Four years ago, few South African institutions and developers expanded their real estate footprint on the African continent.
Those who dared to venture beyond South African borders, often enticed by prospects of dollar-based returns, were often met with strong criticism given the perceived high risks of the continent.
Multi-jurisdictional land ownership legislation, political instability and challenges in assembling debt facilities were some of the risks associated with the rest of Africa.
Fuelling further negative sentiments was numerous scenarios of industry players who have burnt their fingers after pursuing investments.
How times have changed since then, as African strategies are on the agenda for most developers who are willing to bet on the continent.
It’s no surprise that developers are getting in on the act, especially with prospects of 20% plus returns on real estate projects, figures from PricewaterhouseCoopers (PwC) show.
Real estate projects have been rolled out mainly by local developers in each of the respective countries, says the head of real estate finance in the rest of Africa for Standard Bank Gerhard Zeelie. South African and international developers are also joining the ranks.
The Africa Rising story – which not only makes up of the growing middle class and population growth – but also an undersupply of quality real estate makes for a compelling investment case.
Yet, capital inflows for developments are still concentrated in South Africa. Data and analytics firm Real Capital Analytics (RCA) indicates that sales of large lot size property across Africa topped US$2.17 billion (R28 billion) in 2014, and South Africa accounted for over US$2 billion (R26 billion) of that total.
Despite this, the continent’s burgeoning retail, which is still characterised by informal trading and makeshift markets, continues to present developmental opportunities. Zeelie says there is an insatiable demand for formal retail centres, but there is not sufficient supply. “I would say the shortage is less so in East Africa and more so in West Africa,” he says.
More developers have rolled out retail centres in recent years, a function of improving consumer spending power and rapid urbanisation in some economies.
The main regions that are attracting billions of developmental capital are Nigeria, Kenya, Uganda, Mozambique, Zambia and Namibia. The office sector has also piqued the interest of developers, as they are constantly on the prowl for areas seeing a dearth of office space supply.
“Probably in the majority of countries, there is more office space than there would be retail space. But the continent still offers good investment opportunities provided that you really establish your tenant profile and rent out the properties before you invest in the properties,” Zeelie explains.
Forming partnerships on real estate investments with local players is often the preferred method. What local partners bring to the table is land in various jurisdictions and the developer would bring expertise on planning, construction, project management, dealing with tenants, concluding leases as well as providing direction on operating around in-country legislative framework, Zeelie explains.
Developers who have an appetite for Africa real estate don’t have many choices, given that in most cases they can’t buy existing properties as they are not well established. Thus, embarking on developments is the feasible option.
Debt finance is also difficult to raise and is usually based on a 50% to 60% loan to value, says PwC. This means that there is a heavy reliance on debt rather than own equity.
However, Zeelie says banks have always had an interest in financing developers. “In our experience, we need to have local market understanding to finance these transitions. At the moment there are not too many options available for developers, they go to banks,” he says.
In some cases, private equity has led the way in bankrolling developments in certain countries, says managing partner at private equity development financier International Housing Solutions Rob Wesselo. Private equity firm Actis Africa is one of the big players driving property developments on the continent, Wesselo says.
“While Namibia, Botswana and Mauritius have decent mortgage markets, some markets don’t have a formalised mortgage market. But there is a lot of work to formalise them,” he adds.