Analysis of Short-Let Apartment Market in Lagos, Nigeria

Executive Summary

Lagos state, the economic hub of the most populated country in West Africa, Nigeria, has seen a rapid rise in population. Its current population stands at about 17 million, which is projected to reach 30 million by 2035, creating an opportunity to fill the housing gap in the state. Hot zones like Lekki, Ikoyi, Ikeja, etc., hold a massive percentage of demand for short-let apartments.

The need for privacy, more sought comfort has increased the adoption of short-let homes over hotels in the state by its citizens and tourists. Also, research has proven that short-let rentals in Nigeria could be 20-25% cheaper than hotel rooms. While data from Statista put the average occupancy rate of Nigerian hotels at 47.5 percent in March 2021, a survey by BusinessDay across three of Nigeria’s busiest cities shows the average occupancy rate for short let apartments increased to 76.3 percent in March from 54.6 percent reported three years ago.

Strategic investment in short-let apartments provides a great deal of value in rental income compared to local rental income. In 2020, all existing short-let owners received a 17% short-let net rental income on all their properties and are set to experience the same in 2021. Compare this to local rental income rates of around 3%-4% in Nigeria; that’s a whopping 425% – 566% difference in margins. Short-let owners can expect to get back their return on investment in just 5.8 years compared to 20 years for local rental income and then experience year-on-year profit after each consecutive year.

The above statistics show that investing in short-let apartments is a very wise and strategic business investment with even more significant potential in the years to come.

Introduction

The term “short-let” is one of the few words in the Nigerian real estate space that has become more popular over the years and it is of no surprise. Short-let apartments are furnished self-contained apartments that are rented for short periods of time. Short-let give customers opportunity to stay in a private property that offer a more personal and comfortable experience than a serviced apartment or hotel. Though it has been in existence in Nigeria since 2011, the not so popular short let apartment leveraged the COVID-19 lockdown, a period when most hotels were out of business and were forced to close their doors to occupants, to record breakthroughs.

According to a report by Market Watch, the short-term rentals market has grown significantly during the last few years, and it is expected to grow at a rapid pace in the next five years with the occupancy rate projected to be at 70% in 2021. The increase in short let homes adoption is in close relation to the growth in the tourism industry as travelers have widely adopted short-term rentals, such as the vacation homes on Airbnb and other booking channels, resulting in one of the hottest arms of the sharing economy. In fact, short-term rentals yielded 30% more profits for homeowners/investors than long-term leases, with an estimated global market valuation of $169 billion in 2018 alone.

Short-Let Apartments in Lagos

Lagos, the most populated state in Nigeria with about 17 million people is the state with the most demand for short let apartments. With a growing urban and middle-class city comes a need for recreational centers, tourist accommodation and activities. The state’s influx of tourists over the years have has led to an increase in the adoption of short let rentals. Research has shown that the demand for short let apartments in Lagos is centered around its hot zones like Lekki, Ikeja, Ikoyi, etc.

According to African Futures Papers, by 2035, close to 30 million people could live in Lagos, turning Nigeria’s commercial hub into the largest megacity on the continent. At the same time, more than a third of Africa’s urban population is expected to live in West Africa. Nigeria’s Lagos city is estimated to become one of the fastest-growing cities in the next twelve years with Lagos becoming a megacity by 2030.

The residential vacancy rate in Lagos is put at about 41%. It opened up a potentially lucrative market as they can command around 30% higher rates than long-term rentals.

Hotels Vs Short-let Apartments

Over the years, short-let rentals have been a strong competitor with hotels in Nigeria. Short-let rentals leveraged on the COVID-19 pandemic, thereby gaining more ground in the hospitality industry. According to a report by Tech Cabal, Short-lethomes, maintained a 75% occupancy rate during the COVID-19 pandemic. At the same time, the hotel industry took an unprecedented hit in bookings, with a month-on-month decline in sales, with the majority of hosts experiencing close to zero percent occupancy rates due to the different regulations imposed by the government during that time. This agrees with the projection by Market Watch that the occupancy rate in short-let apartments in Nigeria will increase to about 70% in the next five years.

While data from Statista put the average occupancy rate of Nigerian hotels at 47.5 percent in March 2021, a survey by BusinessDay across three of Nigeria’s busiest cities shows the average occupancy rate for short let apartments increased to 76.3 percent in March from 54.6 percent reported three years ago. Described as the most affordable option for month-long stays, estimates by analysts show that a short let in Nigeria could be 25–50 percent cheaper than a hotel room

2020 Demand for Short-Lets in Lagos by Location

The chart shows the high demand locations and occupancy rate for short let apartments in Lagos State.
  • Lekki controls the large majority of the demand with close to 50% demand. This is followed by Ikeja and Victoria Island with a cumulative of 23%.
  • The demand could be attributed to the high demand for entertainment and lifestyle events in this locations.
  • The occupancy rate for short-let apartments have grown from 56.5% to 70% between 2018 and 2020.

Historical Demand and Occupancy Rate for Short-let Apartments in Lagos

Occupancy Rate Projection for Short-Lets in Lagos

Pricing

The rental range for short-let apartments is wide and depends on the offer’s quality, branding, unit size, and location. Rents can go as low as N25,000.00 for a studio apartment to as high as N150,000 per day for a three-bed apartment. According to Alitheia, Lagos currently has just over 7,000 three, four and five-star hotel rooms, ranging in price from N35,000 to as high as N200,000 a day.

Some back of the envelope calculations shows that if a property company gets a three-bedroom apartment in Victoria Island, Lagos, at an agreed price of ₦3 million per year, modifications may cost an extra ₦1.5 million yearly. Modifications may include partitioning a flat, installing washing machines or heaters, and general repairs.

If that unit is occupied 40% of the time at an assumed daily charge of ₦60,000 for a short-let apartment, that could generate returns of ₦8.9 million per year for one apartment unit.

Benefit of Short-let Apartments to Guests

One of the significant benefits of short let apartments to tenants is cost. It has already been established that short let rental in Nigeria could be about 20-25% less than the cost of a hotel room. Asides from cost, other benefits include:

  • A home away from home

Although a classic hotel operator and a short-let/serviced apartment provider share the same objective — selling accommodation for a night —Short-let/serviced apartment providers attempt to provide ‘a home away from home’, personalized service, and larger living spaces. The attraction of short-let apartments is that they offer the comfort and facilities of a hotel, with the privacy and facilities of home.

  • Quality of fit-out and amenities

Unlike hotels, Short-let/serviced apartments are fully furnished and contain en-suite bathroom facilities, a fitted kitchen or kitchenette, and a lounge/dining area that includes a sofa bed. The standard of a property is likely to define the level of amenities provided.

  • Preferred family accommodation

Larger space compared to hotel rooms, the ability to self-cater, and price make serviced apartments perfect accommodation for family travelers, especially on extended visits. Short-let/Serviced apartments offer more space, privacy, and convenience when traveling with a family let it be leisure or business trips.

Benefits to Owners and Investors

  • High-income potential

The most significant benefit of owning a rental property is that the renters provide a direct income stream. There is no limit to how much money one can earn from owning a short-let home.

In 2020, all existing Digital Landlords received a 17% short let net rental income on all their properties and are set to experience the same in 2021. Compare this to local rental income rates of around 3%-4% in Nigeria; that’s a whopping 425% – 566% difference in margins. Digital Landlords can expect to get back their return on investment in just 5.8 years compared to 20 years for local rental income and then experience year-on-year profit after each consecutive year.

  • Flexibility in tenancy

Since it is a short-let apartment, the owner reserves the right to dictate the duration of stay for each occupant, thereby controlling income and tenancy