The expansion of international and regional retailers into emerging markets in Africa is fuelling a wave of the construction of modern shopping centres. Africa’s fast-growing cities are home to a growing middle class whose heightened appetite for quality goods and convenience is changing the retail business.
African retail brands including Kenya’s Nakumatt supermarket chain and South Africa’s Famous Brands, Woolworths, Pick n Pay and the Foschini Group are expanding to other parts of the continent, targeting the emerging middle class. Most of these brands are anchor tenants of new malls planned for, or under construction in countries such as Kenya, Nigeria and Ghana.
Real estate investment company African Land Investments (ALI) is seeking to buy shopping malls in “growing markets” in the continent. Established last year, ALI provides an exit option for individual developers and private equity funds which own shopping malls in the continent.
ALI owns the US$140m Manda Hill Mall in Zambia’s capital Lusaka. The 44,000m² mall is the biggest in sub-Saharan Africa, outside South Africa.
ALI CE Kevin Teeroovengadum says the firm intends to grow its portfolio to $500m in the next three years. He explains that the increasing number of malls under construction in Africa is testament to the continent’s changing economic environment and its growing appeal to investors.
Speaking to How we made it in Africa on the sidelines of the recent East Africa Property Investment Summit in Nairobi, Teeroovengadum said ALI is eyeing high quality malls “in defensive locations and good catchment areas”.
“Our strategy in the next two years is to go and find big defensive shopping malls that we can buy and grow our portfolio to half a billion US dollars.”
Teeroovengadum notes that in the markets ALI is eyeing, it is “expecting fair returns”.
“Given that we have bought in Lusaka we are going to be looking at other opportunities in Zambia, but there you have got limited opportunity because it is not a big market. We are going to be focusing on West Africa; we are very keen to get into the Nigerian market. In East Africa we are looking at the region as opposed to a single country… but we still need to be in Kenya. Nairobi is going to be an important market for us to look at.”
Teeroovengadum says its South African shareholders are seeking passive income in high-growth economies. ALI is owned by Johannesburg Stock Exchange-listed property firms Hyprop (87%) and Attacq, previously Atterbury Investment (12.4%).
“In the rest of Africa we can buy income producing assets in a growing market. In South Africa the economy is not growing that well… [about] 2.5% GDP growth, whilst in markets like Kenya and Nigeria you are talking about 6%-8%.”
He notes that there are not many malls up for purchase in most countries but this is likely to change over the next year.
“It is only in the last couple of years that we have seen private equity funds developing these malls. It’s very limited opportunities, but on the other hand there are very few buyers who have got funding like we do to go and do those deals. We estimate in the next year or so you are going to have at least two or three assets per country that will be available for sale.”
Diversifying against risk
One challenge ALI is likely to face as it purchases property in different countries is how to “get minimum tax leakages”.
“It’s very easy to look at Africa and think all the countries are the same but the reality is they have got different tax regimes, different governments [and] different rules when it comes to ownership. Each country has its own specificities and I think that is what is challenging. That is also why it does take time to do deals. You need lots of hard work to make deals happen.”
The threat of terrorism will also be a major concern especially in high risk countries like Kenya and Nigeria. Last September’s attack on the Westgate shopping mall in Nairobi in which 67 people were killed has ignited debate on safety in malls which host thousands of people at any given time.
In the aftermath of the attack hundreds of people have lost their jobs and business owners are still counting the losses. The damaged mall remains closed.
To cushion itself from the effects of such an event, the ALI boss says the firm will diversify its portfolio across various countries and cities.
“There are countries and cities where you have higher risk. In Zambia we have got no risk of terrorism at all. If we buy in Nigeria we will probably look at Lagos and Abuja but not further up north [where Boko Haram attacks are frequent]. What we are hoping is that when we have a $500m portfolio, a mall in Nairobi will only represent maybe 20% of that so that if something happens it doesn’t impact the whole portfolio.”