The FDC’s Vacancy Factor Index (VFIX) for 2nd Quarter June 2016 report
attributed the rise in the number of vacant properties, based on the
housing stock as at January 2015, to a combination of rising inflation,
GDP contraction, falling consumer confidence and increasing unemployment
rates.
“Our urban real estate vacancy factor index increased for the second consecutive quarter as aggregate demand and supply forces remain in disequilibrium – a dynamic that continues to persist in the real estate market. “The VFIX indicates a paradoxical phenomenon where supply continues to trend upwards but effective rents remain stubbornly high,” the company stated.
Specifically, according to Vanguard, the report stated that there was a 6.6 percent increase in vacant residential properties in the second quarter. “The residential VFIX has increased by 6.6 percent from 177 in March to 189 in June 2016. Commercial VFIX on the other hand has remained flat at 148.
The huge gap between both indices is due to the fact that residential
properties have a higher sensitivity to economic downturn. A residential
property can easily be vacated without the tenant incurring a huge
cost. Business, however, will face high costs for moving and so the
decision is not made as quickly. For example, companies will face
switching costs like changing addresses on business cards and will most
likely lose some customers as a result,” the report stated.
Economic indicator
“The rise in the index was not surprising, when you consider the 0.36 percent contraction in GDP in the first quarter. A further contraction of 1.5 percent is expected in the second quarter thus putting the economy into a recession. As a lagging economic indicator, the housing sector is likely to remain flat until the stimulus has transmitted through the system. Our expectation is that a point of inflexion of the index will be evident in the first quarter of 2017.
Typically, high vacancy rates imply increased supply, which should translate to lower rents. However, rents in these areas have remained inflated above fair value and continue to be responsible for the high rate of delinquency and abandonment.”
The report further stated that Lekki suburb, with the largest number of residential developments, recorded the highest vacancy rates, while Ikoyi, an elitist suburb area famed for its overpriced properties – mainly new apartment blocks compared to stand-alone houses, has the lowest vacancy rate amongst the three selected locations due to the many derelict lands that exist within the area.
The FDC report asserted that a drop in the vacancy factor will only occur when there is an expansion in GDP and the PMI (or Purchasing Managers’ Index, an economic indicator derived from monthly surveys of private sector companies), an increase in the hotel occupancy rates, inflow of foreign portfolio and foreign direct investment as a result of the new flexible exchange rates, growing consumer confidence and most importantly, the flow of state and federal spending.
Outlook
FDC projects an outlook of further decline in demand for housing until probably the last quarter of the year, when economic activities are expected to pick up. “Given the economic conditions currently faced, we do not expect a quick recovery of the VFIX, as there is a time lag for the market to return to equilibrium.
We expect demand for housing locally to shrink further initially due to lower disposable income and a move from prime areas to more affordable locations. We also expect, in the short-term, new developments under construction. This will increase the supply of properties. From fourth quarter 2016 onwards, we project a pickup in activities as the economy gradually recovers mainly through demand for housing by expatriates,” it stated.
Economic indicator
“The rise in the index was not surprising, when you consider the 0.36 percent contraction in GDP in the first quarter. A further contraction of 1.5 percent is expected in the second quarter thus putting the economy into a recession. As a lagging economic indicator, the housing sector is likely to remain flat until the stimulus has transmitted through the system. Our expectation is that a point of inflexion of the index will be evident in the first quarter of 2017.
Typically, high vacancy rates imply increased supply, which should translate to lower rents. However, rents in these areas have remained inflated above fair value and continue to be responsible for the high rate of delinquency and abandonment.”
The report further stated that Lekki suburb, with the largest number of residential developments, recorded the highest vacancy rates, while Ikoyi, an elitist suburb area famed for its overpriced properties – mainly new apartment blocks compared to stand-alone houses, has the lowest vacancy rate amongst the three selected locations due to the many derelict lands that exist within the area.
The FDC report asserted that a drop in the vacancy factor will only occur when there is an expansion in GDP and the PMI (or Purchasing Managers’ Index, an economic indicator derived from monthly surveys of private sector companies), an increase in the hotel occupancy rates, inflow of foreign portfolio and foreign direct investment as a result of the new flexible exchange rates, growing consumer confidence and most importantly, the flow of state and federal spending.
Outlook
FDC projects an outlook of further decline in demand for housing until probably the last quarter of the year, when economic activities are expected to pick up. “Given the economic conditions currently faced, we do not expect a quick recovery of the VFIX, as there is a time lag for the market to return to equilibrium.
We expect demand for housing locally to shrink further initially due to lower disposable income and a move from prime areas to more affordable locations. We also expect, in the short-term, new developments under construction. This will increase the supply of properties. From fourth quarter 2016 onwards, we project a pickup in activities as the economy gradually recovers mainly through demand for housing by expatriates,” it stated.
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