To deploy global investment on a significant scale Africa needs to develop the domestic conditions to absorb the much higher levels of global real estate investment currently considering Africa.
Typically, African real estate accounts for around 0.5% of large global funds’ commitment. That said, most of the global real estate funds that have invested in Africa, have sustained reasonable returns at a portfolio level over the last two decades. This has meant that most have stayed and that most have also either maintained or increased their allocation over the years. “This has built familiarity with – and confidence in - the continent,” says Adeniyi Adeleye, Executive Real Estate, Africa Regions, for Standard Bank.
The next big step is to increase the level at which these global funds’ commit to the continent.
The biggest challenge to achieving this is not so much global appetite or confidence but rather, “the ability of African markets to deploy or sustainably absorb this capital,” explains Mr. Adeleye.
Most of the continent’s leading markets have fundamental real estate demand and supply imbalances meaning that they present a largely attractive long-term investment outlook. As such, demand for real estate investment opportunities has remained consistent in most of Africa’s larger markets despite commodity price induced volatility challenges.
“Despite macro-challenges, most investors who made a commitment to the continent over the last two decades have stayed, managing volatility by seeking to evolve from short-term to more permanent real estate investment structures,” says Mr. Adeleye.
Standard Bank has supported significant evolution in the funding of real estate development on the continent. Private equity seeking alpha during the heady pre-economic crisis days appears to be giving way to longer-term funding structures.
“Private real estate funds seeking to evolve into Real Estate Investment Trusts (REITs) aim to draw on pension funds or other sources of institutional capital, for example, and are proving to be more effective in Africa’s longer-term real estate investment cycle, which typically requires much more patient structures,” says Mr Adeleye.
Yet the scale for growth going forward is much larger.
Encouragingly, policy and market conditions on the ground in Africa are shifting in the right direction. One of the keys to increasing investment in African real estate is to unlock capital in local markets. Even though some of the larger markets on the continent have regulatory or structural constraints that limit investments to unlisted real estate securities, “real estate investment, with its long and stable return profiles, still represents a fantastic opportunity to deploy local savings for broader investment and economic growth,” explains Mr. Adeleye.
Financing real estate investment requires low and predictable interest rates. In many African jurisdictions, local interest rates have been both high and volatile. This has meant that, traditionally, African real estate investment has focused on top end, global quality, opportunities that will attract hard currency funding. Today, however, leading African markets are rapidly developing the road, rail and digital telecommunications infrastructures linking their economies to the global economy. The industrial, retail and service sectors that these infrastructure ecosystems enable is making middle and lower end real estate opportunities more attractive to investors.
In short, “as African markets develop rational globally-linked and market-relevant infrastructure, real estate investors have to fund fewer of the ancillary infrastructure (roads, power, services) that have historically made middle and lower end opportunities unattractive in Africa,” says Mr. Adeleye.
Africa’s heavy focus on backward processing in agriculture (the continent’s biggest sector and traditional mainstay) also represents a significant opportunity for real estate investment – on two fronts. Firstly, the physical infrastructure required to develop a beneficiated agricultural export sector presents a real estate investment opportunity in its own right. Secondly, and arguably more importantly, “exporting beneficiated goods will limit the imported inflation endemic to raw commodity exporters,” explains Mr. Adeleye.
“If interest rates in African markets can be sustainably brought within the 10% to 14% range, we’ll see an explosion of middle and lower end real estate opportunities as these suddenly become justifiable – to both global and local investors,” he adds.
China’s heavy investment in African infrastructure at the government to government level as well as private investment in businesses unlocking the continent’s industrial and beneficiated agricultural export opportunities is deepening Africa’s ability attract and deploy much higher levels of both global and local real estate investment.
Standard Bank combines in-country presence and insight, a multi-jurisdictional view and capability across 20 African markets with an established presence in all leading centres of global capital and real estate investment. “Observing, advising, managing and growing Africa’s real estate sector enables us to recognise the scale of the opportunity that awaits those markets able to create the conditions to deploy significantly higher proportions of the world’s real estate investment capital,” says Mr. Adeleye.