The retail market in Nigeria is witnessing mixed fortunes as investors shy away from Grade A malls due to currency volatility, inflation, and challenges faced by tenants in paying rent. Developers are grappling with a challenging operational environment, making it difficult to maximize profits and exit the market.
Despite Nigeria's promising investment potential, several significant hurdles have led to reduced foot traffic in many malls. These hurdles include tenants' struggles to meet rental obligations, the growth of e-commerce, foreign exchange rate fluctuations, and declining consumer disposable income. Several large-scale mall projects have been put on hold recently, primarily due to high construction costs, foreign exchange rate volatility, and surging inflation, which currently stands at 24.08 percent.
In contrast to previous years when the retail sector saw robust foreign and local investment, significant investors are now shifting their focus away from large Grade A retail centers. They are opting for smaller, localized, and niche retail developments instead. According to the Nigeria Retail Industry
Report for 2023, convenience stores continue to thrive despite challenging times for retailers. While there was double-digit current value growth in retail in 2022, constant value sales declined, and new store openings were limited due to soaring inflation, with the headline inflation rate reaching 25.80 percent in August 2023.
Many of the existing large malls in cities like Lagos, Port Harcourt, Abuja, Kaduna, Enugu, Onitsha, and Asaba are struggling to achieve full occupancy, making it challenging for investors to recoup their investments. As a result, some major retailers are exiting the market, and local investors are showing renewed interest in the retail sector. Recently, Novare Real Estate
announced plans to sell four of its Grade 'A' portfolio mall properties in Lagos and Abuja
. These include Novare Mall, completed in 2016 along the Lekki-Ajah Expressway, which is the largest retail mall in Lagos.
Novare, Resilient Africa, and Artee Group were among the leading investors who embarked on their development projects in 2016 despite economic challenges. Novare's decision to sell its properties is viewed as a significant development in Nigeria's real estate market. Industry sources reveal that many developers took loans to finance these facilities, but the high cost of maintenance, foreign exchange market volatility, and rising diesel costs have made it difficult for them to repay these loans.
In prime locations, new malls face issues of low foot traffic and limited space uptake, with rents reaching as high as $700 per square meter. Mall owners and developers now face a tough choice between losing tenants or granting concessions on rent and lease terms to retain them. Retail tenants are increasingly seeking rent reductions, rents denominated in the local currency, and more flexible lease agreements. Rogba Orimalade, the former Chairman of the Nigerian Institution of Estate Surveyors and Valuers (NIESV) Lagos branch, highlights the impact of economic factors on both overseas institutional investors and local investors. The cost of maintaining Grade A malls continues to rise, driven by various factors.
Orimalade suggests that some of these challenges are self-inflicted, as many developers fail to conduct proper valuations to set realistic rent rates. Moreover, in their rush to fill their facilities, developers often neglect the importance of tenant mix in malls.
In response to these challenges, the retail sector is seeing a shift towards smaller, neighborhood-focused developments with no more than three floors. Categories such as pharmaceuticals, wellness/lifestyle, recreation, food and drink are still in demand, but they alone cannot fill Grade A malls.
Akin Opatola, Vice President of the International Real Estate Federation (FIABCI) Nigeria, acknowledges that the retail sector remains attractive but has witnessed significant changes, especially with the rise of online shopping. He believes that Grade A malls in prime locations will continue to thrive, although some tenants are grappling with high rents, they are content due to the foot traffic they attract. Opatola points out that some investors enter the market with specific yield expectations but eventually exit, putting their assets on the market at elevated price points.