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During 2015, sub-Saharan Africa experienced its lowest economic growth rate since the 2008 global financial crisis. Growth rates of above 5% are likely to drop to below 4% in 2016, says Dr Dirk Prinsloo of Urban Studies with whom JHI, a subsidiary of Excellerate Property Services, has partnered to produce its first Africa Property Report.
Following years of high growth expectations for the continent, investors, property developers, retailers and fund managers are now, unsurprisingly, looking at Africa with a somewhat more jaundiced eye.
This is partly because of the underperformance of some of the newly-opened shopping centres on the continent. Some retailers and developers who moved into the region aggressively have pulled back, worn down by difficulties that include challenging regulations, infrastructure problems and markets that they perhaps thought they understood, but didn’t.
Understanding a particular country and the different nuances of each region is a key to success, according to JHI. The multidisciplinary property services group manages more than $10bn in assets – over 2 300 buildings with almost 21 250 tenants – via its footprint in 17 African countries.
The property boom in Africa peaked during 2011. Today it is one third of that.
But when it comes to property development in sub-Saharan Africa, the trick, says Adriaan Otto, general manager of Excellerate Property Services Africa, is to concentrate on individual cities and nodes within cities, not the region as a whole.
“In spite of headwinds in many African economies, brought on by reduced commodity prices and a decline in demand from the Chinese economy, there are still indications of optimism in selected markets,” says Marna van der Walt, CEO of Excellerate Property Services.
Drivers of opportunity
Urbanisation: Real potential is tied to urbanisation, one of the major drivers of property markets. Prinsloo says the continent’s urbanisation rate is expected to reach 50% by 2037. In sub-Saharan Africa urban dwellers are expected to increase from the 400m in 2010 to 1.26bn in 2050.
“In the coming decades, migration towards Africa’s cities will account for 90% of the population movement,” explains Prinsloo.
According to the JHI and Urban Studies Africa Report 2016, urbanisation and urban growth is expected in large cities like Kinshasa, Lagos and Dar es Salaam.
Development in African cities is not only directed at these mega cities, but also to the intermediate cities that are directly associated with their surrounding environment. These are also the cities where future growth in terms of shopping centre and housing development will occur.
The middle market: Much is made of the growing middle class in Africa, estimated to be around 330m people in 2010, says the report. And Standard Bank’s report Rise of the middle class in sub-Saharan Africa, published in August 2014, says the 11 fastest-growing countries in Africa (Angola, Uganda, Nigeria, Ghana, Kenya, Tanzania, Ethiopia, Sudan, South Sudan, Mozambique and Zambia) will have increased their middle class from 15m households in 2014 to 40m by 2030.
“It’s a growing middle market. But it takes time. Take South Africa, where the middle market has only started growing since 2002. The middle market in most African cities is still very small. So too is the affluent market,” says Prinsloo.
Residential: There is a dire need for affordable and social housing within cities. As small as it currently is, there is no space for the middle market so that too presents opportunities for developers, says Otto.
Growth also exists for good-quality space in the specific affluent markets, while densification is creating a need for more multiple-type unit residential developments close to CBDs and job opportunity areas, he adds.
Road infrastructure: The biggest infrastructure drive in most African economies is road development, says Otto. With this comes pockets of development opportunities that are linked to this, Otto says.
Distribution and logistics: New mall developments need to be supported by warehouse and distribution hubs to support the growing consumer market, providing opportunities within this sector, says Van der Walt.
Challenges for those venturing into Africa
Understanding the market: “In many African cities, 60% of urban dwellers are still in the informal housing sector. You need to understand the composition of a city and make sure that you are focusing on the correct suburbs,” says Otto.
The shopping environment on the rest of the continent is less sophisticated than South Africa’s and still needs to see a shift from non-formalised shopping into a formalised environment.
In addition to filling malls with a good tenant mix, shifting that informal shopping behaviour can pose a challenge for developers.
Size does count: “Understanding the people in the catchment area is vitally important, including what their income levels and disposable incomes are. The middle market in many of these catchment areas doesn’t even exist,” says Prinsloo.
Overestimating a catchment area size by concentrating only on household numbers may be one of the reasons for the underperformance of some malls. Currently, the size of a number of regional strip malls are being scaled down in size – proof perhaps that some mall developments have been too large for those markets.
Travel time and shopper behaviour: Consumers in these markets are often impacted by lengthy travelling times or even ability to get to malls. They just shrink the area in which they operate and also undertake fewer daily activities, explains Van der Walt, often shopping in the evening or late afternoon to combat these difficulties and link it to the entertainment experience.
Infrastructure: PwC research suggests that infrastructure spending in sub-Saharan Africa will reach $180bn annually by 2025. Much of the spend will come from government partnerships with the private sector.
In many African countries property developers have to supply their own infrastructure; from power to sewerage works and even soft services. That said, lack of infrastructure does not hold back the development of a city in Africa.
“In Africa, infrastructure is just created differently. But it will not hold urbanisation back. That happens in spite of a lack of a formalised infrastructure programme because informal infrastructure takes its place,” Van der Walt tells finweek.
Risks
Apart from political and social instability; changing government policies and an overdependence on natural resources; legal aspects, such as property ownership rights and investment restrictions; the timeframe of investments; and the restrictions on possible exit strategies are just some of the risks associated with development in Africa.
Putting figures into context
Using socioeconomic status as a measure of where property development potential exists, a report by Higgs & Swanepoel (2015 Pan African Socioeconomic Status Measures by TNS) rated Mauritius, SA, Cape Verde and Botswana as those countries with the highest development opportunities.
Potential from a number of countries in the middle segment included Ghana, Kenya, Namibia and Zambia. This however needs to be seen in a much broader context cautions Prinsloo, citing the level of activity in SA that is of a much greater scale compared with other sub-Saharan countries.
A sense of that scale is better understood when you learn that the entire economy of Rwanda (around which there has been much positive noise) is one tenth of Johannesburg’s.
From a property development perspective Johannesburg’s office space alone will soon exceed 10 million m2. That’s 3 million m2 more than the whole of the rest of sub-Saharan Africa.
SA is ranked sixth in the world in terms of the number of shopping centres. Shopping centre development in SA during 2014/15 comprised 1.5 million m2 compared with around 900 000m2 committed space for the whole of Africa.
Finally, there is SA’s rapidly expanding middle class. Since 2002, 4m middle-income households have been added to the market, a large part of the reason for the exceptional growth in shopping centre development in SA.
Size and scale aside, hurdles to success in Africa often come with a lack of sensitivity to local conditions, says van der Walt. Price point too is a sensitive issue. What may be deemed an entry-level tenant in SA is often top-tier in other African countries.
That also impacts the number of formal retailers as tenants, currently very limited in these regions. Yet, that does not mean opportunities do not exist for further development.
While a cautious approach is promoted, JHI’s report points to pockets of opportunity that exist for those with well-executed research and a good understanding of Africa. JHI appears to be demonstrating that by rolling out its services to a wider African platform that includes Morocco.
There is a place for investment to flow to Africa, says Van der Walt. “The world cannot ignore Africa. Africa provides them with opportunities for growth that they are not seeing in their own markets. That growth and the opportunities for growth on the African continent will drive a growing property market.”
“But the better you understand Africa and the more practical in your solutions you become, the higher your success rate will be.”
This article originally appeared in the 16 June 2016 edition of finweek. Buy and download the magazine here.
