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Real Estate: Risk-Takers Choose To Invest On The Ground In Africa

Real Estate: Risk-Takers Choose To Invest On The Ground In Africa

Though Sub-Saharan Africa is currently home to the smallest amount of institutional-grade real estate in the world, the region is fast becoming a hotbed of property development activity.

The uptick is so profound that PricewaterhouseCoopers (PWC) estimates that Sub-Saharan Africa will have the second-fastest growth rate in construction activity in the world through 2025.

“In the greater Johannesburg area, there are 8 million people and 80 shopping malls, so one mall per 100,000 people. In Ghana, Kenya, Nigeria, Mozambique and Zambia, the urban population is 120 million, and there are 12 shopping malls. One mall per 10 million people,” David Lashbrook, head of Africa investment strategies for Momentum Global Investment Management, said to illustrate the scale of the possibilities for the region.

“(And) that’s just in retail,” he adds.

Indeed, Africans are already avid consumers. According to McKinsey & Company, shoppers in Africa were already spending more in 2012 than their counterparts in Russia or India, and consumer-facing industries in the region are forecast to grow an additional $410 billion through 2020.

Rapid urbanization is adding fuel to the growth, and could potentially magnify the need for commercial development. Deloitte estimates that over 100 cities in Africa will have populations greater than one million by 2040 and seven cities with over 10 million.

In other words, the continent is growing, and consumer demand with it.

Momentum Global Investment Management is planning a $250 million sub-Saharan real estate fund later this year, with a lifespan of up to eight years, focusing initially on shopping malls and office buildings in countries such as Mozambique and Rwanda.

Momentum also targets commercial property for offices and light industrial development. The firm’s Africa fund is managed by the South African Eris Property Group.

Renier van Rensburg, chief financial officer of Atterbury Africa, an African real estate investment and development firm, puts it this way: “South Africa has only got so many opportunities, and there is such a huge development scope available to us outside of South Africa.”

Of course, with opportunity comes risk, and Sub-Saharan Africa is no exception.

“We look at a country that is stable enough that, if we invest in it, we can get a profit distribution… the economy must have good growth prospects, specifically from a real estate perspective,” says van Rensburg.

The key investment criteria include the obvious, like property fundamentals and operational capabilities, and the not so obvious, like beneficial tax exemptions and the ability to generate dollar-denominated returns.

The latter can provide a certain amount of certainty to the investment and help to mitigate risk — and there is always risk. Aside from logistical quandaries and the cost of development, there are also more basic issues, like sovereign risk.

Keeping An Eye On Politics

Lashbrook also notes the importance of keeping a finger on the pulse of the political environment, while stressing the importance of understanding the complex land use rights that are often a feature of African markets.

“They are always changing, so that is by far and away the first thing you’ve got to square up,” he says.

Big picture legal and political risks aside, there are also operational and logistical challenges that must be overcome.

“You cannot assume anything,” van Rensburg says, “Everything from VAT registration to how you can realize your income” are issues that must be addressed anew in each market.

In other words, there is no single way of doing business or going through a given bureaucracy — each nation represents its own unique challenges and hurdles.

There are also issues of forecasting tenancy and occupation for a given development. Lashbrook says that a big risk is “building without a tenant or end-buyer… especially if you go to some of these smaller cities where the commercial market isn’t that huge.”

All that is to say, risk management is essential.

One way to help ensure success is through local partnerships. Lashbrook says they are “absolutely key,” and help to demystify everything from idiosyncratic property rights issues to trends in the local property market, as well as providing access to local networks. “[Momentum] is present in five countries, but we realize that we still need to have a local partner.”

“Our partners aren’t a one-man band but established corporates that have preferably done some property themselves.”

PWC’s Real Estate 2020 report underscores the importance of such local knowledge. “Real estate organizations will need to focus on the markets they really understand, while concentrating more than ever on the basics of local knowledge and tenant demand,” the authors note.

For investors and developers that can do it, the continent could represent a major source of opportunity. Between the rise in consumer spending, ample room for property growth, and rapidly developing economies, it is, at the very least, a tough market to ignore.