Real estate in Africa: Possibilities for property pioneers
Real estate players highlight challenges to property development on the continent.
For the past 15 years, Global Real Estate Institute (GRI)-hosted conferences have been meeting points for the world’s leading real estate players. This year, international investors and developers congregated for the first Africa GRI conference in Nairobi, Kenya.
Holding a GRI conference in Africa is an indication of the increasing importance that investors and developers in the real estate sector are placing on sub-Saharan Africa as a largely untapped region within which to invest and build.
The aim of the conference, held in June this year, was to explore the opportunities of doing business together and to identify the principles of successful and sustainable growth in the real estate sector in Africa. The conference focused on discussions around investors being ready to open Africa’s investment doors; where to invest beyond South Africa; hotel and retail developments in East and West Africa; and, significantly, private equity in African real estate.
Opportunities to invest
To date, investment flows in the real estate sector in Africa have depended on a number of considerations. Investment is normally favoured in markets that benefit from an extensive population with a burgeoning middle class; offer a healthy growth rate and real opportunity for real estate; exhibit relative political stability and regulatory frameworks; ensure security of title to property; and generally offer investor-friendly markets. Such investment parameters have meant that real estate developers and investors have initially focused on markets like that of Ghana, Nigeria, Tanzania, Kenya, Mozambique and Angola, with South Africa being considered a developed market in the real estate sector.
While the participants at the GRI conference generally acknowledged that sub-Saharan Africa offers significant opportunities in real estate, participants pointed out a number of challenges experienced by developers and investors. Many of these challenges have been around for many years and include infrastructure (or the lack thereof); title security; a scarcity of professionals qualified as quantity surveyors, town planners, architects and sworn valuers; and development financing. Because these challenges hamper development, the importance of urgently addressing these issues was stressed at the conference. On the other hand, participants made it clear that for those investors willing to look beyond the challenges, the yields are promising.
Financing real estate growth
Developers raised the important issue of a lack of financing for real estate development, which is desperately required to satisfy, for instance, the three million square metre retail gap in West Africa and the lack of affordable housing across the continent.
Jeremy Cleaver of CDC Group, a participant at the GRI conference, remarked that, historically, development finance institutions (DFIs) and multilateral development banks have provided a significant portion of the capital required for real estate. The situation is now changing, with international and African pension funds, sovereign wealth funds and African private equity and real estate funds becoming significant players in the sub-Saharan region. New emerging market investors, such as regional and Chinese investors, have furthermore been bringing liquidity into the continent.
There is also a growing recognition of the need for domestic finance to play a more significant role in real estate development, with rent being paid by tenants in local currencies. In Zambia, for instance, the recently promulgated Statutory Instrument No 33 of 2012 aims to reinforce the use of the kwacha in all domestic transactions by stipulating that the Zambian kwacha must be the sole legal tender for all public and private transactions.
Typically, investors who have financed their Zambian developments, whether retail, office or industrial parks, in foreign currency (usually in US dollars) would necessarily require the rentals to be received in dollars in order to service the dollarised funding. While such legislation may have resulted in some investors placing their real estate pipeline investment into Zambia on ice, investors are noticeably still willing to entertain creative solutions to deal with the kwacha value fluctuation. The legal validity of some of these solutions has not yet been tested.
Participants at the conference generally agreed that domestic finance can play a role in providing long-term finance to the burgeoning middle class who desire to buy residential properties secured by mortgage bonds. In the East African market, there are currently only approximately 18,000 mortgages registered in Kenya, resulting in a substantial opportunity in the mortgage market for banks and other finance houses.
DFIs require recipients of development finance to implement and maintain good environment, social and governance (ESG) principles, as well as to comply with international anti-bribery legislation, such as the UK Bribery Act and the Foreign Corrupt Practices Act of the US, which have extra-territorial reach. The benefit of regulation associated with DFI financing includes that it is generally easier to on-sell an African development company which demonstrates good ESG and anti-bribery principles, as buyers in the real estate market look for well-managed companies in order to reduce the perceived risk of doing business in Africa. The creation of such high value “stock” in the real estate market, in turn, creates a healthy secondary exit market. This makes it easier for investors to sell their developments, whether it is a retail mall, office block or hotel, and offers a sophisticated platform for investors to invest in.
Given the relative infancy of the real estate market in Africa, a further challenge highlighted is the lack of trading information or data on real estate developments in Africa, which makes it difficult to set rentals. Rentals are currently perceived as being very high and therefore lucrative for investors as demand outstrips supply, but some concern remains regarding the sustainability of such high rentals; and as more and more developments are rolled out in the continent, so the rentals will reduce.
The ability to attract high quality tenants in the retail space is a challenge, resulting in a relatively poor depth of retailers. This will, however, improve in the near future as tenants start looking to expand their operations into the continent. Participants also suggested that a good development should make provision for expansion possibilities at the outset, as the market will in due course expand exponentially.
Demand outstrips supply
Historically, real estate developments revolved around tourism. This pattern is however changing, especially in East Africa, where the developments in the oil and gas sector are leading to business people and not tourists occupying hotels. The demand outstrips the supply by far. Participants at the GRI conference pointed out that the segmentation of urban areas due to infrastructure challenges (staying where you are meeting) prohibits the potential growth to service this change in hotel occupancy.
Savvy investors now know that one cannot apply a previously successful development plan to another region without implementing changes suggested by well-informed and connected locals. The “Africa is not one country” refrain is more important than ever, as each jurisdiction is continuously developing its own processes and regulatory frameworks. Successful developments will also increasingly rely on well-qualified real estate advisors such as valuers, town planners and architects.
Security of title remains a concern for developers and investors alike. Participants pointed out that some 50-year leasehold rights obtained in Nigeria in the previous century are now being renewed without challenge. This may lead to some certainty in that the perception that the system is reliable, may be established. Title insurance as a business opportunity remains a reality.
A general feeling of optimism prevailed among the participants, those from Europe again pointing out that the opportunities there are far less than in Africa. Participants were urged to use the know-how of institutions like banks that have already done much of the local groundwork investigation. Add thereto thorough due diligence processes based on advice of locals and many concerns can be allayed to reap the rewards of a pioneering spirit.
Maria Krüger and Christy Hobson are senior associates at Webber Wentzel.