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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

Residential Property

Prices for buying and renting residential property vary depending on size, location, neighborhood, habitat density, technical standards of the building, and the distance to the city center. Prime locations attract the local upper class, expatriates, and foreigners, while the middle classes tend to be located in midmarket properties. Low-income groups dwell in areas at the lower end of the market. However, boundaries of this segmentation are not fixed.

Large numbers of the urban poor live in informal settlements that can stretch over large areas of African cities. The property’s vicinity to such settlements also affects the price for purchases and rents. Long-term investors wishing to invest in residential properties should keep a careful eye on informal settlements and how they are likely to develop in the foreseeable future. As long as average personal incomes grow faster than the urban population, the social situation should be stable and even allow for poverty alleviation in the city.

When urban population growth (determined by the general demographic trend and the speed of urbanization) starts to exceed the increase in personal incomes of new city dwellers, informal settlements can be expected to increase as fewer people can afford housing, and more of them will be impoverished. This will lead to a degradation of property assets and falling prices. It may also undermine the value of existing properties in adjacent areas.

Regional rental rates of residential real estate 2010 (Upmarket, low density areas; US$/month). Source: MMC Capital Research

Prime residential estates in low density areas are most expensive in those countries and cities where supply is very tight, and where the upper classes control a disproportionate amount of the wealth. In the DR Congo and Tanzania, rental rates are very high, despite the extremely low average purchasing power in these countries.

In terms of prime residential rentals in the region, landlocked countries, such as Zimbabwe, Botswana, and Malawi, offer fairly competitive monthly rates compared with other regional counterparts, such as Angola, the DR Congo, South Africa, and Tanzania.

Availability, quality, and security of properties of the highest standard, as well as provision of electricity and Internet access, are other parameters that need to be factored in.
Luanda, the capital and largest city of Angola, is the most expensive city in the world for expatriates, according to Mercer's Cost of Living surveys. It is followed by Tokyo and N’Djamena, Chad.

In terms of location, it is important to distinguish between macro and micro locations. The bigger and more important the city where an office, industrial building, shopping mall, condominium, or villa is located usually means the higher the price. Zimbabwe provides a good illustration. The capital, Harare, is far more expensive than the secondary cities of Bulawayo, Beitbridge, Victoria Falls, Gweru, Masvingo, and Mutare. In Harare, tenants have to pay about 2.5 times the prices in the other cities. This pattern of properties in the largest city having the highest prices applies to most countries in Africa.

The number of monthly rentals that a tenant has to pay in advance to the lessor gives a good indication of how great the imbalance is between demand and supply. In many cities in Nigeria, Cameroon, and other West African countries, tenants have to pay 24 months’ rent in advance in cash. When the initial period of two years is over, the rent for the next 24 months has to be put on the table. These rules apply when huge demand meets limited supply. Obviously, this situation is very different from that in developed countries.

> Continue to part 5