Africa’s construction industry: insight into the opportunities and risks

The case for investing in construction on the continent is strong, with the following factors contributing to this robust case: rapid urbanisation, strong current and projected economic growth, a rising middle class, regional integration and strengthened democracy, transparency, accountability and governance in many of Africa’s 54 nations. Each of these factors is driving opportunities on the continent.

What are the opportunities and what are their drivers?

Urbanisation and housing: In 2010 Africa had 51 cities with more than a million inhabitants, and only one city – Cairo – with more than 10 million. By 2040, it is expected to have more than 100 cities of more than one million inhabitants and seven cities of more than 10 million.

The largest city is projected to be Kinshasa, where the population is expected to reach 24 million (PIDA, 2011) by 2040. These pressures are already being felt and in a bid to cope with this rising urbanisation, entire new cities are already being developed such as Tatu City in Kenya, the City of Light in Accra and King City in Takoradi, Ghana accommodating 178,000 residents between them and being built at the cost of US$300 million. In Nigeria, there is the Greater Port Harcourt City and the modern Eko Atlantic City being built on reclaimed sea.

These ‘self-contained’ new cities, based on the work-play-live concept, are intended to relieve the highly congested metropolises and minimise the need for inhabitants to go into the ‘centre’. Indeed, demand for housing is growing across all price points. In Nairobi, for example, there is a demand for some 150,000 affordable new homes per annum at the lower end of the price spectrum, but with only some 30,000 units being built annually. Ghana, sits with a 1.6 million units housing deficit which is anticipated to grow to 3.6 million units by the year 2022 according to the Consumer Protection Agency of Ghana. While many countries in Africa have traditionally not had a developed mortgage market, this is changing as banks and specialised financial institutions are rolling out new programmes such as lower-income mortgages.

Ghanaians, for example, are now able to more easily access 15-year mortgages for 18,000 cedis (US$9,245) and this is, in turn, creating opportunities for developers.

Strong growth and resultant shortages of office space: As more businesses access African opportunities and set up local operations, the acute shortage of high quality, well priced office space is being exposed. Office rentals on many parts of the continent are high commensurate to the quality on offer. Business activity emanating from the oil and gas industry has further pushed rentals higher, making Luanda and Lagos some of the costliest cities in the world to live and operate in. In a 2012 cost of living survey, Luanda ranked as the second most expensive city in the world for expatriates. Lagos was ranked at number 39. To put this into context, Tokyo is the most expensive at number one, just one place ahead of Luanda, while Paris ranked 37, Stockholm 46 and Vienna 48. Luanda rentals can be in the range of US$150 per square metre per month and Lagos US$70.

A rising middle class and increased consumer spending power: The rise of the African middle class, as a percentage of the population, has been steady – in 1980, 111 million or 26% of the continent’s population fell in this category rising to 151.4 million or 27% of the population in 1990 with a further surge to 196 million in 2000 and a dramatic increase to 313 million in 2010, equating to 34.3% of the population (African Development Bank, 2011). The rise in absolute numbers, compared to the percentage rise, has been more dramatic and this is best explained by the increase in population, with Africa having hit the 1 billion population mark in 2010.

The prime beneficiaries of this socio-economic trend are consumer businesses and, primarily, retail – food and clothing. There is currently an explosion of such businesses moving into the continent and with that, a rise in the demand for formal retail infrastructure.

To illustrate the scale of the opportunity, Nigeria is comprised of 36 states under its federal government system. With a population of 160 million, there are opportunities of scale across the country, beyond Lagos. The development of retail space is not happening fast enough and remains a key constraint to retailers’ African growth plans. This, in turn, is hampered by insufficient FDI inflows into property. This has now created an opportunity for institutional investors, including African pension funds, which traditionally have not invested in this asset class, but this is changing.

Regional integration and cross-border infrastructure projects: Many of Africa’s 54 countries are small, with populations of fewer than 20 million and economies of less than US$10 billion. Their infrastructure systems, like their borders, are reflections of the continent’s colonial past, with roads, ports, and railroads built for resource extraction and political control, rather than to bind territories together economically or socially (PIDA, 2011).

The essential benefit of regional infrastructure is to make possible the formation of large, competitive markets in place of the present collection of small, isolated, and inefficient ones.

As regional bodies and the African Union continue to drive the integration imperative, this is creating opportunities for an array of large infrastructure projects that span borders. Initiatives such as the North-South Corridor and the Southern Africa Development Community (SADC) Infrastructure Master Plan present massive opportunities for public private partnerships (PPPs). There is recognition that such PPP arrangements could assist governments close material financial, managerial and technical gaps, while supporting further regional integration. For example, there is a US$100 billion funding gap for the SADC Infrastructure Plan. The North-South Corridor project is equally ambitious and costly. It comprises 157 projects in the North-South Corridor, conceived as the area between Durban and Dar es Salaam, and includes 59 road projects; 38 rail projects and six bridge projects.

Risks and challenges

While opportunities abound, what are the risks and challenges that need to be navigated in undertaking construction projects on the African continent?

  • Challenges of accessing funding for property developments in many parts of sub-Saharan Africa. Although some developments in South Africa are funded with up to 100% debt, in the rest of the continent developers often need to put down around 50% in cash.
  • For construction projects that cross borders, there is a lack of alignment between national and regional priorities and legislative frameworks. Where regional and continental infrastructure policies do appear in national legislation, too often they are not enforced.
  • Construction costs (and professional fees) on the continent are high due to the non-availability of specialist building materials. Furthermore, is the high cost of land. An acre in a prime zone in Accra can cost up to US$2 million. However, these need to be balanced against rental yields of over 10% for retail, residential and industrial properties.
  • While there is a rising middle class in Africa, Africa remains a cash society and this places strain on household incomes. The mortgage market is underdeveloped or non-existent in the majority of the continent. The mortgage to GDP ratio for Ghana remains under 1% compared to 32% for South Africa (SARB, 2011) and 19.6% for Namibia (Bank of Namibia 2011). For most Africans wanting to own a home, the following approach is adopted: come up with the bulk of the money in one fell swoop or begin accumulating cement, tin sheeting and other housing components in order to start working in spurts as the cash comes in.

This article is an extract from a Deloitte report entitled ‘Construction on the African Continent: Opportunities, Risks and Trends’