Student housing: Emerging investment frontier with high yield, stable cash-flow
A widening gap between a growing student population and little or no student accommodation supply has thrown up opportunity in student housing which has capacity to offer high yields and stable cash-flow to investors and developers ready to make the switch.
Nigeria has a population of over 170 million with a growth rate of 2.6 percent per annum. 70 percent of its population is below the age of 30. There are 133 universities in Nigeria, and most of them were built without adequate provision for accommodation.
Because government is no longer putting much in education development in the country, private capital are finding their way into the development of education infrastructure just as in other sectors.
The ability to sign a long lease on land belonging to a higher institution or acquiring land adjoining a higher institution, building and charging a ready pool of student off-takers a market rent with 100 per cent occupancies leading to a stable cash-flow, sounds like a real estate developer’s dream.
A new report on real estate market in Q3 2017 by MCORE says many developers are already taking advantage of this development. “Universities are latching on to the trend, offering land parcels to developers under a long term Build Operate and Transfer model and seeking a share of revenues in exchange. Gross yields can be as high as 15 percent, but a closer look at the story is not as easy as it sounds”, says Munachi Okoye, CEO, MCORE.
Okoye says, however, that for this new investment frontier to be attractive, it has to be sustainable. With treasury bills offering risk-free rates of up to 18 per cent, allocating funds to risky green-field development in exchange for a 15 per cent yield does not sound so attractive.
International investors to whom a 15-percent yield may sound very attractive also have to contend with the currency risk inherent in a potentially depreciating Naira eating up dollar returns, especially over a long time frame.
“A market that appears to offer stellar returns may hold dangers lurking beneath. However, attractive returns may exist for the investor that is able to create a well branded , scalable , institutional offering that can roll out a high volume quality product at low cost.
Taking a look at the commercial office segment of the market, the new report notes that the introduction of the new supply of Class A buildings to the Ikoyi and Victoria Island office markets over the last few years have made significant adjustments in the markdet.
This, combined with a fall away in demand over the same period due to recession, has fermented competition between new higher quality Class A space and older historical Class A space. The new space has pushed the old Class A space down the rankings to re-emerge as Class B space with an attendant negative impact on achievable rents.
“The new prime Ikoyi/Victoria Island space commands rents as high as $750psqm, but rents for Class B space formerly classed as A space have fallen from a high of up to $900 per square metre a couple of years ago to as low of $450 per square metre in order to remain competitive”, Okoye said.
At these reduced prices, Class B rents are now becoming affordable to a wider array of businesses that used to occupy residential accommodation re-purposed as office space , allowing such businesses to migrate into purpose built office space at rents higher than but still comparable to former residential re-purposed office space.
Historical commercial office locations in Lagos include Marina, Victoria Island, Ikoyi and Ikeja. In recent times, Lekki Phase 1 with an attractive location abutting Victoria Island is now vying to join this group with the introduction of purpose built Class B office space currently being built primarily a long the Admiralty Way.
Floor areas are generally smaller and number of floors less than in neighbouring Victoria Island, however the smaller leasable areas allow for an easier absorption of the space into the still emerging Lekki Phase 1 market.
Occupiers are primarily professional service firms, traditionally occupying residential property in the Lekki Phase 1 / Oniru area who see the benefit of purpose built office space without having to pay Victoria Island rents. Rents range from as low as N50,000/ $140 per square metre to a high as N180,000 / $500 per square metre.
It is perhaps bad news for speculators but good news for genuine buyers that as the Q3 of this year, Prices of prime land have remained stable over the last year showing a growth rate of only per cent in both Naira and USD terms. Oniru, also known as Upper Victoria Island in Lagos, has shown the strongest growth of 10 per cent while Victoria Island at the other end of the scale has fallen by 5 per cent over the last year.
Eko Atlantic, according to the MCORE report, remains the most expensive of the locations it tracked with a 37 percent premium above neighbouring Victoria Island. The premium reflects the improved standards of infrastructure in the Eko Atlantic City but is also reflective of Eko Atlantic land prices benchmarked in dollars.
Eko Atlantic now sells for N524,000 / $1,700 per square metre; Banana Island, N385,000 / $1,261 square metre; Victoria Island, N380,000 / $1,250 square metre; Ikoyi N369,000 / $1,210 square metre, Lekki Phase 1 N195,000/ $640 square metre, and Oniru N168,000 / $550 square metre.
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