THE IMPACT OF TAXATION ON REAL ESTATE TRANSACTIONS

Describing the Ikoyi property as a house would be pushing the definition of ‘house.’ The roof had caved in, the wooden stairs rotted away, kitchen was non-existent, the garden was a jungle and there were no functional windows. “But it is structurally sound” was the Landlord’s cheerful response as he placed an offer of $175,000 per annum rent, payable five years in advance to the potential tenants. The representatives of the tenant – a bank, made a counter offer. They wanted a lease for 15 years at the same rent. Eventually, it was agreed that a five-year advance of the rent ($175,000 per annum) would be paid with rent revision clauses for the next ten years.

This fairy tale, happily ever after story took place in 1996. Today, the Landlord is offering the property albeit now well renovated, for N20m but can ‘come down to N15m.’ Payment terms include this clause: 1 year rent is acceptable. This means that using the exchange rate of N480 – $1 (Abokifx rate 19/08/20), the landlord is effectively ready to accept $31,250 rent for the property, compared to $175,000, twentyfour years ago.

Why this turn of events? Those negotiating for the bank (now defunct) in 1996, knew that, as they were discussing with the Landlord, he was also fielding comparative offers from multinational companies, Embassies, International Oil Companies (IOCS) and local financial institutions. This level of demand meant that the landlord could charge a premium over the going rates, even for a decrepit building. An Ikoyi residential address was considered essential for the Managing Director

So while it is true that there is an oversupply of properties in the highend markets heightening competition, the drying up of demand is also a major factor landlords have to consider in current times.”

of the bank to compete with his peers in the financial sector. But by 2018, the situation had changed drastically. Demand for property in the high-end locations has weakened significantly. The banking reforms had pruned the number of the banks, oil prices meant that the IOCS had cut back on staff and therefore housing, while Embassies had relocated to Abuja over the period.

So while it is true that there is an oversupply of properties in the high-end markets heightening competition, the drying up of demand is also a major factor landlords have to consider in current times.

This is not only the case in the residential property segment. In its 2019 Nigeria Real Estate Market Outlook, Northcourt, a real estate investment solutions company explained that in the shopping malls, “Grade A retail rents are now paid in local currency as opposed to the erstwhile favourite – the US Dollar and payable monthly in some instances (as

opposed to annually/multi-year).” What started as incentives occasioned by the 2017 recession is now the norm. And while the worsening exchange rate is part of the problem, other issues are also at play: difficulty in remitting foreign exchange and a hostile business environment have combined with the Covid 19 pndemic to make malls a very expensive location for retailers.

Same for high end offices. In its OFFICE

MARKET VIEWPOINT Q3: 2018, Broll observed ‘Market practices that have become the norm (rent free periods, tenant improvement allowances, extended BO periods, etc.) have persisted amongst prime-grade landlords. In a bid to drive occupancy levels, competitive leasing terms which are favourable to tenants were noted in Q3:2018.

The median average asking rent for A-grade offices in Ikoyi has remained constant at Us$750/m2/annum in Q3:2018. In the Victoria Island commercial node, the median average asking rent has also remained fairly constant at US$650/M2/ annum. Vacancy rates in A-grade buildings are currently around 76% and 56% in Ikoyi and Victoria Island respectively.’ This situation has been extended by the increasing number of office blocks coming up as with many more in the pipeline, The point must however be made that demand has not dried up completely. Indeed, in some real estate segments like coworking spaces, demand is rising. There is increased demand for studio flats in high end locations of Lekki, Ikoyi and Victoria Island and relative strangers linking up to share an apartment is not becoming common. When landlords and owners offer favourable finance terms like paying rent monthly or developer

mortgages, they see a spike in demand which shows that the issue for many is cash flow as they cannot pay a year’s rent or pay for the property outright.

In post covid 2020, the landlord must work out where the demand is and position their offerings appropriately. We have seen that working from home has become a trend and owners of commercial property have to weigh the attractiveness of their property in light of this. Working from home also has some implications for landlords of residential property as well. Facility managers have seen usage of facilities go up - power, water etc use has spiked. Tastes of people in property type has changed as well - gardens are now better appreciated, extra rooms that can be used as a study, good internet connectivity are now high on the list of tenants’ desires.

Below are a few questions, landlords and owners should ask themselves about their current property, if they wish to follow the demand trajectory…

Should the property be re-configured?

A landlord of a 5 bedroom semi detached house in Lekki Phase 1 had been looking for a tenant for his property for over two years. Based on the comment of his 30 year old niece that she would gladly take the property if she had two people to share it with, he reconfigured the property into two nos 2 bedroom flats and the servants quarters into a chalet. He was able to let the flats for N2m each and the chalet for N1.2m bringing his total rent to N5.2m. This was compared to the N4m he was prepared to take for the entire property let as a whole. It is this type of space reconfiguration that has been applied to commercial office blocks in the form of Collaborative workspaces (co- working) According to Wikipedia, Coworking involves a shared workplace, often an office, and independent activity. Unlike in a typical office, those coworking are usually not employed by the same organization. So instead of landlords of commercial office blocks, looking for one or a small number of corporates to take up long term leases of spaces in their property, they have reconfigured the property to take a larger number of small businesses. This is where the demand is.

According to a report by the Broll Property Groupco-working: Trends and outlook in the Lagos Office market, this is a fast growing segment of the market. “In Lagos, we see the global co-working trend through a varied number of local service providers operating in the market. With over 50 local co-working operators, Regus is the only international brand operating under a direct franchise model in the market. Nigeria has a strong entrepreneurial culture as cataloged in the Global Start-up Ecosystem 2017 Report, which valued the Lagos startup ecosystem the highest in Africa with a growth index of 6.6. As these start-ups continue to spring up, we see a stronger demand for co-working real estate solutions. “

Should the use be changed?

Lagos is evolving rapidly and the character of many neighbourhoods can change. It appears overnight but astute watchers of a location can see the trend well before it becomes the norm. For instance, for over eight years, Castles Lifestyle has been reporting on the commercialization of Lekki Phase One. The precedent was clear: this was how Victoria Island moved from being primarily residential to overwhelmingly commercial. The reason for the movement of corporates to Lekki Phase One is obvious: it is about 40 – 50% cheaper than renting office space, and with the Lekki Link Bridge, it is also very assessable. Forward-looking landlords have already converted their properties on the ‘high streets’ of Fola Osibo, Admiralty Way, Admiralty Road etc to shopping malls. Others are joining in but they have missed the first wave and will have to contend with fierce competition. Owners of shopping malls are also changing their models to focus on revenue generating areas like parking food courts, play areas and cinemas.

Facility management: service or self-service?

A new lexicon has entered the real estate dictionary – ‘self

service. It refers to a multi-tenanted property where the landlord does not provide all or any facility management services. A landlord of a townhouse mini-estate in Oniru found to his chagrin that it was until he removed the generator as part of the services to be charged for that he was able to let the apartments fully. His tenants, mainly families, had their own generators and inverters and were not ready to pay the service charge for alternative power generation. In some other apartment blocks, even in highbrow Ikoyi, tenants have negotiated with the landlords to limit the alternative power supply to reduce the Service Charge. Landlords have to judge the appetite of the prospective tenants for top facility services – if the tenants don’t want them or are not prepared to pay for them, then those services are a turn off and not an attraction. We have seen a number of adverts styling properties as ‘Self Service’ to indicate that there is a demand for such properties.

Upfront versus monthly payment

For many properties in the high end locations especially, demand has been seen to spike when the landlord agrees to accepting rent on shorter periods - monthly, quarterly as opposed to yearly or in the bygone days of two to three years in advance. The landlord will have to balance the convnient option of a yearly tenant but possibility of a void period while waiting for the tenant against the difficulty of managing a monthly tenancy but having the property occupied for most of the time

The Short-lets model.

By now the trend is becoming clear. If your property cannot be let in the conventional fashion, then consider other altering the offering to attract another type of tenant. One of these options is the short let model. Again, this depends on the location, style and layout of the property and the amount of work the Landlord is prepared to do make this model a success. However, with the right property, plugging into the Air bnb network means that most of the work has been done for the landlord.

Void periods is a recent phenomenon brought about by changes in the real estate landscape. The conventional tenants have disappeared. To get their properties yielding a fair return, landlords have to ‘follow the money.’ Who has rent money to spend and what do they want to spend it on? It then lies on the landlord to ensure their properties meet the criteria of these prospective tenants. If not, their money will go to another property.