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Total returns on residential property investment tumble as demand totters

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IMAGE: Adetokunbo Ajayi, CEO, Propertygate Development & Investment Plc »


For the first time in five years, returns on investment in residential properties on the mainland areas of Lagos, Nigeria’s commercial capital,  has tumbled to 2 percent over declining capital values and tottering demand, a new report on Asset Class Performance in the Nigerian Investment Portfolio by Residential Auctions Company (RAC) has revealed.

The report which defines expected total returns from an investment as a combination of the capital growth (appreciation in value) of the security over a time period, says that the income return depends on the asset class which could be dividends for equities, coupons for bonds and rental income for property.

The report takes a look at the mainstream mainland market excluding Ikeja GRA, Yaba, Surulere, Ilupeju, Maryland, Omole Phases I and II, Magodo Phases I and II, Anthony Village and Gbagada where low demand is compelling property prices to marginally drop by about -2.77 percent under the period.

Adetokunbo Ajayi, CEO, Propertygate Development & Investment Plc confirmed this in a chat with BusinessDay, explaining that just like annual returns, yields for the upper-mid income residential market on the mainland have also declined in recent time because of some market forces that have capped rental returns on the axis.

“Though some residential properties in Lagos mainland still have their capital value nosing upward, the same does not apply to rental income, as tenants are not easily cowed to pay exorbitant fees on that axis,” Ajayi said.

Yields on residential properties in the Lagos mainland axis currently range between 2 percent and 2.8 percent, dwarfing returns from the Island axis where yields are in the region of 6 to 8 percent.

BusinessDay investigations reveal that a fully detached house in Magodo Phase I sells for N70 million but rents for an average of N1.5 million, giving an annual return of 2.1 percent.

Likewise, at Magodo Phase II, a fully detached house sells for between N90 million and N100 million, the same property rents for about N2.5 million per annum, translating to an annual yield of 2.8 percent.

 At Omole Phases I and II, a fully detached duplex which would readily sell for N85 million rents for N2 million, raking in a return of 2.4 percent. These returns, Ajayi argued, were clear signs of an underperforming market.

However, according to RAC, the latest decline in total return in the axis contrasts with the market return in the medium term (three years) and long term (five years) period where total returns have been moderately high at 14.96 percent and 11.80 percent respectively.

A close look at returns on the mainland residential market however, shows the axis posses low volatility, making it a less risky investment with moderate expected returns either in the medium or long term.

The market also boasts of an inverse correlation with the Lagos Island residential market and equities which make it an ideal asset class within a multi-asset portfolio to hedge against risk. 

For instance, the Lagos Island residential market has, in the last five years, pulled the least return (3.61 percent) on investment when compared to other assets such as equities or Federal Government bonds, as the market continues to gather steam to rebound from the lull it suffered during the global economic recession.

Article Credit: Businessdayonline

Updated 4 Years ago

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