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Casablanca: African real estate market still standing after tough 2016

2017/08/20

African real estate has had a tough year navigating diffcult economic conditions. Most investors on the continent remain private equity groups as opposed to long term investors or Real Estate Investment Trust ( Reit) investors.

There have as well been currency problems in the likes of Nigeria and Zimbabwe. But 2017 could be better if commodity prices rise globally.

"The continent gained traction last year, notably in the Hotel, Retail and Residential sectors. One hopes that, in 2017, there will be fewer economic and structural difficulties for African real estate," said Ortneil Kutama, Africa Property News Media Director.

Beginning with the tourist industry, Mauritius, South Africa, Kenya and Mozambique have enjoyed strong hotel and resort development increase off the back of increasing interest in African tourism and International Investors.

Mara Delta, the major pan African real estate investment trust (Reit) has established a large presence in Mauritius. The company bedded down its presence in Mauritius by opening its chief office there.

Mara has invested in various African nations over a couple of years. Investors are starting to take Mara Delta additional seriously. The improvements in Mara may encourage professionals to inventory an extra Africa focused real estate investment trust.

Grindrod Investment Management’s chief investment officer Ian Anderson says Mara Delta has got its act together.

“While other Reits have abandoned or scaled back their expansion into Africa, Mara Delta has actually continued to grow aggressively, in terms of both portfolio size and geographic diversification.”

Anderson says while investing in Africa comes with various risks, Mara Delta’s management team have delivered on the expectations they created in the market.

Mara Delta only started with two properties in 2014 – the famous 30 711 square metre Anfa Place Shopping Centre in Morocco and Anadarko Building, an office block in Mozambique. It has invested in Kenya, Zambia and Mauritius, managing a portfolio of largely retail properties worth additional than US$250 million (R3.5 billion).

Lagos has stood out as a large African city which has experienced increased investment and rising home prices.

Meanwhile with respect to residential, Lagos set to benefit from the major budget ever announced by a Nigerian national in November.

The “Golden Jubilee Budget” coinciding with the National’s 50th anniversary is the major budget ever by a Nigerian national.

Expectedly, it emanated from the national with the highest grossing internally generated revenues- Lagos national, a major investment and commercial hub comprising of the highest priced real estates in Nigeria across the office, retail, residential and industrial markets.

Nigerians are currently showing a growing interest in residential estates.

While there is appetite to invest in the Nigeria's listed property sector on the Nigerian Stock Exchange (NSE), the regulation is actually tax inefficient and the sector is still underdeveloped.

Currently, there are four listed property companies on the NSE with a combined market capitalisation of over ₦45bn (R1.97bn) . These are Skye Shelter Fund PLC, Union Homes Real Estate Investment Trust, UPDC and UACN Property Development Company.

Private equity investors were the major source of funds in the office and retail sectors. The likes of Actis, RMB Westport and again local funds inclunding Africa Capital Alliance and Landmark have been at the forefront of allocating capital to real estate developments across different sectors and locations in Nigeria.

Currency Shortages

Large challenges for African real estate have been related to currency shortages. Nigeria and Zimbabwe have struggled because they had a lack of US dollars in the country.

This has been one of the reasons that real estate capital flows have been shifting to eastern and southern Europe as opposed to to sub-Saharan African.

Real estate advisory firm JLL actually released a statement this year wherein it identified a that currency volatility and illiquidity were the two major factors hindering real estate capital flows into sub-Saharan Africa.

While transactional volumes of prime real estate in the sub-Saharan Africa region for 2015 were around $400m, transactional volumes in 2016 slowed to about $170m.

Yield compression experienced in central and eastern Europe was driven by South African investment groups investing in eastern Europe at the expense of opportunities closer to home, to the sum of around $1.5bn in 2016. This was additional than the total investment volumes recorded in Kenya, Nigeria and Ghana for the completed five years or so.

Experts at JLL have said Nigeria should be witnessing major investment into its commercial property industry, given its large economy relative to the rest of the continent, its people, which is additional than 184-million people and its general development potential. From presently on its reliance on oil and its volatile currency had hindered investment .

A falling Brent crude oil price, where from Nigeria derives about 70% of national revenue, had caused the country’s outlook to weaken. This meant the national struggled to pay salaries and to stimulate increase, prompting it to increase borrowing.

Nigeria needs to make structural reforms to its economy so as to attract real estate investment . At least the central bank chose to float the naira, but Nigeria needs to do a better job at increasing its foreign exchange, particularly US dollar reserves.

Kenya’s economy growing Fast

Nairobi, Kenya has as well enjoyed strong residential property increase.

Values in Kenya’s residential property market continue to rise sharply, amid robust economic increase and a sharp increase in the people of middle-class and expats.

Kenya’s economy growing between 5% and 6% a year and is expected to expand by additional than 6% this year in 2017, according to the International Monetary Fund (IMF), making the country one of the fastest-growing economies in Sub-Saharan Africa. The central bank cut its key interest rate by 50 basis points to 10% in September 2016, to boost economic increase.

Foreigners can freely buy commercial class land in Kenya. This type of land is for gain or revenue making purposes. Yields are moderate to good in Nairobi, Kenya, and one can expect around 6.5% from an apartment. But Nairobi is not cheap. A five bedroom home can cost $1.1 million in what is still a poor country. But the rental returns are rather good. A 3 bedroom apartment in an elite district of Nairobi can be bought for around US$200,000.

A 3 bedroom home may go for US$500,000. Townhouses are somewhere between these two prices. Gross rental yields on Nairobi apartments are moderately good, at around 6.0% to 7%. Townhouses yield around 5.0% to 6.0%. Yields on detached houses are lower and sit at between 4% 5.5%.

Nairobi property is attractive, with significant capital gains potential. The best combination of rental yield and capital gains seems likely to be offered by townhouses. As additional multinationals open offices in the likes of Kenya, Ghana and Zambia, a need for larger and higher quality offices will be built.

Various private equity groups will dominate this market. Africa still has potential but it cannot rely on private equity investments only – the kind that exit next a few years. Africa needs longer term investors and additional Reits particularly on the Nigerian, Ghana and Kenya stock exchanges, concluded Kutama.

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