Attractiveness of the African property market - CNBC Africa

Attractiveness of the African property market


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Buying African property has been a very attractive option.

In recent years buying African property has been a very attractive option considering that the continent is a vast place with several countries that are big tourist draws. But most investors have shied away from buying property on the continent due to the constant civil unrest and strife that seem to plague it.

Among the major reasons for investing in African property is the outstanding value that you get for your money. As the cost of living is extremely low foreign dollars can go a long way. In fact, it is very easy to live like royalty in Africa given the current rates of exchange for the currencies of most first world countries.

The other very major attraction for investors is the relatively inexpensive yet high quality of labour and materials that can be purchased for the development of housing and resorts. There is also a huge number of world-class facilities and related support industries that cater exclusively to the needs and wants of the business executive as well as the wealthy traveller.

Even Standard Bank has come out in support of Africa’s residential property market stating that it offers potentially lucrative opportunities for investors with the capability and experience to develop and manage quality housing stock in the continent’s booming urban centres.

This is as a result of rapid urbanisation in response to population growth and sustained economic expansion which is boosting demand for residential rental stock in Africa, where home ownership remains elusive due to the dearth of long-term mortgage financing in parts of the continent.

Economists and commentators argue that although we’ve seen a lot of activity in African commercial property, particularly in the real sector, the residential market hasn’t attracted as much interest due to the lack of well-developed home loan products on the continent. However, they state that this barrier to home ownership could be an opportunity for investors looking for new frontiers in the rental market.

It is imperative for potential investors in Africa’s residential rental market to have the expertise to construct quality housing stock as well as the management capability to collect rents and conduct on-going maintenance on their investments due to the lack of property management firms on the continent.

Standard Bank is one of the banks on the continent that definitely sees opportunities to finance residential property developments in Africa but investors must have the ability to manage the entire process from construction right through to rental management and maintenance.

There are challenges to investing in residential property in Africa but there are massive opportunities as well, particularly in booming centres like Accra, Lagos and Nairobi.

African banks say that they are more than prepared to finance this sort of investment; it’s just a matter of backing the right deal and partnering with investors who have the necessary capabilities.

Recently the Global Real Estate Institute (GRI) held a conference in Nairobi, Kenya an indication of the increasing importance that investors and developers in the real estate sector are placing on sub-Saharan Africa as a largely untapped region within which to invest and build.

To date, investment flows in the real estate sector in Africa have depended on a number of considerations. Investment is normally favoured in markets that benefit from an extensive population with a burgeoning middle class; offer a healthy growth rate and real opportunity for real estate; exhibit relative political stability and regulatory frameworks; ensure security of title to property; and generally offer investor-friendly markets.

Such investment parameters have meant that real estate developers and investors have initially focused on markets like that of Ghana, Nigeria, Tanzania, Kenya, Mozambique and Angola, with South Africa being considered a developed market in the real estate sector.

While the participants at the GRI conference generally acknowledged that sub-Saharan Africa offers significant opportunities in real estate, participants pointed out a number of challenges experienced by developers and investors.

Many of these challenges have been around for many years and include infrastructure (or the lack thereof); title security; a scarcity of professionals qualified as quantity surveyors, town planners, architects and sworn valuers; and development financing.

Because these challenges hamper development, the importance of urgently addressing these issues is important for the growth of the sector.

Developers in Africa have raised the important issue of a lack of financing for real estate development, which is desperately required to satisfy, for instance, the three million square metre retail gap in West Africa and the lack of affordable housing across the continent.

But it seems like there is hope, the situation is now changing, with international and African pension funds, sovereign wealth funds and African private equity and real estate funds becoming significant players in the sub-Saharan region.

New emerging market investors, such as regional and Chinese investors, have furthermore been bringing liquidity into the continent.

There is also a growing recognition of the need for domestic finance to play a more significant role in real estate development, with rent being paid by tenants in local currencies.

It is generally agreed that domestic finance can play a role in providing long-term finance to the burgeoning middle class who desire to buy residential properties secured by mortgage bonds.

For example in the East African market, there are currently only approximately 18,000 mortgages registered in Kenya, resulting in a substantial opportunity in the mortgage market for banks and other finance houses.

Given the relative infancy of the real estate market in Africa, a further challenge highlighted is the lack of trading information or data on real estate developments in Africa, which makes it difficult to set rentals.

Rentals are currently perceived as being very high and therefore lucrative for investors as demand outstrips supply, but some concern remains regarding the sustainability of such high rentals; and as more and more developments are rolled out in the continent, so the rentals will reduce.

The ability to attract high quality tenants in the retail space is a challenge, resulting in a relatively poor depth of retailers. This will, however, improve in the near future as tenants start looking to expand their operations into the continent.

It is very clear that there is an infrastructure backlog in Africa, and therefore the region presents a massive opportunity for construction groups in terms of new public-private partnership opportunities.

South Africa’s Group Five is focusing on accessing more of the mining capital spending in Africa through the delivery of multi-disciplinary solutions to mining companies operating in remote locations. In this regard, the group has provided mine construction, housing and infrastructure works in the DRC, Zambia and West Africa.

Historically, real estate developments revolved around tourism. This pattern is however changing, especially in East Africa, where the developments in the oil and gas sector are leading to business people and not tourists occupying hotels.

The demand outstrips the supply by far. Segmentation of urban areas due to infrastructure challenges prohibit the potential growth to service this change in hotel occupancy.

Security of title remains a concern for developers and investors alike. Some 50-year leasehold rights obtained in Nigeria in the previous century are now being renewed without challenge. This may lead to some certainty in that the perception that the system is reliable, may be established. Title insurance as a business opportunity remains a reality.

While it is a fact that sub-Saharan Africa exhibits a compelling consumer story, the opportunities in real estate and construction cannot be overlooked.