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April 11, 2016

Originally published in PERE.

Macroeconomic issues are unsettling occupiers in Africa, writes Anthony Lewis, head of Sub-Saharan Africa capital markets at JLL, but they are unlikely to derail the region’s real estate capital markets story

Growing global emerging market fears driven by depressed oil and commodity prices have put a dampener on the well-documented ‘Africa rising’ narrative of the last decade.

Multi-national corporate occupiers, regional investors and developers appreciate the compelling long term fundamentals and demographic potential that the sub-Saharan markets offer, but they are presently cautious as to how the current challenges will play out in key markets in the short to medium term.

Nigeria and Angola, sub-Saharan Africa’s first and third largest economies have been particularly affected by acute dollar shortages, regulatory uncertainties, capital controls and the risk of currency devaluation, which has curtailed leasing requirements at a high point in the supply cycle. This, in turn, is putting downward pressure on rents and is challenging the sustainability of dollar-denominated leases.

But whilst this snapshot of the region’s West African markets may dominate the headlines, East African markets, in contrast, are maintaining robust growth trajectories, giving investors ample reason to continue with plans to create or maintain investing strategies.

It comes as no surprise that Singapore’s sovereign wealth fund, GIC Private, was recently revealed to have made investments with two of sub-Saharan Africa’s most prominent development fund managers Actis and RMB Westport. The state fund is perhaps the highest profile institutional investor to commit money to the region but it is not alone. Numerous other global investor groups are currently learning about the markets and assessing strategic investments to get a toe-hold too.

The broader, short term emerging market challenges and the turning of the cycle will result in necessary innovations and progress for the longer term sustainable development and progress of these sub-Saharan African real estate markets, most of which are still in the ‘frontier’ phase of their evolution.

The outgoing tide is exposing developers that have built poorly conceived and unsustainable product, of which there is plenty. Occupiers and consumers alike have greater choice of accommodation nowadays. And they are more demanding around cost, quality and value. Retailers and retail developers in particular are thinking more about making their shopping centres more relevant and appropriate to the evolving culture and consumers in local markets.

In addition, a renewed focus by governments on infrastructure development and efficient supply chains and logistics facilities will bring to the fore development opportunities that have until now been largely been overlooked in favor of office and retail schemes.

As an investment market, sub-Saharan Africa is still very much in its infancy. But, off a very low base, it has the potential to grow exponentially. The first vintages of regional private equity development funds are in their exit phase, with $300 million to $400 million of investment grade assets being traded in 2015 – a drop in the ocean relative to the $750 billion that was traded globally in the same timeframe.

We anticipate that between $500 million and $1 billion could trade in 2016, albeit much will depend on the broader macro outlook. Achieved investment yields were in range of 8.5 percent and 9 percent, however pricing may now reflect the more uncertain short term outlook in some of these markets.

In the meantime, the regional funds will continue on their growth journey.

As they do, we believe that in time these funds will be see increasing competition from domestic pension funds and institutions.

First time savers and the growth in the insurance markets is rapidly increasing the domestic capital base, requiring these institutions to expand their allocations beyond bonds and money market instruments into real assets.

Having been previously constrained by limited mandates and a lack of real estate expertise and stock, we are seeing domestic institutions engaging advisors and partnering with regional or global groups to establish the necessary asset management capabilities.

If regional and international investors prefer to sit out the current macro uncertainties, it may well be the moment for domestic capital to seize the initiative.

Anthony Lewis
Head of Capital markets, Sub-Saharan Africa

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