Publications
Partners
Slowing growth on the continent, due in part to the decline in commodity prices, sub-scale markets and risk perceptions are some of the factors limiting investor appetite for the property sector in sub-Saharan Africa.
“We have never seen so much liquidity in the global markets. But despite the abundance of opportunity in Africa, the money is struggling to move there. That relates to all the risks we are seeing around us. Most of that capital is very risk averse,” explained Jos Tromp, executive director: Head of research Continental Europe at CBRE, speaking at the Expo Real conference in Munich in October.
Foreign investors perceive a risk premium to venturing into unknown markets or outside the key economies of South Africa, Nigeria and Kenya.
This is especially true, said Tromp, when political unrest is a factor, when the size of the economy doesn’t allow for the scale that investors are looking for, or when there is a need to build various local organisations.
“Some see it as just not worth the effort, so in my view focus will remain on the big countries. […] There is an abundance of opportunity but it is difficult to assess the markets if you haven’t been there. That is perhaps where many foreign companies struggle with understanding Africa,” said Tromp.
That lack of understanding of the 54 vastly different countries and the risk that is attached to the unknown have ensured that most of the capital has flowed into countries like Nigeria, Kenya and South Africa. Ironically, the biggest opportunities on paper may be lying in the second-tier growth markets.Risks
The continent’s exposure to the commodity cycle, markets that are not as mature as investors like, currency, security and land ownership risks (see box) also have a hand in discouraging investors.
Transparency inroads are being made so that “it’s not typical business as usual”, but the biggest risk for Africa, says Gikonyo Gitonga, managing director of Axis Real Estate, adviser and real estate service provider in Kenya, is corruption and lack of transparency.
Tromp says there’s a checklist that investors should work through before committing to an investment on the continent:
- Proper due diligence: Look for local players who know the market in order to obtain legal and professional real estate advice.
- Undertake market research because data is often difficult to come by.
- Do a thorough risk analysis over and above that required for developed markets.
Who’s doing what and where?
To a large degree, the investment market in sub-Saharan Africa is driven by institutional capital from South Africa, said Tromp. “There are also some private equity funds from the Middle East and on the occupier side the former colonial powers are quite active. The French and Portuguese are also active in the construction sector, particularly in Angola and Mozambique. But foreign parties in most of these markets are very limited.
“Investors tend to look at sub-Saharan Africa based on a kind of ‘golden triangle approach’, with a hub in the East, West and obviously South Africa and the smaller countries around it,” explained Tromp.
But lately there appears to be a reverse trend for South Africa, much of which has to do with the political and economic headwinds the country is facing.
“We are seeing a lot of the funds moving liquidity out of South Africa to places like Europe, particularly to Central Eastern Europe,” said Tromp.
Nigeria’s volatile and challenging economic situation is also not aiding investment decisions.
Of the three big investment sweethearts, it is Kenya that Tromp is more upbeat about. “Kenya is one of the more mature developing markets in Africa. The economy is more stable, the rental rates are more stable and the development as a consequence is more stable.”
But retail in Kenya is perhaps overheating, cautioned Gitonga.
Tromp said: “Much of the air has gone out of the markets and this presents many good development opportunities.
“Start looking actively at development plots. Study the markets; make sure you have the information to back up your investments. Choose the right scale, and invest.
“The market is likely to come back in the next five to 10 years. And when it comes back, it goes very fast.”
Glenda Williams was a guest of Messe München South Africa (Pty) Ltd at Expo Real.
This article originally appeared in the 17 November edition of finweek. Buy and download the magazine here.
