A strong Case for Real Estate Investment in Africa

LAGOS (Capital Markets in Africa) – Africa is experiencing the world’s fastest rate of urbanisation, with rapid growth in middle class populations in sub-Saharan cities driving demand for quality products and a modern shopping experience.

While uncertainty and volatility have clouded the near term investment outlook for Africa, astute real estate investors with a longer term perspective recognise the continent’s potential based on positive demographics, urbanisation and growing personal incomes.

The continent’s challenges have tended to over-shadow its longer term potential. In our view, this stage of the economic cycle presents significant opportunities for superior future investment returns.

Commercial property development in sub-Saharan Africa is an enticing proposition. The retail sector remains among the most under-penetrated globally, with significant potential. Facilities for retailers to operate from, as well as to support their logistical operations, remain scarce.

Earlier this year, global real estate consultants Knight Frank released their Shop Africa report, analysing the retail landscape across most of Africa.

According to data they and the South African Council of Shopping Centres collated, South Africa has 23 million square metres of shopping centre space, while the whole of the rest of sub-Saharan Africa with its bigger population and faster growing economy has a corresponding figure of three million square metres.

Within the rest of sub-Saharan, there are also anomalies. For example, Windhoek, with a population of just over 300 000 (as at the last census in 2011) has 260 000 square metres of formal retail space, while further north, Nigeria’s Lagos with an estimated population in the central area of 20 million, has a total formal retail area of 121 000 square metres.

Indicative of the potential in African commercial property is that, despite tough economic conditions, an estimated 20 000 shoppers descended on Novare Lekki, the largest shopping centre in Lagos when it opened for trade on 25 August 2016.

Novare Lekki was developed by Novare Real Estate Africa at a project cost of $80 million and boasts 22 000 square meters of gross lettable area. With Shoprite and Game as anchor tenants, the mall has 100 shops, including restaurants and five Genesis cinemas, as well as 1,000 parking bays.

Mandate to invest
Novare Fund Manager, a private equity fund manager with a mandate to invest in retail and commercial real estate in sub-Saharan Africa outside of South Africa, has a strong track record of successful property development in Africa.

Novare launched its first fund, the $81 million Novare Africa Property Fund I, in July 2010. Its first investment was the successful Novare Apo mall in Abuja, Nigeria, which opened in June 2012.

The Novare Africa Property Fund II had its first close at the end of June 2014, having raised $351 million from South African institutional investors. The fund has invested in various projects, with a strong pipeline awaiting capital deployment, including in West-, East and Southern Africa.

Novare’s approach when identifying property developments is to work in partnership with leading South African and international retailers expanding in sub-Saharan Africa.

Aside from Novare Lekki, other projects the fund has invested in include the Novare Gateway mall in Abuja, where construction is in full swing. With bulk earthworks completed at Novare Central, also in Abuja, construction has also commenced on this mixed use centre consisting of retail space and A-grade offices.

Construction has also started at Novare Matola mall in Maputo, Mozambique, while groundworks is underway at Novare Great North in Lusaka, Zambia. Despite the positive outlook, the reality of the current business environment is that many African countries find themselves heading towards the bottom of the “Ease of doing business” indices, with infrastructure backlogs proving to be a reoccurring problem.

While there has been significant progress in these areas since 2000, businesses that choose to operate in these economies are often faced with unique challenges and risks, both economic and political.

In Mozambique, for example, there are concerns that overall external debt levels are in unsustainable territory, raising concerns about the government’s administrative capabilities and prospects for growth.

The Central Bank of Nigeria recently unpegged the naira from the US dollar and introduced a more liberal dispensation to determine the value of the currency. This resulted in the naira depreciating significantly, which in the property context, has implications for tenants’ dollar indexed rentals and investors’ dollar denominated debt.

As in other countries, Zambia is experiencing power outages that have become worse due to the country’s dependence on hydroelectricity. The drought caused by the effects of El Nino has had a significant influence on the country’s ability to generate sufficient electricity, with implications for the economy.

Managing the risks
Novare Real Estate Africa has been investing on the continent since 2007. One of the ways it manages the risks involved with property development is by taking the unusual approach of handling in-house the management of all aspects of a project, starting with construction and procurement, through to letting and management of the completed centre.

In this way, costs and quality can be controlled, while ensuring that tenants’ needs are taken care of. Novare Real Estate Africa have direct relationships with contractors and suppliers and have earned a reputation for not cutting corners and for taking care of the interests of our stakeholders.

They adopt a hands-on approach and strive for consistency amongst the various developments. These factors, in turn, help ensure that there is delivery on the expectations of investors. The principal-agent problem in Africa is simply too large a factor to follow a business strategy of outsourcing some of the key functions.

Because of generally high building costs in Africa, Novare has been able to secure significant savings without compromising on quality thanks to its in-house capabilities. This applies to construction costs and procurement.

Where the procurement of materials is concerned, Novare’s preference is to support local suppliers in each of the countries in which it operates, subject to price and quality criteria. The group retains control of shipments because it’s important to know where materials are for planning purposes.

Aside from the benefit of currency inflows due to local procurement, property developments in Africa contribute to each country’s infrastructure while also creating significant numbers of sustainable jobs. Importantly, Novare’s mostly institutional investors, mostly pension funds whose long-term liabilities match the investment horizons required with the private equity asset class, benefit from superior returns.

In Africa, as elsewhere, the keys to success lie in having the specific skills set and experience to execute transactions profitably, and of course, solid business relationships based on trust.

This article features in the November edition of INTO AFRICA Magazine, insights on Real Estate and Property Investment prospects and challenges in Africa

Contributor’s Profile
Derrick Roper is a qualified actuary. He graduated from the University of Stellenbosch in South Africa and is a Fellow of the Institute of Actuaries in England. Before joining Novare he worked for a number of large financial services companies in South Africa including Sanlam and Gensec Asset Management. He spent some time in the United Kingdom where he gained experience in investment product development in the pension fund market. Derrick co-founded Novare in October 2000. He is a regular commentator on industry topics in the financial media and has addressed numerous conferences across the globe.

Derrick’s areas of expertise include asset-liability matching, strategic asset allocation, alternative investments and private equity investments in sub-Saharan Africa. Derrick’s tendency to innovate in product development saw Novare launch the first South African Fund of Hedge Funds in 2003, and subsequently, the first Novare Africa Property Fund in 2010.

Derrick is the CEO of Novare Equity Partners, a private equity firm investing exclusively in Sub-Saharan Africa outside of South Africa. He is listed amongst the top 50 most influential, innovative and powerful figures in African asset management by Africa Asset Management magazine for 2013 and 2014. He has 24 years’ experience in the industry and is an executive director on the board of directors for Novare Holdings.