The constant frontier
A report by CBRE and DLA Piper into the African real estate market highlighted challenges and opportunity in equal measure. Theo Andrew investigates
It seems as though Africa has been on the periphery of real estate boom for a number of years and, despite the opportunities, there are still fundamental challenges that remain. This is according to report by DLA Piper and CBRE looking into real estate investment in the continent.
According to the report, the unreliability of a large number of African countries on the commodities sector, lingering infrastructure problems, and an unwillingness of foreign investors to venture from the ‘western mentality’ are all conspiring to slow down Africa’s development prospects, and it’s clear that these issues merely scratch the surface of a complex continent.
Paul Dineen, real estate partner at DLA Piper, said when the report was released: “Africa continues to be a major destination for investment, but ... as is to be expected in a continent of 54 countries, the picture is mixed.”
Unsurprisingly, infrastructure problems are nothing new to the continent and significant improvements are needed. Most notably, water, sanitation, power and telecoms are considered ‘critical’ for future commercial and residential developments due to the limitations they place upon emerging economies.
Greg Pearson, director at the Grit Real Estate Income Group (formerly Mara Delta), says: ”The infrastructure in Africa needs huge investment to increase the logistics around most African countries.”
Grit, an African property fund listed on both the Stock Exchange of Mauritius and the Johannesburg Stock Exchange, with a gross asset value of $600 million, is working to change the perception of Africa to investors.
Pearson says: “China has seen a huge opportunity in creating services off the back of infrastructure to unlock the continents potential.”
In December 2015, Chinese President Xi Jinping launched a new era of investment into Africa by backing a $60 billion investment for major capital programmes, concentrating on developing local economic capacity, although this has been scaled back recently to focus on domestic infrastructure developments.
Grit, already in markets including Kenya, Mauritius and Morocco, has managed to take full advantage of Chinese investment and is planning to make moves into Uganda, which, according the report, is a good example of a country focusing on developing its infrastructure to benefit from economic growth.
Pearson says: “We have a very positive collaboration with the Bank of China, they are our largest finance provider and they understand Africa because they have people on the ground, they have spent the time and resources to understand the countries as well as looking at Africa as a continent with over 50 countries in it.”
“We have been able to partner with them exceptionally well in Mozambique, Zambia and potentially more. They have focused around public-private partnerships (PPP), mining and infrastructure rather than anything real-estate specific,” Pearson added.
While infrastructure remains a problem on the African continent, so does certain markets’ reliance on commodities.
Heavily oil-dependent markets, such as Rwanda and Angola, saw overseas investments either completely stop or significantly reduce due to the volatility in the oil market, “exposing still-high levels of dependence on natural resources”, according to Dineen.
Brian O’Donohue, Partner at Pembaland, says: “It’s a fact of most African economies who fail to diversify themselves away from commodities, it’s natural that their gross domestic product is very highly correlated with commodity price volatility.”
The report highlighted the need for markets heavily reliant commodities to diversify and O’Donohue agrees, citing Kenya as an example of a real estate market driven by fundamentals typical of a broadly diversified economy as opposed to one solely reliant on commodities.
Dineen agreed, saying: “The collapse in energy and commodity prices has dented growth in many countries including large economies, such as Nigeria and Angola. It has also exposed still-high levels of dependence on natural resources.”
The report also warns against entering the African market with a “western mentality” and even urges investors to look into choosing an alternative sector before entering real estate. The diverse nature of African markets means that local knowledge conducting due diligence are essential for success, something the Chinese have been successful in.
O’Donohue said: “Each market has their own challenges, for example, in Mozambique the state owns all the land and an individual or entity can own the right to use the land, which is challenging legally because it is alien to how western multinationals would think about that.”
For many markets on the continent, land and planning systems remain largely unregulated and as a result create unstable conditions with high vacancy rates and low rental levels.
Phil Gregory, managing director of CBRE Middle East & Africa, comments: “The long-term view regarding ease of doing business in Africa is improving. The jurisdictions that will prosper most rapidly are those that focus on removal of the common barriers including currency and foreign exchange, transparency of title, ease of establishing local partnerships and adaptability and accessibility of local market practices.”
Ease of doing business has improved in the last few years but, according to the report, there is still a long way to go regarding issues surrounding currency and ease of establishing local partnerships.
Dineen says: “The strengthening in the US Dollar has raised the debt-servicing burden for those countries with dollar-denominated debts; and the combination of slower rates of economic growth and abundant development has left many markets looking oversupplied.”
This, according to many African real estate players, is scaring many western institutional investors away from the continent.
Gregory says: “Greater consistency of systems and policies across markets will be key to securing wider investment across the continent, as will greater rigour from governments in supporting and underwriting financial structures.”
“Nonetheless, opportunities still exist and a period of limited short-term growth may well offer investors the opportunity to formulate strategy for the period beyond,” he added.
Despite this, the chances of any kind of pan-African legal and regulatory system being put in place are slim, according to O’Donohue. In addition, Pearson believes it’s a question of providing a space for larger institutions to put capital, but the lack of options and depth in the market mean they are turning towards other frontier markets to place their investments.
There is, however, reason to be positive around the future of the African continent, and many believe there is opportunity to be had if you know where to find it.
Dineen says: “Product quality is improving across all sectors, due to the growing influence of international occupiers and developers, and transparency and ease of doing business are improving widely. Meanwhile there are high yields are available, up to 15 percent in some places.”
“Overall the long-term view is positive, but many will be watching closely to see how the market develops as we move into the second half of 2017.”