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.