Lessons from Africa property investor

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26 Mar 2013

Having worked on the African continent since 1998, I am very optimistic and have seen the significant change that happened post 2005 and we are on the right path in terms of growth.

Global investors are diversifying part of their investment and portfolio into Africa as they look for good investment opportunities across various sectors, mining, agriculture, manufacturing, real estate, services and so on.

There isn't a week that goes by without a news article praising Africa's opportunities and it is very clear that global investors are keen to invest in Africa.

We launched our first Private Equity Real Estate (PERE) Fund in 2006 with approximately US$155 million with a strong focus on Sub-Saharan Africa (SSA) and investment in Greenfield developments, mostly Grade A shopping centres and office buildings.

Following the success of our first fund, we have set up our second PERE Fund for SSA with US$280 million of equity under management, which gives us sufficient fire-power to undertake more than US$1billion of property projects in markets that include Ghana (Accra), Nigeria (Lagos/Abuja), Kenya (Nairobi), Zambia (Lusaka), Mozambique (Maputo) and Uganda (Kampala).

What makes Africa the next big thing in terms of development and investment? Why should one invest in the continent?

Africa is at an interesting point and for investors and there are reasons Why investors love Africa real estate?

A number of African countries have had significant debt reduction in the previous decade, political stability, and consistent macroeconomic growth.

The latter comes predominantly from resources rich countries and these are oil, gas, coal, gold etc.

In addition, we are seeing the rise of the new middle class on the continent and this is creating the retail revolution.

Africans are consuming more and want the generic item goods that we consume in the first world or in South Africa.

Global foreign investors have a keen interest to invest in Africa and in various sectors, hence the increasing demand for retail, commercial and industrial space.

This is normal and part of the evolution of Africa. We saw the same thing in other emerging markets such as India, China and Brazil.

How is Africa performing economically in relation to other continents and countries such as Asia, China, India and Brazil?

If we compare with the first world, for example, Europe and USA, Africa’s macroeconomic performance is far better and we have the sense that this decade will provide Africa with good and consistent growth rates, whereby a number of countries will exceed 5 percent GDP growth per annum.

Consumer spending on the continent is forecast to grow by at least 60 percent to $1.4 trillion by 2020, according to the World Bank, with the number of households with disposable income rising by 50 percent to 128 million.

However, we also need to understand that Africa is coming from a very low base and it will take a long time before it catches up with the first world.

As for the other emerging markets (India, Brazil, China), they are still showing good growth rates despite a slowdown in the last couple of years.

But still these markets are ahead of Africa and have very sizeable populations, whereas Africa is a continent with many countries, different cultures, languages, political systems, currencies - but one is optimistic about the future of Africa.

How is the continent developing? What are the main contributors to its recent growth spurt?

Seven African countries are among the 10 fastest growing countries in the world.

Foreign direct investment (FDI) to Sub-Saharan Africa (SSA) recovered to a record high in 2012.

It rebounded to $35.0 billion (3 percent of GDP) in 2012, from $27.4 billion (2.7 percent of GDP) in 2010, and in doing so exceeding the previous high of $34.7billion (3.7 percent of GDP) in 2008.

Zambia for example, has had FDI exceeding 10 percent of GDP the last two years.

Eastern and Southern Africa’s natural gas reserves, especially the offshore fields of Mozambique and Tanzania, could significantly boost the region’s FDI inflows.

In 2011, Mozambique’s FDI inflows doubled to $2.1 billion and new discoveries are still being made.

The development of gas fields and the liquefied natural gas industry will require substantial upfront investments, of which FDI will likely play a significant role.

Eni’s (an Italian company), which plans to invest $50 billion (likely between 2013 and 2018 to 2020 in our view) to develop the gas fields recently discovered in Mozambique, is one such example.

A lot of the FDI is predominantly in the oil/gas extraction, copper, nickel, lead and zinc mining. Africa is a rich resource continent.

Development in these sectors also leads to opportunities in the support services sector.

For example, there is a plan to develop the biggest logistic park in Tete (Mozambique) to support the growth of mining companies and we see similar developments to occur in Namibia, Zambia and Kenya.

How are natural resources playing a role in Africa’s growth? Do you think that the economic crisis in the West is playing a role in Africa’s development?

There is no doubt that natural resources are playing a very key role in this fast growth rate in Africa.

What we will see over time (short to medium term), is there will be a multiplier effect as jobs are created in these sectors and lead to growth in the support services sector.

Global foreign investors have a keen interest to invest in Africa and in various sectors, hence the increasing demand for retail, commercial and industrial space.

This is one of the critical factors in the rise of the new African middle class which has been non-existent until the end of the last decade.

Of course, the economic crisis is playing a role. Global investors are diversifying part of their investment and portfolio into Africa as they look for good investment opportunities across various sectors, mining, agriculture, manufacturing, real estate, services and so on.

Furthermore, we are seeing a new breed of global investors from China, India, Brazil, Russia etc. So all of a sudden, African opportunities are being courted by far more investors coming from diverse geographic locations.

Now it’s up to Africa to make the most of this. At the end of the day, it is a demand and supply condition – the more demand, the better it is for Africa.

Is there a strong demand for property on the continent? If so, is there an overall demand for property? (residential, retail, office, industrial or a demand for a specific sector?)

We are seeing demand across all aspects.

If we take retail, a number of South African tenants such as Shoprite, Pick n Pay , Woolworths, Game, Edgars etc. are now expanding into the rest of Africa.

These retailers need developers and equity investors to assist in their geographical expansion by building new shopping centres and these can range from your 10 000 square metre convenience centres to your 50 000 square metre regional malls.

As for offices, as we are seeing more international companies coming to Africa, they are in need of decent office space, and the fact that rentals have been going up consistently over the last 5 years, means that there's not enough of good office buildings being developed.

On industrial property, I believe this is the next sector that will witness good potential as logistics companies expand on the continent.

We are already seeing opportunities in key markets such as Kenya, Zambia and Ghana.

When it comes to residential, there is a huge opportunity as the African population keeps increasing, the rise of the new middle class and also a move from extended family to nuclear family.

In a nutshell, opportunities are everywhere in the property sector.

Why is Nigeria the ‘tiger’ of the region? What are the reasons for this and which other West Africa countries should we take note of?

Nigeria is a big country with more than 165 million people and a big Diaspora overseas.

In Ghana, we have plans to develop the first mixed-use development of around 70 000 square metres which will include offices, hotel, retail and residential.

We should not forget that the Diaspora brings a lot to Nigeria in terms of money being repatriated and also in terms of the brain gain as well.

Currently, Nigerians who have worked overseas are returning to Nigeria and this is what Africa needs – more talent and skills.

Nigeria has got huge oil reserves, it’s GDP of Nigeria will surpass that of South Africa in the not so distant future.

We have also seen how over the last 5 years, Nigerian banks have expanded in the rest of Africa.

The other key country in West Africa is Ghana. Again this has been the case with the transformation over the last decade.

Reduction in government debt, political stability and economic growth as well as the Ghanaian Diaspora – these have been positive factors for Ghana.

Obviously it is also sitting on major commodities including oil.

What has spurred on the development of the emerging middle class? And what does this mean for the region?

The development of the middle class comes on the back of a number of things. Consistent economic growth helps in creating jobs which in turn raises the disposable income of people who in turn are willing to spend.

Also, the development of the financial services sector is also a key catalyst as Africans can now obtain credits to consume for example, obtain home loans, car financing and so on, note that this was almost non-existent pre-2005.

Consumer spending on the continent is forecast to grow by at least 60 percent to $1.4 trillion by 2020, according to the World Bank, with the number of households with disposable income rising by 50 percent to 128 million.

Current property development projects

Actis is developing East Africa’s biggest shopping mall in Nairobi in Kenya, which will be around 50 000 square metres.

In Ghana, we have plans to develop the first mixed-use development of around 70 000 square metres, which will include offices, hotel, retail and residential.

,As for debt funding, we are again seeing a number of South African banks and Offshore banks willing to provide long term funding, though interest rates are still high - the market is better than it used to be two years ago.

In Zambia, we are developing another mixed-use scheme consisting of a hotel and a retail centre of 35 000 square metres.

We are looking at the development of the first logistics/industrial park outside of Lusaka. This will be a first in Zambia where private sector funds will be dedicated to such infrastructural development which will help to support the growth of the manufacturing sector in Zambia.

Besides these, we are also developing via our real estate company in Mauritius, the first master planned sea resort town in the North East of Mauritius.

We’ve started construction of the first Phase on 10 percent of our land bank which includes a 5 star hotel, retail and approximately 250 residential units. Subsequent phases will take the rest of this decade to be fully developed.

How does access to finance work in terms of property companies planning to develop in the region?

One needs to understand that access to finance is still a big issue in Africa, it is improving year-on-year.

We have more equity investors willing to invest money in property developments than a couple of years ago.

For example, we started our first fund with US$155 million of equity with one investor and our second fund is US$280 million with more than six global investors.

We are also seeing a number of South African developers who have started scouting the continent for opportunities - a good sign as investors not only see these opportunities but also believe in them.

They are also becoming more comfortable in terms of investing in property assets that was once considered to be sticky assets.

Funds are being set up to provide an exit mechanism for those who have invested and taken development risks and I believe there will be growing interest for those property funds and investors who are not keen to take development risks but are looking for yields.

The same way as we’ve seen the listed property sector growing significantly over the last decade and having delivered good returns, we will see the same evolution in this decade; this may not be of the same magnitude though but it will happen.

As for debt funding, we are again seeing a number of South African banks and Offshore banks willing to provide long term funding, though interest rates are still high - the market is better than it used to be two years ago.

The next thing that needs to happen is for property developers and funds to start tapping the capital markets in Africa as a mechanism for debt funding. Why not asset backed bonds?

How would you persuade companies to invest in West Africa? 

West Africa is a big market, with again different countries, political systems, languages and currencies.

For example, the francophone countries such as Cote D'Ivoire, Senegal, Togo etc. are yet to see South African developers and retailers.

But the opportunities are definitely there. I think, it is important to penetrate new markets with local partners as this can help in bridging the gap, whether it is a cultural or language gap.

Where do you see Africa in the near future?

Global investors are keen to invest in Africa. I think those that are going to make a difference, are those that have a focused African strategy.

Of course, there are hurdles as there are in any other parts of the world, but if you are focused and patient, then you will succeed.

It’s about medium to long term gains, hence exciting times ahead. As we would say in Africa ‘Kenako’ (Now is the time). - Kevin Teeroovengadum

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