October 2016
The great African capital migration:
exploring trends impacting real estate
capital flows in Sub-Saharan Africa
Capital Markets Research
2
The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
Contents
What are the current financial drivers? Two-speed cycle in emerging economies
SSA in the global hunt for yield
SSA vs emerging Europe
4
4
6
7
How are physical imbalances impacting the market?
Predicting future demand
Disjointed urban planning
Currency cycles and the impact on consumption
Where are the discontinuities in the real estate market?
Managing volatility
Dealing with income inequality
10
10
11
11
Regulatory change, how can it support the market?
How to make SSA a suitable home for global capital migration
Development of the REIT market
Strengthening the pillars of liquidity
Improving transparency
15
15
17
18
20
Macroeconomic factors and the fundamental case
Growth in infrastructure development
Growth in corporate activity
21
21
22
12
12
13
Conclusion23
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JLL
3
The great African capital migration
Much has been made of
Sub-Saharan Africa’s (SSA)
growth potential in recent
times and how this can play
out in real estate markets
across the continent. The
global real estate cycle, post
global financial crisis, is well
developed and arguably at a
cyclical peak with prime yields
in global gateway cities at, or
below, the levels seen in 2007.
Across emerging markets, the
picture is more complex. Some
markets, such as in Central
and Eastern Europe (CEE), are
seeing record levels of inflows,
pushing pricing to just a modest
discount to developed markets.
Other emerging and frontier
markets, including many
markets within SSA, appear to
be lagging behind, with their
real estate markets capturing
little or none of the current
global interest in real estate.
This paper places SSA in the context
of the broader global real estate cycle
and seeks to establish whether many
of these markets have been unjustly
ignored and whether one should expect
them to benefit in the future. With all the
provisos that apply to such a relatively
opaque market, five key themes are
considered to help position the region in
the global real estate cycle and to draw
some conclusions about their future
performance.
1
What are the current financial drivers in the market?
2
How are physical imbalances impacting the market?
3
What are the main policy discontinuities affecting the real estate
market in SSA?
•
•
What do trends in global real estate capital flows imply for the SSA region
and how do we account for a two-tier growth pattern in emerging markets?
Where does SSA sit in the global hunt for yield, and more particularly
where is it placed relative to other comparable emerging markets?
• What are our expectations about future demand?
• How should investors price the supply response and the volatility of SSA
real estate markets?
•
•
How do pro-cyclical fiscal policies create discontinuities in real estate
markets?
How are policies impacting income inequality in the region and what
impact is this having on real estate markets?
4
How is regulatory change, impacting the market?
5
How are certain macroeconomic factors impacting the
fundamental case for SSA real estate?
• Is real estate transparency really improving in SSA?
• How important are financial infrastructure reforms and what is the future
of public and private markets?
•
•
Instead of focusing on economic growth rates in individual countries,
we ask how infrastructure growth is supporting the build-out of real estate.
How important is the growth of corporate activity for occupational markets
and consequently real estate markets in SSA?
“In many respects, a two-speed cycle has
evolved with some emerging markets racing
ahead and others lagging way behind.”
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4
The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
What are the current financial drivers?
The current global real estate
cycle has brought real estate
investment volumes in most
developed and many emerging
markets back to pre-global
financial crisis levels. There
are, however, some regions that
have not managed to capitalise
on this seemingly insatiable
appetite for real estate. As
global investment volumes grow,
we look at why SSA has not
been able to tap into this trend.
Two-speed cycle in emerging economies
The last decade has seen real estate become a truly global asset class. While total
volumes are similar to those in 2007, the makeup of the market is entirely different.
The era of low interest rates and financial deregulation globally has seen a surge in
the number of truly global players within commercial real estate. At the same time, the
geography of real estate investment has expanded little. Globally, the direct real estate
investment market is now worth around $700 billion, compared to around $200 billion
after the global financial crisis. And yet it remains concentrated in a few predominately
developed, Western markets (Figure 1).
Figure 1: Concentration of investment activity – 88% in 20 markets
800
700
USD billion
600
Developed Asia
500
Western Europe
400
300
88%
200
North America
100
2007
North America
2008
Western Europe
2009
2010
Developed Asia
Source: JLL Global Capital Flows Tracker
COPYRIGHT © JONES LANG LASALLE IP, INC. 2016. All Rights Reserved.
2011
Developing Asia
2012
2013
Southern Europe
2014
Latin America
2015
CEE
Other EMEA
JLL
In contrast to this trend, it would appear
that the surge in development and
investment activity experienced in SSA
(excluding South Africa) between 2008
and 2014 appears to be tapering off and
in some markets stalling completely.
Transactional volumes of prime real estate
in SSA for 2015 were approximately
$400 million, which was roughly double that
achieved in 2014. However, transactional
volumes so far this year have slowed to
around $150 million.
The situation masks a more complex
picture. The depth of the investor base in
SSA has increased fairly significantly over
the last four to five years with the entry
of a number of regional and international
investors seeking to acquire incomeproducing assets. These new entrants
include the likes of Mara Delta, Hyprop,
Attacq, Sanlam Africa Core Real Estate
Fund and Old Mutual Property. There are
also a number of regional and international
investors with strategic mandates to
acquire income-producing assets in SSA.
They are currently in a fundraising stage
or are scouting the market for attractive
acquisition opportunities.
Figure 2: SSA capital markets transactions (inbound)
160
140
120
USD million
In emerging economies, investment activity
has been developing at two speeds,
reflecting a divergence in the ability of
certain economies to attract capital. The
more developed emerging economies,
including countries in CEE and Russia
(before the start of the current commodity
price cycle) have benefitted from
strong capital flows which have brought
investment volumes to well above the
levels seen immediately before the global
financial crisis.
5
100
80
60
40
20
0
“13 “14 “15
Southern Africa & Mauritius
“16
“11 “12
East Africa
“13 “14
“15 “12 “13 “14
“15
West Africa
Source: JLL Global Capital Flows Tracker
“The depth of the investor base
in SSA has increased fairly
significantly over the last four
to five years with the entry
of a number of regional and
international investors seeking to
acquire income-producing assets.”
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6
The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
SSA in the global hunt for yield
Broadly speaking, global capital remains focused on gateway cities, which has pushed real
estate yields in established markets to record lows (Figure 3), which has in turn encouraged
capital to migrate across borders to capture value. In Europe, for instance, the obvious trade
has been to move South (to Spain, Italy and Portugal) and East (to central and Eastern
Europe and, until recently, Russia). A quick look across Eastern Europe shows that prime
office yields in Warsaw are now at 5.5%, and in Prague at just 5.0%, which is only a modest
premium to developed Europe (in the region of 100bps to150bps).
Figure 3: Global office yields and yield compression
7.2
6.87%
6.7
%
6.2
5.7
5.49%
5.2
4.74%
4.7
bps
70
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016
50
%
30
10
-10
-30
Yield compression (bps)
Source: JLL
“Broadly speaking, global capital remains
focused on gateway cities, which has pushed
real estate yields in established markets to
record lows”
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JLL
7
SSA vs emerging Europe
Investors in emerging economies have also
been part of this globalisation of capital
flows, with South African groups in particular
looking at opportunities in Eastern Europe
at the expense of opportunities closer to
home, which has in turn been driving much
of the recent yield compression experienced
in CEE. Over $1.3 billion of investment
has come from South Africa into central
and Eastern Europe in 2016 alone.
To provide context, this is more than the
total investment volumes recorded in
Nigeria, Kenya and Ghana since 2012.
2015 and 2016, the majority of prime real
estate transactions were concluded at
yields in a band ranging from 7.5% to 9.0%
(see Figure 4). Anecdotally, it would seem
that this band is likely to shift up by around
50bps to 100bps over the next 12 to 18
months.
As yields have compressed in emerging
Europe, pricing is more dispersed in SSA
markets, with the risk on the downside.
Based on the transactional evidence for
Figure 4: Investment and pricing trends in SSA
11
USD 50m
USD 150m
USD 150m
USD 200m
USD 400m
USD 150m
( to date)
Two River Mall
Plexus
Atlantic House
10
Anadarko Building
Zimpeto Square
Ikeja City Mall
Accra Mall
9
Initial yield (%)
Accacia Office Park
Capital Properties
Junction Mall
East Park Mall
Jacaranda Mall
Club Med
Buffalo Mall
Mukuba Mall
Bay Holdings (EA)
Milimani City Mall
Manda Hill
Condominium Vale
dos Embroiderers
Greenspan SC
Bagatelle Office
8
Highway House
Kafubu Mall
Cosmopolitan
Mall
Hollard
Vodacom
Barclays HQ
Mauritius
7
Bagatelle Mall
6
2011
2012
Size of transaction bubble:
Mozambique
Kenya
2013
USD 20m
Tanzania
2014
USD 50m
Zambia
2015
USD 75m
Ghana
Nigeria
2016
USD 150m
Mauritius
Sample of transactional evidence from arms-length transactions.
Source: JLL Global Capital Flows Tracker
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8
The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
The obvious question is why South African investors
would bypass opportunities closer to home, in a
geography that many other global investors are still
struggling to understand, to go to regions which offer
yields at only a modest premium to some of the more
developed European markets?
To understand
this, consider the
following
four key
factors
The first, obvious, issue is pricing. So far, the
risk versus reward of investing in emerging
European markets has arguably been superior
to investing in SSA. This is not just a real estate
issue. In an environment where manipulated
monetary policy has pushed capital into already
crowded asset classes, investors have been
unwilling to assume the extra risk of low liquidity
and an unclear regulatory environment. For
example, FDI into South Africa, despite its
currency issues, has been growing at a steady
12.1% for the last five years. Yet in SSA, it has
been persistently sluggish, growing a mere 7.6%
over five years since 2010.
Third, in most SSA markets there are few
natural domestic buyers for investment grade
real estate assets, making the region reliant on
inward investment. In emerging Europe, since
the global financial crisis, domestic buyers
have accounted for some 70% of investment
volumes, driven largely by pension and
insurance funds.
COPYRIGHT © JONES LANG LASALLE IP, INC. 2016. All Rights Reserved.
Second, currency has been a major headwind
to countries in SSA and is the primary driver of
volatility in commodity exporting economies.
Investors wishing to invest in SSA countries
(which are generally dependent on commodity
exports and have currencies prone to significant
currency devaluations) have to price a significant
premium above their risk free rates to account
for liquidity risk when markets turn. Furthermore,
broadly speaking, exchange reserves and import
coverage are falling in the region, which makes
pricing even more unclear.
Fourth, economic growth relative to growth
in previous years has been falling in SSA (see
Figure 5). Admittedly, five year forecasts are
above global averages, but it is concerning that
growth has been slowing over the past five years.
JLL
9
Figure 5: SSA GDP growth (2001 - 2016)
8.0
7.5%
6.8%
7.0
6.1% 6.1%
6.0
%
5.0
6.8%
5.6%
5.2%
4.9%
4.7%
4.4%
4.3%
4.6% 4.7%
4.0
3.0%
2.8%
3.0
2.1%
2.0
1.0
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
Source: Oxford Economics
Figure 6: Historical capital inflows to Africa
250
200
USD billion
150
100
50
0
-50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-100
FDI inflows
Other investment inflows
Portfolio investments inflows
Total
Source: McKinsey Global Institute
Total foreign capital flows to the region as a whole have not been immune to the impact of
this slowing growth trend. Indeed, from 2000 to 2005, investment volumes increased by 17%
annually. From 2005 to 2010, annual growth rates were approximately 22%, but from 2010 to
2015 growth rates dived to average only 7%, suggesting that the slowing GDP growth rates
have, in general, put somewhat of a dampener on investment activity across the region.
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10 The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
How are physical imbalances
impacting the market?
Investors in emerging markets
face relatively high levels of
risk because emerging markets
are broadly speaking more
inefficient than developed
markets in the way that supply
responds to demand. We explore
in greater detail how this
inefficiency manifests itself
in SSA. Physical imbalances,
such as the mismatch between
expectations of future demand
and existing supply, disjointed
urban planning and currency
shocks all create risks as well as
opportunities.
Predicting future demand
In emerging markets, real estate supply
often moves away quite sharply from
underlying economic drivers, partly because
forecasting demand accurately can be
difficult. This dynamic is particularly clear in
economies that run strong pro-cyclical fiscal
policies, often driven by an over-reliance on
the export of commodities. This can amplify
the real estate cycle. Russia is a classic
example of this. In 2015, when the oil price
was touching levels lower than during the
global financial crisis, record levels of retail
and office stock were coming to market.
The hangover from this type of irrational
exuberance – when developers hold
unrealistic expectations about future growth
married with a plentiful supply of cheap
credit – can last a long time.
Lagos is in a similar bind with a boom in
the construction of Grade A office buildings
despite the oil price still trading at 50%
below its cyclical high.
As a result, prime rents in Lagos are facing
downward pressure and vacancy rates are
starting to increase. As we discussed in
our recent paper, “Currencies and Rents:
The Commodity Impact on Sub-Saharan
African Real Estate”, this has important
implications for not only rental levels, but
also the currency that landlords can expect
to get paid in.
One key element to overcoming the
challenge of mismatches between overexuberant demand projections and
actual demand drivers is increased data
transparency. A lack of adequate data and
information can often lead to inaccurate
demand projections based on conjecture.
Fortunately, data transparency is improving
in the region, but still has a long way to
go. In the interim, over-exuberance may
continue to result in over-supply and lower
than expected returns for those developers
who are inclined to build speculatively.
Figure 7: Lagos office pipeline
50,000
45,000
40,000
m2
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2016
Victoria Island
Source: JLL
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2017
Lekki
Lagos Island
2018
Ikoyi
Eko Atlantic
JLL
11
Lagos, Nigeria
Disjointed urban planning
Urban planning can be particularly
disjointed in emerging economies and
is rarely sophisticated enough to cope
adequately with the pressures from office
and retail developers. This increases the
risk of obsolescence as the right assets
are delivered to the wrong location, often
at the wrong time. Our experiences in
China, another rapidly urbanising economy,
show that CBD locations can move quite
frequently within cities as old precincts are
demolished and new ones constructed.
This poses a challenge for both investors
and occupiers who believe they are locating
in the CBD only for it to move. In India, in
contrast, much of the new office supply has
been characterised by out-of-town business
park developments, partly because strict
planning laws make redeveloping within
CBDs more difficult.
In SSA, we see examples of both
CBDs that have moved as well as new
developments on the edge of urban cores,
driven predominantly by strict or inefficient
planning laws. The fact remains that in SSA,
post-colonial development policies have
focused on industrialising a limited number
of regional urban centres. This in turn has
led to a concentration of population and
industries in relatively few urban settlements
which mirrors the experience in India in
many ways. The key challenge faced by
several African cities is how to address
overcrowding. Flexible and inclusive urban
planning is essential to overcoming this
challenge.
Currency cycles and the impact
on consumption
balance budget spending makes developers
in emerging markets vulnerable to amplified
economic cycles. The retail sector in SSA
in particular has struggled to deal with the
recent commodity slump and the impact
this has had on consumer behaviour. In
the relatively new formalised retail markets
in SSA, international retailers have also
experienced a number of country-specific
challenges, including obtaining stock due
to restrictive import regulations. Weakening
currencies have also put pressure on many
tenants as their rents are often denominated
in US Dollars which has in many cases led
to tenants facing immediate rental hikes.
How retailers and occupiers in general deal
with such market adjustments in future will
have a major impact on real estate markets
in these jurisdictions.
A lack of diversification in the economy
and an overreliance on export markets to
“The key challenge faced by many African cities is how to
address overcrowding. Flexible and inclusive urban planning
is essential to overcoming this challenge.”
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12 The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
Where are the discontinuities
in the real estate market?
For some time, many SSA
economies have had to deal
with a lack of continuity when it
comes to government policies,
particularly fiscal and monetary
policies. Many SSA countries
have adopted pro-cyclical fiscal
policies, which have entailed
spending too much when times
are good and cutting back
drastically during downturns.
Such short sighted policy
stances tend to amplify real
estate cycles, thereby increasing
pricing volatility which in
turn raises hurdle rates for
investors. In addition, policies
relating to income inequality
have been inconsistent and in
some cases non-existent which
creates challenges for real estate
and muddies the relationship
between urbanisation and real
estate growth.
Managing volatility
One of the main challenges that SSA
markets face is the risk premium that
investors typically require for investing
in an asset class that is subject to high
levels of pricing volatility. An issue that is
further magnified by existing low levels
of liquidity. Pricing volatility is increased
through a combination of an over-reliance
on foreign capital and SSA’s general overdependence on the export of commodities
to support economic growth.
In addition, the spend/cut back tendency of
SSA countries makes it extremely difficult
for investors to forecast a steady and
reliable return on investment. Countries
like Nigeria and Angola are particularly
vulnerable to this, but less so in more
balanced economies like Kenya.1 The net
effect is that infrastructure bailouts are less
likely to be funded from private sources
and instead require government initiatives
or an external programme such as SSA
has recently seen emanating from China.
China’s FDI investment in SSA grew from
$9 billion in 2009 to $32 billion in 2014,
although even this has started to fall away
in recent years.2
Greater depth in financial markets, that is to
say deeper pools of domestic liquidity and
more reliable access to international capital
markets (in bad times and good), can
help to break this cycle as this will allow
governments to continue spending during
downturns which in turn will lead to more
stable markets. The same can be said for
having low levels of debt to GDP as well as
deep pockets of international reserves to
cover external debt obligations in times of
uncertainty.
Figure 8: Total reserves (% of total external debt) by region
200
180
160
140
%
120
100
80
60
40
20
0
1990
Sub-Saharan Africa
2000
2010
Latin America
2014
1990
2000
2010
2014
1990
2000
2010
2014
Arab World
Source: World Bank Data Bank
1
2
Konuki and M Villafuerte, ‘Cyclical Behavior of Fiscal Policy among Sub-Saharan African Countries’, IMF, 2016, Available at: https://www.imf.org/external/pubs/ft/dp/2016/afr1604.pdf
‘Investor Nationality: Policy Challenges 2016’, UNCTAD World Investment Report, 2016, Available at: http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1555
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JLL
13
3,000
600
2,500
500
2,000
400
1,500
300
1,000
200
500
100
Real estate investment volumes
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
2004
-
USD billion
USD million
Figure 9: Russian real estate investment vs FX reserves
FX reserves RHA
Source: Bloomberg/JLL
SSA markets are lagging the BRICS
countries in this context and are probably, in
terms of investment volumes in real estate,
where Russia was in 2004. However, some
progress has been made. Nigeria has had
some success in the years preceding the
global financial crisis through the creation
of a fiscal framework which supported the
creation of a budget reference oil price
and an Excess Crude Account which
tapped excess oil revenue. This allowed
for countercyclical fiscal policies at a time
when the oil price was falling. Though
political and spending pressures since then
have somewhat limited its efficacy, and as
the Nigerian economy’s reliance on oil to
support its spending has increased again,
volatility in its financial markets and real
estate sector have also began to increase
once more.3
3
Dealing with income inequality
Discontinuities in government policies
also affect the real estate market through
the increasing prevalence of income
inequality. Broadly speaking, urbanisation,
which is well documented in SSA, is highly
correlated to growth in real GDP. This in
turn has the potential to positively impact
the SSA real estate case through a larger
base of middle class consumers that drive
sustainable growth in occupational markets.
Nevertheless, the urbanisation discussion is
too often a panacea for analysts struggling
to structure an investment case. We would
suggest that while the trend of urbanisation
is quite clear in the region, it is not in itself
a guarantee that real estate development
will follow. Indeed, the limited investment
volumes over the last five years would
suggest that SSA economies that have
been urbanising for some time now have
not yet seen all of the benefits in real estate.
Evidence in other emerging markets which
have undergone similar transformations
is that the trickledown effect of wealth
creation may not be quite as widespread
as previously thought (for example, see
Latin America in Figure 10). While there
is no doubt that urbanisation has been
responsible for improving the wealth and
quality of life for tens of millions of people,
there is an increasing debate as to whether
the process benefits mostly the richest in
society. This debate is especially pertinent
in SSA which is home to some of the
highest levels of income inequality in the
world (Figure 10).
T Konuki and M Villafuerte, ‘Cyclical Behavior of Fiscal Policy among Sub-Saharan African Countries’, IMF, 2016, Available at: https://www.imf.org/external/pubs/ft/dp/2016/afr1604.pdf
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14 The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
Figure 10: Gini coefficients by region
Gini Index
(Income equality = 0)
25 - 30
30 - 35
35 - 40
40 - 45
45 - 50
50 - 55
55 - 60
60 - 66
Source: World Bank Gini Index
An example of how a high Gini coefficient
environment can be dangerous to real
estate investment can be found in the
lessons learned by China during its recent
urbanisation drive.
The development of retail in China was
characterised by the rapid development of
luxury retail, initially in first tier cities and
then down to second and third tier cities.
This resulted in an enormous expansion of
the Chinese retail sector concentrated at
the luxury end. The inevitable consequence
of this was an oversupply of high end luxury
malls, but with insufficient luxury tenants to
fill them. This shows that in countries with
high income inequality, it can be difficult
for investors to enter the market in a
sustainable way without the risk of oversupply becoming quickly apparent.
The good news is that SSA malls have
started to absorb demand from a wide
variety of retailers and customers, not just
the wealthy, suggesting they are responding
well to this threat. South African retailers
COPYRIGHT © JONES LANG LASALLE IP, INC. 2016. All Rights Reserved.
such as Game, Pick n Pay and Shoprite,
which cater predominantly to the needs
of people at the base of the Gini pyramid,
have been particularly prominent as the
anchors of most new malls in West and
East Africa. This stands in contrast to the
China example.
Another encouraging factor that is particular
to SSA is the fact that regional retailers,
including Kenyan supermarket operators
Nakumatt and Uchumi, have been opening
stores throughout East Africa. At the
same time, Choppies, a discount retailer
from Botswana, is currently adopting
an expansionary drive in Southern and
East Africa. International retailers such
as Carrefour have also made inroads
in Francophone Africa. Wal-Mart has
struggled to make progress in Africa via its
majority stake acquisition of Massmart in
2012, but this is mainly because it is still
grappling with the challenge adapting to
effectively cater to the needs of low income
consumers.
At this stage, international luxury brands
have minimal presence in a few of the
premier regional malls across Africa
(excluding South Africa). Examples include
Hugo Boss, Lacoste and Levi which have
recently opened stores in Lagos at the
Palms Shopping Mall. Fast-fashion outlets
such as Benetton, Mango and Aldo have
also recently opened stores in Sea Plaza
in Dakar.
It seems as though international brands
have recognised the importance of entering
the SSA market through franchising
agreements or partnerships with local
operators. But most importantly developers
and retailers seem to be aware of the
importance of adapting their strategies
to cater to the needs of low income
consumers, which will continue to be an
important driver of real estate development
in SSA in the short to medium term.
JLL
15
Regulatory change, how can it
support the market?
Real estate is maturing as an
asset class which has important
implications for SSA. In our
view, SSA is positioned to
be pushed further along the
real estate cycle as a result of
deepening pools of liquidity,
changing pension and insurance
fund investment preferences,
and improving regulator
transparency.
How to make SSA a suitable home for global capital migration?
One of the hallmarks of the current real
estate cycle has been the outbound
expansion by Asian investors into global
real estate markets. While the Chinese have
dominated many of the headlines, the South
Koreans and Taiwanese provide a more
interesting snapshot behind capital flows.
Both countries have very large institutional
investor bases that have built up signifcant
holdings of domestic real estate. Such is
their local market dominance that pricing
and concentration risk have become
a concern for regulators, encouraging
instituional investors to look overseas for
investment oportunities.
The South African market is undergoing
a similar evolution. South Africa also
has a large institutional investor base
which has been invested heavily in the
domestic real estate market for some time
now. As a result of this, opportunities are
becoming relatively scarcer, which in turn
has led to yield compression similar to that
experienced in South Korea and Taiwan.
Consequently, South African institutions
have increasingly been investing outside
of Africa over the past decade and Eastern
Europe has been a major beneficiary
of this capital over the last 18 months
(see Figure 11).
Figure 11: SA investment abroad and office yield compression
12.00
1.4
1.2
11.00
10.00
0.8
9.00
0.6
8.00
Office cap rates (%)
USD billion
1
0.4
7.00
0.2
6.00
0
2006
Africa
2007
2008
Australia
2009
CEE
2010
UK
2011
2012
US
Europe
2013
2014
2015
2016
Office cap rates
Source: RCA and JLL
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16 The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
There are of course the encouraging signs
of an increasing number of transactions
happening across the SSA region, but to
date the levels of liquidity and pricing do not
appear to be providing the requisite market
scale or risk premium to attract significant
new global investors and capital flows to the
region. See Figure 12 for country-specific
pricing tendencies.
Figure 12: Select countries’ prime yields / cap rates range and transactional evidence
Plexus
Atlantic House
Two Rivers Mall
Anadarko Building
Prime Cap Rate / yield (%)
Zimpeto Square
Acacia Office Park
Capital Properties
Junction Mall
East Park Mall
Mimani City Mall
Buffalo Mall
Cond. Vale dos
Embonnairos
Hollard
Jacaranda Mall
Mukubu Mall
Manda Mall
Bay Holdings
Greenspan Mall
Kufuba Mall
Highway House
Cosmopolitan Mall
Accra Mall
Ikeja Mall
Club Med
Bagatelle Office
Barclays HQ
Vodacom
Bagatelle Mall
Prime Cap Rate / yield (%)
Transaction evidence
Source: JLL GCF Tracker, sample of transactional evidence from arms-length transactions
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Anfa Place
JLL
17
Development of the REIT market
For foreign capital to actively pursue
opportunities in the SSA market, much will
need to be done to address the issues of
illiquidity and volatility. As discussed above,
budgetary reform could potentially break
the habit of pro-cyclical fiscal policy, which
will go some way to address the problem of
excessive volatility. Developing a functioning
and effective domestic REIT market could
have some impact on the issue of illiquid
markets.
We view the development of the REIT market
as a fundamental underpinning for the SSA
real estate sector. The growth of REITs in
SSA should support much deeper pools of
global capital and a wider investor base.
South Africa leads the way in REIT market
development in SSA, with 36 publically traded
REITs with a combined market capitalisation
of $33 billion. However, broadly speaking,
the SSA REIT market still lags significantly
behind developed-world markets.
That being said, despite all its challenges and
issues, progress is being made. Nigeria has
three publically traded REITs with a market
capitalisation of $100 million and Kenya has
one publically traded REIT with a market
capitalisation of $25 million. Tanzania has
one newly-listed publically traded REIT with
a market capitalisation of $31 million, while
Ghana, the oldest REIT market in the region,
also has one publically traded REIT with a
market capitalisation of $11 million.
Nairobi, Kenya
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18 The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
Strengthening the pillars of
liquidity
One of the main challenges facing real
estate markets in emerging economies
is the relatively inefficient mediation of
capital between the interests of a growing
class of savers and asset classes that are
required to provide a stable return over the
longer term.
In developing SSA markets, such issues
are particularly pertinent. Deep pools of
capital that are created by the development
of a functioning pension fund system, for
example, create an anchor for financial
markets through the provision of long-term
capital. Generally speaking, economies
in SSA face two challenges. First, the
pension system is undeveloped as a whole.
Whereas in developed markets (including
South Africa) pension fund investments
are typically close to (and in some cases
even above) 100% of GDP, in emerging
economies this figure is typically far lower.
In South Africa, for example, pension fund
investment as a percentage of GDP is close
to the European average of 70%. Nigeria,
Kenya, Ghana and Angola all lag behind at
levels of less than 15%.4
Secondly, pension fund investments in
developing markets tend to be much
more conservative in terms of asset class.
Typically, pension funds in OECD countries
invest about 85% of their portfolios in
the ‘traditional’ asset classes (equities,
bonds and cash). Pension funds in nonOECD countries tend be slightly more
conservative, typically investing some
90% in traditional asset classes. The
proportion that is available to be invested
in ‘alternative’ assets, of which real estate
is typically the most important component,
is disproportionately low in part due to
historically conservative regulations.5
The good news is that as pension fund
assets tend to grow in line with positive
macro-economic and demographic
trends, they are increasingly recognising
the importance of looking for investment
yields that provide positive real returns.
Additionally, improving regulatory
environments are forcing these markets
to reconsider their investment approaches
to the asset class. With each emerging
market progressing at its own pace, initial
signs of pension fund participation have
been encouraging.6 Nigeria in particular
has made good progress in recent years
which has resulted in the National Pension
Commission moving from a $14 billion
deficit in 2004 to a $24 billion surplus
in 2016. The McKinsey Global Institute
notes that total pension fund contributions
in Nigeria increased at an annual rate
of 34% between 2006 and 2010, driven
predominantly by the public sector.7
As GDP growth moderates, we anticipate
that the investment case for real assets that
provide a long-term, stable income stream
will grow. Up to now it has been typical for
pension funds in SSA to focus on equities
and debt in their home markets to take
advantage of fast-growing economies. It
is encouraging therefore that, as forecasts
have moderated, Nigerian pension funds
for example have started to invest in
infrastructure projects.
Kenya is another example of an African
country that has taken the lead in the
pension fund regulatory progress in
the region. Kenyan pension funds are
expected to reach $10 billion assets under
management this year. Kenya still dictates
that 10% of such assets may be allocated to
‘other assets’ including real estate.8
“The good news is that as pension fund
assets tend to grow in line with positive
macro-economic and demographic
trends, they are increasingly recognising
the importance of looking for investment
yields that provide positive real returns.”
4 ‘OECD Pension Markets in Focus’, OECD, 2015, Available at: http://www.oecd.org/finance/private-pensions/pensionmarketsinfocus.htm
5 IBID
6 IBID
7 ‘Lions on the Move II: Realizing the Potential of Africa’s Economies’, McKinsey Global Institute, 2016, Available at: http://www.mckinsey.com/~/media/McKinsey/Global%20
Themes/Middle%20East%20and%20Africa/Realizing%20the%20potential%20of%20Africas%20economies/MGI-Lions-on-the-Move-2-Full-report-September-2016v2.ashx
8 ‘New opportunities for Kenya’s pension funds’, Oxford Business Group, September 2016, Available at: http://www.oxfordbusinessgroup.com/news/new-opportunitieskenya%E2%80%99s-pension-funds
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JLL
19
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20 The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
Luanda, Angola
Improving transparency
The 2016 JLL Global Real Estate
Transparency Index reveals that SSA has
continued to make advances in real estate
transparency in recent years. Out of the
12 markets from the region included in
the 2014 Index, six (Botswana, Zambia,
Ethiopia, Nigeria, Angola and Ghana)
have recorded reasonable progress in
transparency. Advances in the ‘Market
Fundamentals’, ‘Performance Measurement’
and ‘Governance of Listed Vehicles’
sub-indices have supported the overall
regional improvement, as greater
involvement by international real estate
consultancies and local data providers
elevates the level of access to information
about real estate markets.
Interestingly, technology is allowing
some SSA countries to leapfrog the
normal transparency evolution process
by introducing innovative new ways of
improving access to data or to faster, more
reliable services. Examples include:
• Rwanda – One-stop online centre for
development permit applications, including
mobile payments for processing.
• Ghana – Bitland is trialling a system
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to record title deeds with blockchain
technology in 28 communities around
Kumasi.
• Kenya – Digitisation of land registry
completed in Nairobi; land rate and stamp
duty payments can now be made online or
with mobile payment systems.
• Southern Africa – Realty is running
a successful crowdfunding platform for
investing in real estate development
projects in several Southern African
countries.
While solid steps towards greater real
estate market transparency continue
to be made across the region, forward
momentum has stalled in some countries
as the complexities of implementing
new regulatory structures have become
apparent, or other priorities – such as the
impact of slowing commodity markets –
have taken precedence.
In Kenya, for example, progress on real
estate market and urban planning regulation
has been impacted by disputes over
mandates and conflicting areas of authority
between the recently created National Land
Commission (2010) and the Ministry of
Lands. Recently proposed bills that have
potentially far-reaching consequences for
the sector (such as the Physical and Spatial
Planning Bill 2015 and the Omnibus Land
Amendment Bill) have become mired in
disagreements between different regulatory
bodies.
Despite the slowing of momentum in some
markets, there are continuing examples of
tangible regulatory advances being made
around the region, including:
• Kenya – Its first REIT (Fahari I-REIT)
was listed in 2015 and others in the pipeline
are expected to list in 2016. In addition, a
National Construction Authority to regulate
construction firms became operational in
2015.
• Rwanda – New building code and urban
planning regulations were introduced in May
2015, and Rwanda has become the only
country in Africa to have all rights to land
documented, with over 10 million parcels
of land entered into its Land Administration
Information System (LAIS).
• Tanzania – Introduction of Estate Agency
Bill 2015, which aims to regulate the sector
and set up an Estate Agency Board.
JLL
21
Macroeconomic factors and
the fundamental case
We argue that development of
the real estate market has to
be built on two pillars: first,
the growth in infrastructure
development and, second,
evidence of growth in corporate
activity driven in turn by a
healthy domestic market.
Growth in infrastructure development
There is no doubt that infrastructure
development has improved in Africa,
albeit from a low base. The absolute level
of spending on infrastructure has grown
significantly over the last decade from an
average of $36 billion between 2001 and
2007 to an average of $80 billion in 2015.
However, as a share of GDP, it remains
relatively small, at around 3.5%. The
challenge is delivering the infrastructure.
Funding is an issue, along with actually
building the assets. As the McKinsey Global
Institute suggests, a shortage of adequate
skills and often challenging geographies
make infrastructure development in SSA
difficult.9
One important tool that governments
have at their disposal to overcome these
challenges is public-private partnerships
(PPPs) which are relatively underutilised
in Africa. Between 2000 and 2014, PPPs
accounted for only 4.5% of Africa’s
infrastructure projects by value. This is
comparatively quite low relative to 8.6% in
other emerging markets.10
Figure 13: Country by country cumuluative infrastructure PPP investment
Swaziland
Comoros
Ethiopia
Somalia
Eritrea
Gambia
Sao Tome and Principe
Burundi
Central African Republic
Seychelles
South Sudan
Buinea-Bissau
Lesotho
Cabo Verde
Namibia
Sierra Leone
Mauritania
Djibouti
Botswana
Mauritius
Liberia
Niger
Chad
Rwanda
Madagascar
Malawi
Togo
Gabon
Burkina Faso
Guinea
Benin
Mali
Congo
Mozambique
Zimbabwe
Zambia
Angola
Congo
Cameroon
Uganda
Sudan
Tanzania
Côte d’Ivoire
Senegal
Tunisa
Ghana
Kenya
Algeria
Egypt
South Africa
Morocco
Nigeria
0
5,000
10,000
15,000
20,000
25,000
Cumuluative investment (USD million)
30,000
35,000
40,000
Source: The United Nations Conference on Trade and Development (UNCTAD)
9 ‘Lions on the Move II: Realizing the Potential of Africa’s Economies’, McKinsey Global Institute, 2016, Available at: http://www.mckinsey.com/~/media/McKinsey/Global%20
Themes/Middle%20East%20and%20Africa/Realizing%20the%20potential%20of%20Africas%20economies/MGI-Lions-on-the-Move-2-Full-report-September-2016v2.ashx
10 IBID
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22 The great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa
Growth in corporate activity
Expansionary demand for office space built
on the growth in corporate activity is the
basis on which the real estate argument
must ultimately be constructed. The
challenge for SSA is that, historically, the
main regional capitals such as Lagos and
Nairobi, have not been seen as targets
for regional headquarters for international
companies. Such companies generally
prefer to use South Africa or a European
capital as a regional hub. This trend has
been exacerbated by tight supply of quality
office space which has driven extremely
high rents, relative to say Johannesburg,
Johannesburg, South Africa
COPYRIGHT © JONES LANG LASALLE IP, INC. 2016. All Rights Reserved.
as well as quality of life issues for corporate
expatriates. Given the current growth profile
of SSA economies combined with market
volatility we see no compelling evidence to
suggest this is going to change soon. That
is not to say that expansionary demand
cannot grow, but there is natural limit on the
extent to which it can develop, particularly
over the short-term.
Instead, we see the domestic market as the
primary driver for the occupier market in the
region. Despite the challenges the region
faces, corporate SSA is growing reasonably
robustly. We calculate that in SSA,
excluding South Africa, there are
at least 70 companies with an annual
revenue of above $100 million in 2015.
Broken down to a regional level, the cities
which are likely to see the strongest benefit
are Lagos and Nairobi.
JLL
23
Conclusion
With many developed markets,
along with some select emerging
markets reaching their cyclical
peaks, markets in SSA are well
placed to take advantage of an
increasing preference on the part
of foreign capital to migrate out
of low-yielding environments into
the greener pastures offered by
higher-yielding markets. This is
provided of course that concerns
about country-specific risk and
illiquidity can be overcome.
For SSA real estate markets to
become an attractive migratory
destination, and in so doing
in many ways replicate the
success of markets in CEE, they
should ensure that the following
initiatives are undertaken:
1
2
3
4
5
Improve liquidity, lower currency volatility, increase domestic investor
bases, and improve GDP growth rates to promote the financial
drivers that underpin domestic real estate markets.
Improve urban planning initiatives, reduce currency volatility and
improve the quality of built stock to overcome physical imbalances
that typically affect these markets.
Eradicate short-term pro-cyclical fiscal policies that result in
discontinuities which investors typically seek to avoid, and adopt
continuous policies to address income inequality.
Grow pension and insurance fund markets by adopting industry
supporting regulations and also actively grow listed REIT markets
through supportive regulations.
Increase the capacity of PPPs to help develop infrastructure (which
goes hand in hand with successful real estate development) and grow
larger domestic middle-class consumer bases to support the occupier
market, which in turn should promote sustainable macroeconomic
growth in local real estate sectors.
Countries or regions within SSA that are best able to implement these initiatives will be
ideally placed to attract and absorb a large-scale migration of international capital. On the
other hand, investors who are best able to recognise the implementation of such initiatives
and are first to migrate to such markets will enjoy the rewards of yield compression that
will inevitably take place in these markets.
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Sub-Saharan Africa
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Capital Markets Research
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David Green-Morgan
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[email protected]
Pepler Sandri
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Capital Markets
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[email protected]
www.africa.jll.com
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This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been
based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views
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report. No investment or other business decisions should be made based solely on the views expressed in this report.