry into Nigeria was a noteworthy development in the second quarter, signifying the fundamental interest from global players in the Nigerian retail market. Through a joint venture with AG Leventis, a well-established local retailer, Pick n Pay entry is expected to reinvigorate the food and beverage and fast moving consumer goods segments of the formal retail market. Increased competition with the likes of fellow South African brand, Shoprite is beneficial for the overall market through the increase in choice for the consumers. Despite the current headwinds facing the sector and the wider economy, Nigeria has remained a key, relatively untapped market for players across the retail industry s value chain. Developers such as Novare, Resilient Africa and Artee Group are going ahead with planned schemes in their development pipeline despite economic challenges. We are seeing that developers are adapting strategies that better suit market realities. This is most apparent in recent and expected mall deliveries in the secondary market ranging between 8,000m² and 12,000m². Location 2 Average net rental/m /month Prefloating Exchange Rate ( 282/$28/0 7/2016) US$ Lagos 13,296 19, Abuja 10,835 15, Port Harcourt 9,850 14, Enugu 7,486 10, Warri 7,289 10, Kano 6,895 9,870 35

5 Outlook Whilst the change in CBN policy is expected to increases liquidity and access to forex, the retail sector will continue to face significant challenges over the next 12 months. The inadmissibility of items currently banned from the interbank forex market under the CBN s new policy will see many retailers continue to depend on the higher forex rates offered on the parallel market to fund Imports. RESEARCH Nnenna Alintah E: research@broll.com.ng RETAIL BROKERAGE Obiajulu Uzoigwe E: retail@broll.com.ng INVESTMENT BROKERAGE Bolaji Edu E: nigeria@broll.com.ng Furthermore, as the market practice continues to allow leases with dollar denominated rents payable in Naira at the interbank exchange rate, upward rental pressure is expected in the foreseeable future given the imminent depreciation of the Naira against the dollar. We however expect that push back from tenants given these realities will intensify and we anticipate that landlords might be willing to consider extending substantial concessions to tenants who are likely to see effective rents increase by 35% to 45%. On the investment side, the change in the forex market is expected to fuel investor confidence. Given the inherent opportunities in the retail market, we expect that investors who up till now delayed investments will intensify the consideration of allocating capital to the retail sector. A sustained surge in investor confidence over in the medium- to long-term is however predicated on a favorable and predictable regulatory environment which remains largely speculative in the coming 6 to 12 months. SUB-SAHARAN AFRICA RESEARCH Elaine Wilson E: ewilson@broll.com NIGERIA OFFICE 6th Floor, ED Building, 47 Marina Lagos Island, Nigeria Telephone: 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, 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.