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Real Estate in Africa

Note: This report is an extract from the book "Grow Rich in the New Africa".

Table of content: Part 1: Real Estate as an Asset Class Part 5: New City Developments
  Part 2: The Investment Case for Real Estate Part 6: Yield of Real Estate Investments
  Part 3: Commercial Property Part 7: Legal Ownership of Real Estate
  Part 4: Residential Property Part 8: Conclusion

The Investment Case for Real Estate

This would normally be a good environment for rising property prices, making real estate an attractive economic sector and preferred asset class for institutional and individual investors.

However, most real estate projects in the West are highly leveraged, as they are financed with very little equity, if any at all. Instead, they are used as collateral for huge loans from mortgage banks. A special situation can be observed in Austria and Hungary, where most private real estate investors have financed their houses with foreign exchange loans, mostly denominated in Swiss Francs and Japanese Yen. Both currencies have appreciated against the euro and the Hungarian forint, respectively, thus increasing the amount to be paid back.

Properties that are debt financed are not considered a hard asset, but rather a financial asset. Only debt-free property used for one’s own residence can be seen as a hard asset that preserves value for an individual or family.

In addition, national economies facing recession will see a shrinking of private household income and falling purchasing power, leading to lower property prices. Rising interest rates (which may result from falling bond markets) will put additional pressure on the owners of highly leveraged property. If they are forced to sell into a falling market, prices will fall further. Foreclosures become inevitable, thus further fuelling the vicious circle. Increasing supply and lack of demand will derail the market as a whole. On a macro level, the negative demographic trend of rapidly ageing populations in Europe, Japan, and China will not support the demand side of the equation. This indicator will remain negative for decades to come.

The development of continuously falling property prices that was experienced in the United States (despite record low interest rates) could well be repeated in parts of Europe. Real estate markets in Spain, Ireland, and the United Kingdom are heavily exposed to such chain reactions.

In a nutshell, investing in real estate is not necessarily a good idea, at least if you live in the United States or Europe.

The Investment Case for Real Estate in Africa

The situation in rapidly expanding emerging and frontier markets is, however, very different from the gloomy scenario described above. Macroeconomic growth translates into higher national, corporate, and personal income. On a macro level, both rapidly rising population and the major trend towards urbanization are leading to high demand for residential housing, especially in the cities.

Many countries in Africa are experiencing a construction boom that is set to last for years to come. High pent-up demand for residential housing and rising incomes of the rapidly growing middle class offer an interesting playing field for property developers. The demand for office buildings and new city hotels will remain strong on the back of solid macroeconomic growth and the rising interest of international companies in accessing African markets.

Inflation rates in most African countries are significantly higher than in the developed world. Inflationary periods are generally good for the appreciation of real estate prices.
The price level for buying or renting properties depends on a broad range of factors, the most important being the relationship between supply and demand, location, purchasing power, availability, terms and conditions of financing, and type of use.

Mortgage financing is still in the early stages of its development in Sub-Saharan Africa except for South Africa, which is a developed market. Where access to mortgage loans is limited and interest rates are punitively high, very few people are able to obtain financing for their homes. As a result, most local property markets are far removed from any risk of a bubble developing.

In markets like Zimbabwe and the DR Congo, where little credit is available, the majority of house purchases are self-funded, so buyers are able to dictate terms.

The real estate market can be divided into several sub sectors. Each sector has its own pros and cons and depends on distinctive customer groups. The current situation and outlook may also differ from country to country.

Sub sectors of the real estate market:
  • Office buildings and business parks
  • Residential housing
  • Industrial buildings
  • Shopping centers
  • Hotels (city hotels, resorts)
  • Lodges
  • Farms
  • Land (municipal, agricultural, forestry)

Guesthouse on a farm, Zambia

Downtown Kigali, Rwanda

Sandton, Johannesburg, South Africa

> Continue to part 3