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Long-term investment case for property in Africa remains intact

24 September 2020 1:38 PM

There’ll be many opportunities for frontier investors in the coming years, says Absa's Somaya Joshua.

Article by Somaya Joshua, Head: Commercial Property Finance (Africa Regional Operations) at Absa.

According to the African Development Bank, at the start of 2020, the African continent was forecast to deliver 3.9% economic growth and was home to six of the fastest-growing economies in the world. Importantly, for the first time in a decade, more than half the continents’ growth came from investment finance and this provided a sound foundation for property investment activity.

Covid-19 has had a material impact on many of the emerging and frontier economies and the World Bank has warned that the West African Economic and Monetary Union, as well as the East African Community, will be hard hit in the near-term; but we believe that the long-term investment case for property remains intact.

It is important not to “group” all of Africa together and make blanket statements about where the value lies. For example, shopping malls have long been a popular destination for property investors in South Africa, where big retailers traditionally provided stable rentals and attracted consistent foot traffic. In contrast, the concept hasn’t taken off to the same degree in places like Kenya, Ghana and Nigeria where much of the geospatial and built environment is still largely in the early phase of development. Another example is how a report published by Knight Frank Africa contrasts yield performance across various property sub-sectors in Accra and Nairobi – as can be noted; there are notable differences in both rental levels and achievable yields in the different markets:

Exhibit 1: A comparison of property sector rents and yields in Accra and Nairobi – source: Knight Frank

It’s likely that many of the infrastructure projects that will drive economic linkages of African states can be catalytic for property markets on the African continent and, in particular, for the logistics and warehousing subsectors.

Expanding intra-Africa trade requires a robust logistics environment, including fit for purpose logistic infrastructure. Moreover, delivering on such a broad scale of infrastructure projects requires more than just planning for economic linkages; it also requires the financial resources and the technical capabilities to assess key financial risks associated with infrastructure projects. A recent McKinsey & Co. report titled Solving Africa’s infrastructure paradox indicates that despite available funds, large pipeline and clear needs, few infrastructure projects in Africa (less than 10%) reach financial close. It also found that as much as 80% of projects fail at the feasibility and business-plan stage. That is a dynamic that may have un-intentionally slowed development activity down.

The specialised nature of property development and investment is inherently challenging. Investors who prove successful are the ones that are able to marshal a combination of resources such as land, financial capital, a thorough understanding of the regulatory frameworks they operate in and a clear understanding of the economic risks and rewards associated to investment opportunities on the continent. Our deep expertise allows us to add value to our clients across the value chain from debt structuring, to property valuation and building project management, interest rate and currency risk management solutions. This expertise and offerings are made available to our clients alongside our well established and experienced in-country teams where we have established banking operations.

Absa’s in-country presence positions us well to partner our clients, facilitating debt funding through in-country operations and cross-border funding solutions by providing experienced deal structuring capabilities that enable experienced local, regional and multi-national property developers and investor client strategies.

At Absa, we have been involved in some transformational projects. An example of this is our successful partnership in Ghana to fund the development of the PwC and Huawei head office development in Accra. We continue to fund opportunities with experienced clients where the product and market remain sound, especially with consideration to the impact that Covid-19 has had on cash flows in certain parts of the real estate sector.

We believe that the real opportunity for African property investors will be unlocked as the markets deepen and investors have access to a more diverse range of opportunities complemented by an active secondary market to ensure greater price transparency. We are still seeing activity in our presence countries and another example of this is the opportunities stemming from the pent-up demand for affordable housing in key jurisdictions on the continent. In many markets, underdeveloped housing finance systems present both a challenge and an opportunity for developers and financiers alike. The demand for affordable housing also extends to student housing. Part of a winning formula for product delivery in that market will also depend on solving for the right product, in the right market and in a sustainable manner.

Despite a difficult operating environment, we have continued to apply our expertise to provide fit-to-market debt solutions to our clients. Our approach continues to be to partner the right client, with the right product and in the right locations. Our existing client base is important to us and is top of mind when we consider how we support them in this economic environment. How we prioritize the allocation of our capital is important as we continue to extend our balance sheet.

We think our customer relationships post this crisis will be stronger, especially when you consider how we have responded to their needs. We have had a resilient, pragmatic and client-centric approach to the impact that Covid-19 has had on some of our client cash flows. We’re growing and deepening our partnerships with clients along the way. Our environment will likely continue to present uncertainties. Covid19 infection rates have increased in the last few weeks potentially adding to an already uncertain environment. We will continue to apply sound judgement in how we assess new opportunities and we’re careful to manage overreactions. We need to continue staying close to our markets, our clients, their lens on the crisis and how we partner their innovation or response strategies as a result of the impact of actions taken to fight the spread of Covid-19. We think our Pan African property business is well-positioned as a prominent funder in the sector and remain optimistic about our developing continent.

24 September 2020 1:38 PM

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