Weathering Africa's commercial real estate storm

Gerhard Zeelie (Supplied)
Gerhard Zeelie (Supplied)

Cape Town - Africa faces a critically important 2017, and while real estate occupiers and investors have both been accustomed to years of high growth rates above global averages, the potential economic and political headwinds could lay the foundation for a new way forward in Africa, according to Malcolm Horne, group CEO for Broll Property Group, a commercial property services company.
He said there are new brands continuously entering the African market, many retailers are still adopting a wait-and-see attitude in countries affected by the current downturn in commodity prices.
“Technology is forever evolving in all sectors of the property market and role players in the property market need to adapt accordingly. For example, the banking sector’s physical asset strategies will closely leverage their digital and online strategies. The increased uptake of mobile, online and alternative channels by bank customers is resulting in physical property dialogues,” he says.
“A number of shopping centres across the continent have also implemented Wi-Fi and apps, while online shopping is becoming more popular. Lower smartphone prices and data costs are driving the digital revolution in Africa.”  
Addressing what can sometimes be the biggest barrier for potential investors, Horne believes that the ease of doing business in Africa has improved, with increased exposure to international companies entering Africa, and a drive by many countries to make it easier to set up business’s in-country.
“However, while positive inroads have been made by a few countries there is still a long way to go, with the majority of countries having mixed success,” he says.


The variables that threaten risk in Africa are equally what contribute to making the continent such a rich landscape of opportunity – especially in the continent’s real estate sector, according to Gerhard Zeelie, head of real estate finance, Africa regions, at Standard Bank.

Africa’s commercial real estate sector is currently a tenants’ market, in his view. Despite a more settled naira and easing dollar liquidity in Nigeria, challenges like importing goods - until recently prohibited for foreign currency allocation – is keeping smaller businesses and retailers under pressure, forcing landlords to continue offering tenants discounts, or capped dollar-based deals.

New malls remain at 50% to 60% occupancy levels as, “tenants shy away from the more expensive dollar-based rentals, or remain unsure of whether they will be able to get prohibited, non-essential, stock through ports,” says Zeelie.
Similar concerns follow Africa’s office rental environment as businesses adopt a wait-and-see attitude, deferring office moves, upgrades and corporate office expansions.

These kinds of challenges mean that commercial real estate developers are struggling to convert Africa’s resilient consumer demand into competitive rentals.

“This is not only constraining income in the sector, but also leading to a depreciation in the value of the continent’s real estate stock as, increasingly, space in new developments stands empty or achieves lower rentals than before,” says Zeelie.


The intensity of the storm in the continent’s commercial real estate sector varies.

In Nairobi, for example, “a better regulatory setting, an easier business environment more generally, and a more diverse economy - with multiple earners of foreign exchange – collectively contribute to a more resilient tenant profile and higher occupancy, even though vacancies exist in certain nodes and sectors,” says Zeelie.

Kenya, or, more correctly, Nairobi’s commercial real estate market, is, however, the exception rather than the rule in Africa.

When projects don’t perform as anticipated, African commercial real estate developments require more patient funding structures which can be achieved through the correct ratio between debt and equity.  

“Projects conceived in earlier, more positive, business environments on very different numbers, for example, should be restructured,” says Zeelie. While a restructure will often involve a higher level of equity finance, “a bank should also display some flexibility in its approach,” he adds.

For example, if financiers have a view on how long negative conditions may last in certain markets they may be able to extend the tenors or repayment terms of financing facilities - provided there is not a significant deterioration in the risk.

Or, if clients have access to shareholder funds, it might be cheaper to put more hard currency into the structure. There may also be options to convert debt into local currency, provided there is enough liquidity in the market.
“Another solution could be to negotiate upfront payment of the present value of all lease payment with key tenants,” says Zeelie. Over the long term this provides these tenants with predictability – and probably a discount – while injecting much needed capital, now, into commercial real estate financing structures, enabling landlords to manage rentals with smaller clients in the short term.

Urbanisation without growth

Selwyn Blieden, head: Africa coverage, commercial property finance at Barclays Africa Group, says without an effective, self-sustaining ecosystem, comprising all the key components of a workable property market, Africa’s urban centres could suffer the effects of what is known as “urbanisation without growth”, or “poor country urbanisation”.

That means more urban sprawl with little or no economic growth potential and worsening shortages of urban housing, commercial space and inadequate civil infrastructure.

On the other hand, a well-functioning property ecosystem could enable the kind of orderly, planned and constructive growth that Africa’s property markets need. Such an ecosystem would also give funders the comfort that property investments made today will still be standing in 20 years’ time and that their loans will indeed be repaid.

When it comes to financing, it seems likely that property markets across Africa will rely increasingly on African sources of funding. One need only look at property transaction trends on the continent to see that foreign funding is in short supply and unevenly spread, says Blieden.


Research commissioned by Barclays Africa Commercial Property Finance shows that between 2003 and 2016, only two of the top 10 African cities that received significant inflows of foreign real estate investment were in Sub-Saharan Africa. They were Lagos in Nigeria and Johannesburg in South Africa. The other eight were all in North Africa.
The continent has a number of African-based funders with the resources to provide financing to property market players. Their ability to do so, however will depend on how smoothly and efficiently the African property ecosystem develops.

Barclays Africa research indicates that inappropriate urban planning regulations and inadequate urban service provision deter foreign real estate investment attraction and economic growth within some jurisdictions in Africa.

A common but serious drawback in many sub-Saharan African countries is the lack of reliable data for risk assessment.

Another concern for funders is the underdevelopment of the regulatory environment in some jurisdictions, hampering efficient planning, approvals and transfers.

Barclays Africa research shows that property finance in its target jurisdictions grew by an estimated 13% between 2013 and 2015, which is significantly faster than normal GDP growth.

"Granted, property markets in Africa are highly diverse, with some growing above 20% and others at zero. There’s no doubt that Africa’s nuanced property markets face challenges, but there are opportunities as well," said Blieden.  

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