Time ripe for African real estate

Growth of continent's middle class augurs well for the industry

Something new is happening in Africa. Unlike in the past, when commodities largely fueled the continent's performance, now consumer spending by a rapidly expanding and urbanizing middle class is driving wealth, productivity and progressive cultural change.

Africans are increasingly city dwellers, and today the continent has 52 cities with populations of more than 1 million. In 1980 just 28 percent of Africans lived in cities, but now 40 percent of the continent's 1 billion people do so. These cities are an economic engine that is projected to have annual spending power of $1.3 trillion by 2030.

Africa is young, more than 500 million of its people being of working age, and this will increase to 1.1 billion by 2040, exceeding India and China at that time.

Although natural resources are declining in importance, the continent still holds vast reserves, many of which will help facilitate and finance general social and economic development. For example, the region has 63.2 billion barrels of proven crude oil reserves and 6.3 trillion cubic feet of proven natural gas reserves. Also, 32 percent of the world's bauxite, the main source of aluminum, is in sub-Saharan Africa

As a result of all these factors, Africa's economies have grown steadily, at between 5 and 6 percent of GDP annually, since the turn of the century. Already, half of all African countries have crossed the threshold to middle income, and by 2025, several more should have done so. As a result, Africa is attracting growing interest from diverse investors. China, Africa's largest trading partner since 2009, has keen interest in this continent.

All these factors bode well for real estate, with research showing that income growth, urbanization and household formation (new families) are all drivers of property demand. This may explain why in most of Africa's leading cities, quality properties are already in short supply.

So what options exist for Chinese investors keen on entering Africa's real estate market? As mentioned already, opportunities abound in building properties. But investors should also consider other areas of urban development. Companies are needed to service land, focusing on installing or upgrading roads, power and sanitation, for example. Several African governments are especially keen on renewable energy. A case in point is Kenya, which in 2013 announced an initiative to add 5,000 megawatts to the grid within 40 months, representing a dramatic increase from the current installed capacity of 1,533 mW.

Needs also exist in other parts of the real estate space. Another potential target is the provision of building materials, from bricks and mortar to fittings, fixtures and furniture. The provision of affordable housing finance, as well as financial intermediaries facilitating investment in property, can add value. Investors can also focus on services such as engineering, architecture and construction.

While there remain openings in the retail, hospitality and commercial segments, few countries have developed an effective model for affordable, mass housing.

There is also a need in many towns for urban rejuvenation, especially slum upgrading and rehabilitation of dilapidated public housing estates. Chinese investors can leverage their skills, networks and access to affordable finance to make a contribution in all these areas.

This is not to suggest that entering these new markets will be easy. For one thing, although improving rapidly, some regulatory regimes remain poorly developed. In Kenya, for example, records and processes are still manual, with digitization of title deeds and e-construction permits only now beginning. Project and housing finance is expensive, with annual interest rates of 16 percent or more.

Infrastructure and utilities are still not widespread, and both technical and soft skills in the building industry are progressing from a low base. The China Kenya Business Index shows that Chinese companies succeed, but not without facing challenges, all of which are also experienced by indigenous companies.

Fortunately, there are many ways for new market entrants to manage risks. One way is to start by investing in pooled funds, such as through stock exchanges and secondary money markets. Another is to enter into joint ventures with local entrepreneurs. From property developers to manufacturers, many Chinese investors have forged successful partnerships with locals for mutual gain. In Kenya, Chinese investors have been involved in projects as varied as government housing projects and Nairobi international airport as well as the largest coal plant in the country's history.

As in other African countries, this has made a positive impact, providing a way for these companies to generate value for shareholders, employees and customers while also contributing to overall economic development.

Laila Macharia is CEO of Africa Metro, an urban development investment firm

www.africametrogroup.com.

(China Daily Africa Weekly 02/13/2015 page9)