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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

Commercial Property

Office buildings, business parks, and industrial buildings address the needs of both local and international companies. The latter primarily tend to focus in a country’s capital, or else its financial/economic center. The following table lists countries where the political and economic capitals are different:

Country Capital City Economic Capital
Côte d‘Ivoire Yamoussoukro Abidjan
Cameroon Yaoundé Douala
Nigeria Abuja Lagos
Tanzania Dodoma Dar es-Salaam
Malawi Lilongwe Blantyre
South Africa Pretoria Johannesburg

The following graph demonstrates that commercial rents are heavily dependent on how the property is being used. Retail outlets provide the highest returns per square meter. Therefore, retail companies have to pay a higher rent than for offices or industrial buildings.

Regional rental rates for commercial property 2010 (US$/square meter). Source: MMC Capital Research

Although the prices of commercial property in Zimbabwe appear to be quite inexpensive compared with other countries, prices were even lower three years ago. Since the currency reform of 2009 and the subsequent dollarization of the Zimbabwean economy, rental rates exploded. From 2009 to 2011, prices in Harare rose from 5 to 25 US$/square meter for shops, from 3 to 8 US$/square meter for offices, from 4 to 10 US$/square meter for business parks, and from 1 to 3 US$/square meter for industrial buildings.

Looking back from here, it seems to have been an excellent time to buy property in Zimbabwe. However, the country was in a deeply depressed state, characterized by high levels of uncertainty and political risk. Bold investors prepared to take such a risk could have made a fortune.

Even in the same city, markets can be very different. The office market in Zambia is a good example. In Lusaka’s Central Business District (CBD), most existing offices are regarded as obsolete as they do not meet modern occupier requirements. Most tenants require an open-plan, flexible space with plenty of car parking plus back-up solutions for electricity and voice and data communications. In addition, occupants want to have the capacity for future expansion. So, rent for top quality accommodations are expected to rise in the short to medium term.

The attraction of industrial areas increases if they have been designated as Free Trade Zones (FTZs) or Special Economic Zones (SEZs). In many cases, the government assigns specific incentives, such as tax holidays, duty-free imports of capital goods, or tax exemptions, to companies located in such areas. Therefore, property prices can be higher than in other industrial areas without such privileges. Companies and investors that want to set up production plants, logistic centers, or office buildings are advised to carefully examine if such special zones already exist or are planned.

Hotels and Resorts

Prices of hotels correlate to the profits that the owner can generate from them. While occupancy rates of city hotels mainly depend on economic activities in the city and the country, because most guests are travelling for business purposes, resort hotels focus primarily on tourists. Occupancy rates of resorts and prices per room per night usually vary depending on the season, and will also be affected by changes in country risk as a result of unrest (e.g., Kenya after the last elections, Egypt after the revolution) or if such a situation has ended (e.g., Côte d’Ivoire). Asset prices of hotels can fall significantly if tourists fail to appear.

Conversely, prices of such assets can rise if the region becomes more attractive to visitors. A good example is the Kavango Zambezi Trans Frontier Conservation Area (KAZA TFCA).

The Kavango Zambezi Trans Frontier Conservation Area. Source: Wikipedia

This area will soon become the largest national park in the world. It will cover parts of five countries (Zambia, Zimbabwe, Botswana, Namibia, and Angola) and includes more than ten existing national parks and game reserves (Chobe NP, Makgadikgadi NP, Nxai Pan NP and Moremi Game Reserve in Botswana; Kafue NP and Sioma Ngwezi NP in Zambia; Hwange NP, Matusadona NP and Chizarira NP in Zimbabwe; and Bwabwata NP, Khaudum NP, Muduma NP and Mamili NP in Namibia). Clearly, the most attractive location in this setting will be that surrounding the world-famous Victoria Falls, including the cities of Livingstone, Zambia and Victoria Falls, Zimbabwe.

Resorts, lodges, and camping grounds in the Kavango Zambezi TFCA should become more attractive when tourism levels to the area increase, thereby driving up occupancy rates and demand for more accommodation. On the other hand, a prolonged recession in the developed world would negatively impact the flow of visitors.

Nevertheless, the tourist industry in Africa hopes for more visitors from Asian countries that might well more than compensate for the possible loss of visitors from Europe and the United States. In order to benefit from the shift towards Asia, local companies and entrepreneurs from the hospitality sector need to adjust their business models and marketing activities accordingly, as well as offer added value to their guests, e.g. by hiring Chinese interpreters.

However, infrastructure challenges have to be overcome before this positive scenario can unfold. In particular, a new bridge has to be built to span the Zambezi River in order to better connect various parts of the area. Financing for this has yet to be secured.

> Continue to part 4