COMMERCIAL PROPERTY INSIGHTS | 12 MARCH 2019

Potential returns outweigh Africa’s property sector risks

Kllaus Karmpher Author

Klaus-Dieter Kaempfer

Head: Commercial Property and Equity Investments, Absa

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To achieve success in certain African property markets, it’s important to partner with locals who have on-the-ground expertise.

The perceived or real risks of investing in the property sector in some African markets are outweighed by the potential returns institutional property investors can achieve.

But to realise success, and even replicate the growth returns investors have managed in countries such as Botswana and South Africa, it is important for investors to partner with locals who have a better understanding of their markets and the regulatory environment.

Replicating success

Botswana and South Africa, and to an extent Mauritius, have provided good returns for investors in property assets, like retail centres, office and industrial parks and even residential accommodation. This is because of an efficient financial system, a transparent regulatory environment and relatively sophisticated credit markets.

Investors can make fair valuation of assets to be acquired and model their expected returns to ensure they are above the cost of capital.

Botswana, for example, has seen solid investment returns, and while the market remains attractive, it is too small, and investors are now exploring other countries across the continent.

South African investors have also been more adventurous by expanding into other African markets, but with mixed results.

There is, however, still wariness among particularly international and institutional investors about exposure to property assets in other African markets, mainly because of concerns about such issues as local currency risk, difficult or uncertain regulatory environment and the absence of local funders who have invested in high grade property assets such as commercial offices and retail shopping centres.

It’s not all gloom though. There is a definite growth story in selected property assets where possible currency volatility can be compensated by higher returns. Returns in countries such as Botswana and Kenya, for example, have seen high rental yields.

Partner with local investors

It is advisable for investors such as sovereign wealth funds and property and private equity companies to consider partnering with local investors, simply because they know the terrain better, understand local nuances and can help to understand the regulatory environment.

It is important to consider that each individual market in Africa is unique and different; what works say in South Africa or Botswana, will not necessarily achieve the same outcome or results in another country.

Things to consider before investing in property assets include whether you will be able to get good tenants, location, local regulations, accessibility of the property and risks such as currency volatility.

Follow a long-term strategy

Property investment is a long-term game and is always tied to the economic growth of a country. Countries such as Kenya, Tanzania, Ghana and Nigeria are experiencing relatively high economic growth rates, which are beginning to attract investors in several sectors, among them property.

There are still a few large institutional property investors in these countries, be they large pension or sovereign wealth funds.

We particularly believe there is also opportunity for Financial Development Institutions (FDIs) who could de-risk projects by for example providing guarantees or even putting equity into the project. Therefore, FDIs should seriously consider how they can become investors in commercial property assets, like industrial parks, and even residential or student accommodation.

In as much as there is an upside in property assets, one has to be careful about not over-paying for an asset because currently, in some of these countries, there are many investors chasing too few properties.

As a result, prices are driven mostly by lack of supply, and not necessarily the quality of the property asset.

The danger of over-paying for a property and charging higher rentals to recoup the investment is that you can face competition from new property developments built at a lower cost but with better facilities and who can attract tenants with relatively lower rentals.

Therefore, mispricing and miscalculating expected yield is a risk that investors should guard against.

Kllaus Karmpher Author
Klaus-Dieter Kaempfer

Head: Commercial Property and Equity Investments, Absa

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