JOSEPH OLAOLUWA writes on the impact of the COVID-19 pandemic on the real estate sector of the economy and how it will shape things in the future
Like a hydra with several ugly heads, the COVID-19 pandemic has slowly infiltrated every sector of the economy, sapping livelihoods. While the nation at large is still reeling from the huge impact on its revenues that are mostly from crude oil, thousands have lost their jobs, or rendered redundant as a result.
For several landlords and property agents, the new normal is owed rent. The ripple effect of a greater segment of working-class people losing their jobs has trickled down to the tenants, most of whom are struggling to feed before considering meeting up with the obligation of paying rents.
A landlord, Abimbola Onisabi, admitted that several tenants had defaulted in rent payment, except those with multiple streams of income.
Narrating a scenario, he said, “I have a tenant, who has not paid for a whole year, because he works at Idiroko. I think he is a clearing agent and since the government closed the border, it has been very difficult for him to even eat. He doesn’t work with the Customs; he is a private man.
“Similarly, one other guy works at the Nigerian Aviation Handling Company Plc. When the aviation industry was closed down completely, people had nowhere to go and the source of income just dried up for most workers in that sector, except for those who have multiple sources of income.”
A Lagos realtor, Jimi Oni, who runs a real estate firm known as Jimi Oni & Associates, narrated an instance when a tenant sought a discount on the rent just to meet up with his financial obligations.
He stated, “I have a tenant, who asked me for a discount of 20 per cent from his usual rent. We are not saying increment now, we are talking about just the rent. He wants us to give him a discount before he can pay the rent. Many of them pay in instalments or in bits instead of paying one-off as they used to do.
“When people are not working, where will they get money to pay? Many of them will keep their rent for personal use instead of giving it to the landlord. I have so many unpaid rents.”
Oni added, “People are not renting office spaces anymore. Offices are not opened. If an office is not opened, how will they expand? Those ones who want to come up too, they cannot do so as well. People are practically working from home and people are working online.
“After COVID-19, you will find a lot of glut in the market; many people are now used to working from home. So, people have to surrender their accommodation or move to smaller ones and ask half of their staff to work from home, so rent money can be diverted to other things.”
Noting that the new normal will affect the market, he maintained that the property business was better because the risks were lesser and the rent had the potential to rise in the future.
Notices to quit
Onisabi explained that notices to quit have not been served on the defaulting tenants due to the situation at hand.
“We have not had instances of issuing notices to quit. We cannot do that except the tenants have been notorious before. There are people who have not complied with our agreements. People like that have never been up and doing before COVID-19. This gives them a chance, but the notice to quit doesn’t take effect immediately as it takes a minimum of six months,” he stated.
The landlord explained that the rents for some of the tenants were due for increase but he had to perish any thought of even a slight increase.
He stated, “Some of them are due for an increase in rent, because you increase your rent periodically in line with inflation, so that returns can be made to the investor. Property generally is a hedge against inflation. It values more with inflation.
“Periodically, you increase your income reasonably. This year, because of this pandemic, we had to decrease the quantum of increase and where it is very small, we had to let go.”
Oni said threats of ejection had been made, but the notices come hand-in-hand with orders from the court.
He said, “We are threatening them and offering notices to quit, but you can’t have an opportunity to file any case now. This is because the courts are not attending to tenancy matters now as such are not urgent matters.
“Urgent matters take priority in the courts now. There is a court for landlords and tenants and we have several tenants we want to serve now. The court has not given time for hearing due to social distancing. You can’t give a tenant a notice without going to court.”
Higher cost of housing
Beyond Oni’s fears for rent defaulters, he is also worried that the new set of houses that the cost of building new houses will go up as the cost of the materials will be impacted by forex and the pandemic.
He said, “Many of the products for housing are import-based materials. Only a few things are locally made. Many other things like tiles, electrical fittings and plumbing materials are all imported.
“The dollar exchange rate is very high. Once the rates are high, it will affect the cost of all these materials. Anyone building houses under COVID-19 will ask for high rent.
“High rent will mean vacancy; and if it is high, nobody will take it and it will be there for a long time. Sadly, not many people will bring down their rent and this defeats normal economic logic.”
The Chairman, Nigerian Institution of Estate Surveyors and Valuers, Lagos Branch, Adedotun Bamigbola, agreed that the new normal had affected lots of people going into the business. However, he stressed that not everyone was defaulting in their rent payment.
He said, “The salary cuts have affected the way people pay rents. The people that used to pay one-off have come around to pay in two or three instalments; the effect of inflation and not having adequate funds to meet up with personal obligations has affected rent payment. It is also affecting people going into real estate.
“That is not to say landlords should not consider free rents for their tenants. Some did, but most did not, because as it is in this part of the world, most landlords depend on rental income. On the whole, it is not a general thing that tenants are not paying rents.”
As part of the housing challenges, he also noted that the pandemic prevented people from getting loans to buy houses as such were being offered based on the outlook of the buyer rather than the seller.
“It has made negotiation look like we are meeting to solve a problem. It is not the seller’s market alone, but the buyer’s,” Bamigbola added.
A report by weforum.org said real estate assets have fallen by 25 per cent. However, the new demand now is for flexible working spaces.
It stated, “As of 3 April, the unlevered enterprise value of real estate assets had fallen 25 per cent or more in most sectors, especially hospitality and leisure. Some asset classes, especially those with greater human density such as student housing, malls and healthcare facilities, had the hardest shock and have already been sold off in considerable numbers.
“Others will be negatively affected later due to variations in occupier demand, since as human footfall is restricted, so consumer confidence dampens.
“The lockdowns also shrank the expected rate of return for letting and construction considerably. The development of new sites has been delayed; many normal human activities have been curtailed, and social distancing measures will put a drag on the ability of commercial premises to generate steady cash flows.
“The bright side is that consumer demand will probably shift towards more efficient properties, especially since the lockdown experience has revealed the downsides of energy-intensive buildings. When it comes to residential properties, where people will likely live and work intensively from now on thanks to remote working, the lack of flexible spaces and efficient energy systems is set to drive new demand.”
The article argues that real estate remains an attractive asset class as it continues to offer good risk-adjusted returns that are less correlated to other asset classes. It notes that investor appetite in certain segments of the market will rise – and sustainability is ready to play a huge role. Asset owners and investors will probably struggle to mitigate risks deriving from tenants’ and users’ rising demands for safe and efficient buildings.
A real estate expert, Adama Salihu, said there would be a need for both landlords and tenants to share the losses incurred.
She said, “It is a reality. There is a very high default rate, at least based on my personal experience, around 80 to 90 per cent. I can’t tell you how long that is going to be like, because these are many tenants and their rents are expiring at different times, but we are waiting till the end of the year.
“However, this is a very uncertain time so, nobody can say with certainty what will be next. Overtime, the picture will become clearer. There has to be some concession between the landlords and tenants to share the loss. I do not see either party taking the loss on themselves. If you do not want to go the legal way, then you will have to make a compromise.”
She said the pandemic had affected the sector like in other spheres of life. While the future is uncertain for prospective investors, she expressed confidence that the sector would experience a boom though a few changes would eventually occur.