Real estate survey 2014: Africa – Consumers drive boom in sub-Saharan Africa
Retail space developments, rather than housing, offer the best opportunities in the region.
|An artist's impression of Garden City Village in Nairobi|
Africa is growing at record speed. With six of the 10 fastest-growing economies in the world, sub-Saharan Africa’s average GDP growth will exceed 5% in 2014. A real-estate boom is an inevitable side effect of rapid urbanization and a burgeoning middle class. According to a report published by consultants PwC in March this year, by 2025, over 60% of all construction activity will take place in emerging markets, up from 35% in 2005. Sub-Saharan Africa will account for the second-largest proportion of this, just trailing emerging Asia, driven by an emerging consumer class: the rise of commercial real estate as a popular asset class is already on the up.
“The growth of retail space is probably one of the most important trends in sub-Saharan Africa at the moment,” explains Gerhard Zeelie, head of real estate finance for Africa at Standard Bank, which came out as the best bank overall for Africa in Euromoney’s real estate survey.
“Retail space is the fastest-growing asset class in terms of real estate, with Nigeria and Kenya being particularly popular hubs in the west and east respectively. Outside of South Africa, Kenya has one of the most developed real-estate markets in the region,” he says.
In Nairobi, the newest addition is Garden City, a retail, residential and commercial project developed by private equity firm Actis. It will house the largest mall in east Africa (50,000m²), an outdoor events area and a theatre.
Garden City is a product of Actis’ second dedicated real-estate fund, one of the biggest in the region. The firm is still looking to fund other projects. The first real-estate fund, launched in 2006 has just a couple of assets left to exit. With the company’s successful track record, Actis sets an example for those working on the continent and comes out on top for developers in the survey.
Louis Deppe, director of real estate for Actis, says: “There isn’t a lack of buying power in the retail space in places like Nairobi, but there is a shortage of quality tenants. And what I mean by this are tenants and retailers that are familiar with African consumers.”
He adds: “In the past we have seen companies trying to set up shop on the ground without the right expertise, companies that haven’t adapted to an African market. In some instances, for example, retailers have assumed that Africa is a dumping ground for leftover stock. But in reality shoppers want the highest-quality products just like anyone else. If not, they won’t pay up and retailers won’t succeed. Companies need to have a better understanding of who they are catering for.”
While shopping malls are popping up in Nairobi, Lagos and Accra to cater to newly affluent consumers, there remains a lack of affordable housing in the region – a problem likely to get worse as population and urbanization rates increase and while structural funding problems continue.
“Local-currency interest rates in the mortgage market remain high and price many people out of the market altogether,” says Zeelie. "It’s not unusual to see local-currency interest rates can be as high as 18% in some places."
"Investors are less likely to enter this sort of market because returns aren’t as high as they are in the retail space," he continues. "Investors develop in dollars while their tenants earn in local currency, so either they pass on the local currency risk to their tenants or they deal with it themselves. Whatever option they chose, the bottom line is that affordable residential real-estate developments aren’t all that profitable and have turned investors of this asset class.”
|Each jurisdiction has its own tax requirements, regulatory framework, risks and problems. It can be off-putting
Estienne De Klerk
At the same time, developers in South Africa, suffering restricted economic growth yet with a relatively well-developed property market, have begun to look north in search of opportunities.
Indeed, some investors will continue to remain cautious because of the complexity and confusion that revolve around land and ownership laws, says Estienne De Klerk, executive director for Growthpoint Properties in South Africa, Euromoney’s best investment managers in South Africa and Africa in the survey. “South African investors are looking north and are looking at potential investments. But right now it’s just a toe in the water. There isn’t much being done on a large scale.”
“Each jurisdiction has its own tax requirements, its own regulatory framework, its own risks and problems," says De Klerk. "It can be off putting. But one thing that the region as a whole has in common is that there is a huge demand for real estate in sub-Saharan Africa. Governments will need to attract capital to ensure real-estate development. This will mean a re-haul of rules and regulations soon.”