Can a new law restore sanity to Lagos’ rental market?

Nigeria’s housing shortage – estimated to be between 14 and 17 million units – is strongly impacting property prices. Alitheia Capital Real Estate reveals in a research note that the upmarket areas of the commercial capital Lagos are overpriced by as much as 30%.

To rent a property in Lagos, tenants often have to fork out two to three years upfront payment as well as large annual fees for facilities and back-up services.

High property development costs are also pushing up prices. According to Alitheia, building costs in Nigeria are nearly 15% higher than in South Africa for comparable developments. “This is driven by incessant increases in the cost of building materials (of which 70% is imported), the growing cost of labour, and payments to the Lagos State Government (LASG) on property transactions.”

Buying instead of renting is, however, not an option for most. “There are only a couple of mortgage products available and double digit interest rates (up to 20%) and short tenors (less than ten years) continue to inhibit growth,” says Alitheia. Home ownership finance, therefore remains inaccessible and unaffordable to 80% of Nigerians.

Research revealed that 90% of the housing stock in Lagos is held by less than 10% of the population.

Through the introduction of a new Tenancy Bill, the state government plans to address the situation tenants find themselves in. Alitheia notes that the law “seeks to regulate tenancy and rent administration . . . Other reasons for the bill include to enhance access to the current real estate stock by addressing the issue of escalating rent and property values.”

The Nigerian Tribune reports that the Tenancy Bill, passed last month, makes it unlawful for a landlord to demand or receive rent in excess of six months from a sitting tenant. Landlords would also not be allowed to receive more than a year’s rent from a new tenant. The law, however, still needs to be approved by the state governor.

By looking at the regulation of the rental property market in India, Alitheia foresees problems with the new bill. India’s rent control law caused a freeze in land and rental prices in city centres, hindering new urban renewal initiatives. “The rent control law became a disincentive to investment in rental housing and led to a reduction of rental housing stock, which in turn led to stagnant municipal property tax revenue.”

Alitheia says that rental housing will continue to be in high demand across Lagos, making it difficult to enforce the law. “A tenant in dire need of accommodation will meet a landlord and an agreement will be struck regardless of what the law states.”

Institutional investors are, however, likely to remain within the law. “This means project viability studies will take into consideration . . . the high cost of finance and reduced upfront rental charges (income) . . . making investments in projects less attractive.”

It seems as if there is no easy solution to Lagos’ housing problems. The huge housing deficit will always distort rental prices. On the other hand, a market that greatly favours landlords is not desirable either.

Alitheia says that the state government should encourage access to affordable housing finance; implement policies to reduce construction costs; and establish a legal and regulatory structure to promote, control and monitor housing supply.

“Renting is an essential component of a healthy housing system, therefore, for effective regulation of the rental property market, LASG should recognise existing rental arrangements and find flexible ways to regulate them. In addition, LASG should enact the law with provision for it to evolve and be backed against current market forces.”