NORTHERN EXPOSURE - JSE MAGAZINE

NORTHERN EXPOSURE

Big players are increasingly attracted to African property investments outside of SA, motivated by the emerging middle classes in many countries

NORTHERN EXPOSURE

When the Economist magazine published its notorious 2000 cover describing Africa as ‘the hopeless continent’, a property boom was building momentum in developed markets. According to estimates by the publication, by 2005 the total value of residential properties in those economies had risen $30 trillion to a total value of $70 trillion. This was more than twice the combined GDPs of all developed countries.

Africa, with the notable exception of SA, was almost entirely bypassed by these events. The absence of private free- and leasehold properties made the continent unattractive to investors and locked value away in forms that could not be used to generate wealth. It could not, for instance, be used as collateral to access bank loans.

In 2000, the renowned Peruvian economist Hernando de Soto estimated that $1 trillion was locked away in Africa’s ‘dead capital’. Just 15 years later, however, property investors are moving into sub-Saharan Africa with remarkable enthusiasm.

The boom in the developed world ended with the 2008 global economic crash. Indeed the property market had become a bubble and was one of the main causes of the crash. But while property investment has lost its sheen in developed markets, sub-Saharan Africa has leaped into prominence.

Anthony Lewis, director of sub-Saharan Africa capital markets at international real estate service company JLL, argues that property investments in developed markets are returning rates of between 2% and 5%.

By contrast, he points out, African investments are currently targeting returns of 25%. Even big global players are interested in a sub-Saharan element in their portfolios.

To understand why Africa is on the investment agenda, look no further than a 2011 cover from the Economist, ‘Africa Rising’. The magazine, in parallel with a range of serious international opinion-makers, identified the rise of a middle class as a critical driver in African markets.

Key continental economies were moving beyond resource extraction and into consumption and services. Retail, leisure and accommodation properties were suddenly on Africa’s agenda.

Northern PQ

‘If you want to build a portfolio of African property investments, be prepared to accept compromise projects’

ANTHONY LEWIS, SUB-SAHARAN AFRICA CAPITAL MARKETS DIRECTOR, JLL

At the same time, reforms to political and regulatory environments were starting to pay off. Lewis points to the recent elections and transfer of power in Nigeria as a good example. ‘Previously property investors interested in Nigeria had certainty only against a five-year time horizon – one presidential term,’ says Lewis.

Five years is far too short a period to make any sort of sense in the property game, where returns are typically calculated over 20 years or more.

JLL, previously known as Jones Lang LaSalle, is a Chicago-based global services group that offers the full range of advisory services in the real estate industry.

In 2011, the company entered the SA market with its purchase of Bradford McCormack and Associates, a local brokerage. Its focus has subsequently shifted to advisory services. It has an office in Johannesburg, which services SA and the rest of sub-Saharan Africa.

JLL also has offices in Casablanca and Cairo, while the Lagos hub – which focuses on West Africa – was set up last year. The East Africa office, in Nairobi, will start up this year.

An on-the-ground presence is critical for at least two reasons, least of all because African markets are becoming increasingly differentiated.

Xander Nijnens, senior vice president of JLL’s hotels and hospitality group, points out that a critical level of analysis is key.

Geographically, Lagos in Nigeria and Accra in Ghana are not far apart yet they currently present completely different challenges. Accra is over-supplied with office space after the end of a 10-year boom. The slow-down is even more marked in the hotel space, which is not buoyed by multi-year leases.

‘An understanding of the restrictions on ownership of land by foreign investors is an important consideration. For example, non-citizens can only own land on the basis of leasehold tenures.

‘Possession of the property is subject to the payment of an annual ground rent and when the lease expires, the ownership of the property reverts back to the freeholder if an extension of lease is not granted. Non-citizens do not have an automatic pre-emption right on expiry of the leasehold term held under a lease from the government. Non-citizens also cannot acquire agricultural properties.’

Northern Inf

Inadequate regulation has been the biggest hurdle to property development in Africa

Nairobi’s boom is not simply a product of location (Indian Ocean rim, continental portal between East African markets and China/India); regulatory reform has also played an important role.

JLL’s Real Estate Transparency Index shows that sub-Saharan Africa has made the world’s strongest progress in terms of regulation, data availability and transactions processes.

Globally, the most improved country last year was Kenya, which digitised its land registry and became one of the few African countries to pass legislation that properly regulates the real estate investment trust industry.

Inadequate regulation has, in the past, been the biggest hurdle to property development in Africa. Nijnens points out that accessing prime land and making sure that there are no issues with title is the key consideration.

Very often a local partner is needed simply to deal with this issue. While the ‘land partner’ makes no further contribution, their knowledge of the local cultural and administrative environment can be key to averting disaster.

In Liberia – which is far from one of the most transparent investment destinations – the Malaysian property and agro-industry group Sime Darby is under considerable pressure, with various local claims about lack of consultation and land occupancy being made with the support of international NGOs, against the company’s 22 000 ha palm oil plantation. A different entry process may have avoided the problem.

Kenya has taken a progressive step by legislating the requirement that all land is registered. A special commission has been established to oversee the sale of public land to private individuals, a measure intended to minimise corruption.

Although transparency is improving, African markets remain for the most part murky. What of the SA companies that have some experience in operating under these sorts of conditions?

Many shopping centre developments in sub-Saharan Africa over the past 20 years have taken place because of the willingness of SA corporates – most notably Shoprite-Checkers and Game – to commit to being anchor tenants.

Yet, while things are improving in some countries, as the example of Kenya shows, hurdles remain. Titles are often unclear and political issues tend to blindside the unwary investor. Land for good developments can be scarce.

‘It’s no good looking for the perfect deal in Africa,’ says Lewis. ‘If you want to build a portfolio of African property investments, you need to be prepared to accept compromise projects.’

‘There’s a lot of money to be made,’ says Nijnens. ‘But it’s not a candy store where you can easily satisfy your desire for a sweet investment.’ However, the prospect of a 25% yield has created a lot of interest, and that’s not going to dissipate soon.

By David Christianson
Image: Gallo/GettyImages