Opinion: Africa still makes real estate investors nervous

Sandton contract

But those in it for the long-term and not for quick profits will cash in on opportunities.

Africa is for the brave and patient. This long-held view still has credence in real estate investment circles, as convincing domestic and foreign investors to place their bets in the continent is a long shot.

Over the past five years, Africa was hailed as a new frontier for property investments with many investors rushing to develop shopping malls, office and industrial (distribution centres) properties.

It’s not hard to see why the interest in Africa was fervent back then: a growing young population and the middle class gave rise to consumerism and many countries that were pulling in double-digit economic growth were largely undersupplied with quality properties.

But interest in Africa has since slowed down, with figures from commercial property data firm Real Capital Analytics showing that sales and developments of large properties across the continent topped US$2.17 billion in 2014, which is one-third (or 33%) lower than in 2011. South Africa accounted for over US$2 billion of this total, excluding transactions concluded by South Africa’s listed property companies.

You don’t have to look far for reasons behind the faltering investor risk appetite: lower commodity prices have dimmed the economic growth outlook of oil exporting countries such as Angola, Republic of Congo, Zambia and Nigeria, the slowdown of China’s economy and volatile currency markets.

Speaking at the Expo Real in Munich early this month, the head of research for Continental Europe at real estate services firm CBRE Jos Tromp said global capital is still risk-averse when it comes to property investments in Africa.

He says companies that have been comfortable to hitch their wagon have opted to invest in mature and bigger markets such as South Africa and Kenya, where property investors are guaranteed stable rental growth rates in stable economies.

“There is an abundance of opportunities out there in the continent. But a lot of foreign companies are still struggling to understand Africa in detail. The money is struggling to move into Africa and that relates to the risks that we are seeing in the continent,” says Tromp.

Other risks include haphazard changes in government policies, instability in the legal framework on land ownership rights and investment restrictions.

Finding value

As a result of the risks, some development projects have been put on ice or aren’t living up to expectations. For example, shopping malls that have opened in various African cities recently are reflecting mixed results – with some performing above expectations and others falling short of projected targets in terms of sales and returns, says CEO of property research group Urban Studies Dirk Prinsloo.

“Developers, retailers and investors have started to be more careful before investing in Africa,” says Prinsloo in the Africa Property Report 2016 report compiled by Urban Studies in partnership with property services firm JHI.

The report tracks property markets in Angola, Botswana, The Democratic Republic of Congo (DRC), Ghana, Kenya, Mozambique, Namibia, Nigeria, South Africa, Tanzania, Zambia, and Zimbabwe.

The report indicates that countries which have the highest development opportunities include South Africa, Mauritius and Botswana while countries like Uganda, Mali and Burundi rank as having the lowest property development potential. (See graph below- countries on the bottom rank as having the lowest property development potential).

real estate opinion graph

Prinsloo says markets that present real estate opportunities are Kinshasa in the DRC, Nigeria’s Lagos and Dar es Salaam in Tanzania, given their rapid urbanisation which paves the way for shopping mall and residential developments.

South Africa

South African companies have been quick to chase the narrative of Africa’s rising middle class as they have attempted to replicate South Africa’s mature consumer and property market in other less mature regions.

“It is clear that in most cities, the middle class does not even exist, and will take a long time to develop into a segment that drives property development,” says Prinsloo, who adds that 80% to 90% of the gross domestic product that is earned from commodities in many African countries has not yet benefited individuals in the lower and middle segment.

Fashion retailers such as Woolworths and Truworths International have paid high school fees for their foray into Nigeria, only to later pull out of the country citing tough trading conditions. Retailers typically drive shopping mall developments as landlords and investors respond to their insatiable demand for more retail space.

Investors who can maximise opportunities are those that will be patient and in it for the long-haul says Christian Hiller von Gäertringen, a researcher on African business and economics. “After all, there are 54 countries in the continent. All these countries are different,” says Von Gäertringen.

He expects the continent (as a whole) to pull in economic growth of 3.7% in 2016 and 3.9% excluding oil exporting countries.

Article by Ray Mahlaka for MoneyWeb