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Is real estate the next big thing for African markets?

In 2000 the Economist headlined Africa as “The Hopeless Continent” portraying a continent ravaged by war, economic and social distress.  Since then much water has flown under the bridge compelling the same magazine to radically changed its headlines referring to the continent as “Africa Rising” in 2011 and “Aspiring Africa” in 2013.  Africa has averaged economic growth of over 5% per year with countries like Ethiopia, Mozambique, Nigeria and Tanzania topping the ten fastest-growing economies over the past decade.  The continent is home to more than a billion people with an expected forecast of 2.5 billion by 2050.   Africa will then be the most populated and youngest continent resulting into the world’s fastest rate of urbanization.   UN forecasts say that the populations of Lagos, Kinshasa and Luanda will all grow by more than 70% during the 2010-2025 period, while Dar es Salaam, Kampala and Lusaka are expected to double in size.   Fueled by sustained economic growth, a sizeable middle class with disposable income is rapidly emerging across the continent thus creating opportunities for both commercial and residential real estate.

The considerable shortfall in the residential segment across the continent equates to opportunities for private development on a large scale, and the lack of public funds for such projects provides a wide platform for public-private partnerships.

Investment returns from real estate in Africa exceed those achievable in most other global property markets. International property funds with a bias on African real estate assets forecast no less than 20 per cent net annual returns.  Opportunities span across almost every sector and market segment as the continent has so much catching up to do.  Demand for high-quality retail, office and industrial space continues to outpace supply as international and local tenants are riding the wave of new economic opportunities.  The considerable shortfall in the residential segment across the continent equates to opportunities for private development on a large scale, and the lack of public funds for such projects provides a wide platform for public-private partnerships.  Furthermore, changing consumer behaviour and rising spending power are fuelling demand for different types of real estate, opening up avenues for more specialised developers and niche investors into the market.  According to Jones Lang LaSalle (JLL), the forecast equity allocation for the Sub Saharan African real estate development market is expected to exponentially increase from USD 5 billion in 2020 to USD 15 billion in 2025.

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African real estate and risk appetite

Risk appetite remains an important consideration for any investor in Africa.  Those that can accept and manage the risks can expect significant rewards on offer from the right investment.  Africa has 54 very different countries with different legal systems, different modes of compliance to these systems operating within different business cultures & environment.  There is no simple answer to the question of which countries are the best to invest in real estate.   Adding to that, legal certainty can be an issue in politically unstable countries. Countries with frequently changing government policies require careful legal considerations with regards to property ownership rights and investment regulations, as well as exit strategies.  Last but not least, the volatility of local currencies against the major currencies needs to be taken into account especially if the investment source is US dollar or Euro denominated.  The latter can be exacerbated in heavily commodity dependent countries, for example, the recent currency turmoil in oil-driven economies.  However, these risks need to be carefully considered, calculated and weighed against significant rewards.

Although economic management and real estate transparency are improving, there’s still way to go to reach the standards applicable in western markets.

Africa’s real estate markets require careful navigation and international investors attracted by the continent’s progress need to look beyond the macro growth story and understand the micro-environment of individual markets.  Although economic management and real estate transparency are improving, there’s still way to go to reach the standards applicable in western markets. The importance of a local partner or a knowledgeable operator with on-the-ground presence when investing in African real estate is greater than in other markets.

Real estate investment opportunities are numerous across Africa for the development of well-located, well-planned properties that can match local needs whilst attracting both local and international funding from investors ready to weigh out the risks to generate premium returns.

Sanjiv Mihdidin will be presenting at FundForum Middle East and Africa on the topic of Real Estate: How to take advantage of this investment opportunity?, on 9th October 2017 in Dubai.

Find out more about the region's leading asset management event.

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