Commercial real estate development in sub-Saharan Africa is booming. Rapid urbanisation, a wealthier population and a rapidly growing middle class, re-location of businesses, and travel to Africa for business and tourism are driving demand for new and modern offices, hotels and retail malls.
Development is not uniform across the continent, but the appetite for developers and lenders is becoming broader. Development in Africa is not without its difficulties, however, and there are hurdles to be overcome when investing in, or financing, a commercial real estate development.
Ghana, Nigeria and Kenya are currently the most active jurisdictions. Development in these countries is focused primarily around the urban centres of Accra, Lagos and Nairobi – both in inner city and out-of town-developments.
Nigeria is attractive because it is West Africa’s largest consumer market, with a burgeoning middle class and investor appetite. Many have predicted that it will overtake South Africa as the continent’s largest economy by 2016. The Eko Atlantic development in Lagos gives an indication of the scale of development taking place, with land reclamation work under way to create a development of over 10sq km.
Nairobi has become a focal point for eastern Africa, as Kenya continues to establish itself as an economic hub for the region. The city itself is also emerging as a centre of excellence in technology – ‘Silicon Savannah’ – and the recent development of oilfields is spurring investment and growth across Kenya. Further down the east coast, Tanzania and Mozambique are also focus markets for developers and financiers, with the recent world-class discoveries of offshore gas in these jurisdictions, complemented by the favourable risk profiles of Maputo and Dar es Salaam compared with their regional counterparts, making them the subject of intense interest and investment over the past two years.
Other countries are also attracting interest. Angola is currently the third largest economy in sub-Saharan Africa and presents a wealth of opportunities with its growing middle class. Moreover, Luanda houses some of the world’s most expensive commercial real estate due to severe supply-demand imbalances, and which present a clear market for new development.
In terms of sectors, in offices Africa is experiencing growth in manufacturing, technology and telecoms, finance and business services, as well as continued investment in its natural resources sector – both in terms of exploration and exploitation of reserves but also in processing to capture greater downstream value. International companies investing in these sectors expect international-grade office space from which to run their businesses. The continent is drastically undersupplied with high-quality commercial property, particularly with the continuing rise in demand.
Across Africa there is an expanding population – and, in particular, a young population that is increasingly brand conscious. South African retailers, such as Shoprite, Game and Pick ‘n’ Pay, are extending their operations across the continent and are at the forefront of the international players seeking to take advantage of this captive consumer market. They are typically seen among the anchor tenants in the wave of retail mall developments coming to market. Other international retailing brands such as Topshop, Zara and Walmart are also looking to expand into Africa. This combination of consumer demand and ability to pre-let units are two fundamental pillars supporting mall development in Africa.
Finally, the growing middle class in Africa and increased overseas travel to Africa has exacerbated the supply-and-demand imbalance for luxury hotels. Africa is currently experiencing the fastest pace of hotel development in the world, with Marriott International, Starwood Hotels & Resorts Worldwide and Hilton Worldwide all targeting rapidly growing urban centres. Some of the highest room rates in the world are in cities such as Luanda.
The challenges investors face include a lack of transparency, poor infrastructure, the difficulty in obtaining permits and approvals, currency risk, political risk and cost control.
In Jones Lang LaSalle’s real estate transparency index, key growth countries such as Angola, Nigeria and Ghana are all classified as opaque. Few countries in sub-Saharan Africa have a computerised land registry system through which title to land can be deduced. The process of obtaining and evidencing good title can be lengthy and time consuming. Thorough due diligence is required.
A lack of investment in major infrastructure and power projects could potentially impede continued economic growth and lead to unsustainable future revenue projections for real estate developments. Government support and an ability to attract private-sector financing for these major projects are key to the continued development of these regions.
Various approvals are required for development of real estate projects, such as planning approvals, building permits, environmental permits and health and safety permits, each typically obtained from a separate ministry or department. Lenders will also be keen to ensure that permits are capable of being secured, to ensure that the property is marketable and capable of being sold, with relevant permits in the event of an enforcement. In particular, land rights are typically held by way of lease arrangements with the state or government, and consents are required to ensure the validity of lenders security. Obtaining these consents can cause substantial delays to timetable.
Real estate financing across sub-Saharan Africa (except for smaller in-country facilities) are typically dollar denominated. An ability to denominate facilities in dollars, and to repatriate loaned amounts, is critical for international lenders. Recent legislation in Zambia triggered concern among investors as to whether dollar funding into Zambian projects would be permitted. However, this was subsequently clarified with supplemental legislation to allow dollar funding for international transactions.
Even more recent regulations issued by the Bank of Ghana have raised similar concerns for funding developments in Ghana. The regulations are applicable only to local Ghanaian banks but this has still raised issues for international lenders in terms of initial lender clubs and syndication concerns, as local banks present key sell-down opportunities. Some countries, such Malawi, Zimbabwe and South Africa, impose a requirement to obtain an exchange control approval, which can result in delays to a financing as lenders will require this prior to funding.
Political stability is critical from both a sponsor and lender perspective and crucial to the success of the project. Real estate projects are particularly vulnerable to expropriation and changes to land rights regimes. Some governments with the foresight to see the benefits of long-term foreign direct investment have measures in place to reassure investors and show a commitment to protecting investors’ assets.
Real estate development and financing can be costly because of the bureaucracy involved. Lease documentation must typically be registered, with the relevant land registries applying a fee in each case. Security documentation may also be subject to stamping and registration requirements, with amounts often calculated as a percentage of the amount secured. In addition, security over land typically requires consent of the freeholder or head lessor – this is invariably the state or government itself, and often specific fees are prescribed.
In conclusion, high yields and projected growth make sub-Saharan African real estate appealing to both developers and their lenders. While there are risks and hurdles to overcome, with patience, careful planning, proper due diligence and sensitivity to the time and cost pressures involved, there is an opportunity to reap substantial rewards.
There are a number of well-established developers in the sector, such as Actis, Atterbury and RMB Westport, and the lending market is becoming more liquid, with increasing interest in the sector from international banks and financial institutions. Similarly, new investment funds are being brought to market. With a combination of demand and market participants keen to address the shortage in supply, the next few years look set for substantial growth in the sector.
Daniel Metcalfe is a partner in Norton Rose Fulbright’s infrastructure practice, specialising in emerging markets financing