A two-speed cycle appears to have evolved in emerging economies with some racing ahead and others lagging behind. Markets in Central and Eastern Europe (CEE) are seeing record levels of capital inflow while many markets in Sub-Saharan Africa are lagging behind, with their real estate markets capturing little or none of the current global interest in real estate.
Tom Mundy, Director: Capital Markets Research for Europe, Middle East and Africa at JLL, a New York Stock Exchange (NYSE)-listed professional services and investment management firm, says that the company wanted to establish whether many of these markets have been unjustly ignored and if one should expect them to benefit in the future.
“We looked at current financial drivers and the key components impacting the case for real estate in Sub-Saharan Africa – pro-cyclical fiscal policies, physical imbalances, regulatory change and macro-economic factors,” explains Mundy.
As global investment volumes grow, the analysis considers why investment activity in Sub-Saharan Africa has not been able to tap into this trend. While transactional volumes of prime real estate in the region for 2015 were approximately $400 million, transactional volumes so far this year have slowed to around $150 million.
Commenting on how investors in emerging economies have been an influential part of this globalisation of capital flow, Mundy adds, “The recent yield compression experienced in Central and Eastern Europe has, to a large extent, been driven by South African investment groups looking at opportunities in Eastern Europe at the expense of opportunities closer to home – over $1.3 billion in 2016 alone. This is more than the total investment volumes recorded in Nigeria, Kenya and Ghana since 2012.”
Anthony Lewis, Director: Capital Markets, Sub-Saharan Africa at JLL, highlights some of the reasons local investors are bypassing local opportunities, “Pricing is an obvious issue with the risk versus reward of investing in emerging European markets so far proving superior to investing in Sub-Saharan Africa. This has much to do with the extra risk of low liquidity and an unclear regulatory environment.” Currency is another headwind as it is the primary driver of volatility in commodity exporting economies. “Add to this a reliance on inward investment due to a lack of domestic buyers for investment grade real estate assets plus a falling economic growth rate and you have a challenging investment landscape,” he says.
However, there are real opportunities for markets in Sub-Saharan Africa 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. Before real estate markets in Sub-Saharan Africa can become an attractive migratory destination, a number of initiatives must be undertaken.
“To promote the financial drivers that underpin domestic real estate markets, we need to foster deep pools of liquidity, lower market volatility and strengthening growth rates,” Mundy confirms.
Improved urban planning initiatives and the quality of building stock will also work towards overcoming the physical imbalances that typically affect these markets. It will also be essential to eradicate short-term pro-cyclical fiscal policies and adopt continuous policies to address income inequality.
Lewis believes that development of the Sub-Saharan Africa REIT market will be the fundamental underpinning for the region’s real estate sector. “Growth of REITs in Sub-Saharan Africa should support much deeper pools of global capital and a wider investor base.”
The analysis indicates that another effective way to develop the infrastructure, which goes hand in hand with successful real estate development, is to increase the capacity of public-private partnerships 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.
The research highlights that regions within Sub-Saharan Africa that are best able to implement these initiatives will be ideally placed to attract and absorb a large-scale migration of international capital, and replicate the success of markets in CEE.
Likewise, investors who are best able to recognise the implementation of such initiatives and are first to migrate to such markets will no doubt enjoy the rewards of yield compression that will inevitably take place in these markets.