Note: This article is an extract from the book "Redefining Business in
the New Africa".
Urbanization is one of the big megatrends in the world of today and tomorrow. Millions of people are migrating from rural to urban areas for many reasons. While the percentage of people living in urban areas has already reached very high levels in the Western world and Latin America, some parts of Asia and most parts of Africa are lagging behind.
The urban population in Africa accounts for about 40% of the continent’s total population. In Latin America, a similar proportion between urban and rural population was observed in 1950. Within the next decade, more than 80% of all Latin Americans will live in cities. So, Africa lies 60 years behind Latin America if it follows the same trajectory.
The urban population growth in Africa is mainly determined by two major factors: the migration of mostly young people from rural to urban areas, and high general population growth because of high fertility rates and low median ages. And because Africa’s youth bulge is now reaching adulthood and will move to cities for better opportunities, Africa will quickly catch up with Latin America.
Strongest Urban Population Growth in Africa
According to UN-HABITAT, Africa will experience the strongest growth among
all regions of the world until 2050. From 2000 to 2030, Africa’s urban
population will grow from 294 million to 742 million people, an increase
of 152%. In comparison, the urban population in Asia will grow by 94%, while
Latin America will add another 55%.
The three largest cities in Africa are Cairo (Egypt), Lagos (Nigeria), and Kinshasa (DRC). Cairo and Lagos populations exceed 10 million making them megacities.
In about 10 years, Cairo will be overtaken by Lagos and Kinshasa. Many African cities will have grown more than 50% between 2006 and 2020. The following image shows the largest and fastest growing cities in Africa.
Source: Trans Africa Invest, based on data from Citymayors. (In other sources, Johannesburg, South Africa is in the top three largest cities in Africa because the East Rand is incorporated into the figures. The UN-HABITAT figures here separate the two)
Construction boom in Lagos, Nigeria
Another factor influencing urbanization is how densely populated a country is. The small countries of Rwanda and Burundi have already passed levels of sustainability regarding the ability to feed their own people with agricultural goods from local sources. Too many people are living too close to each other, allowing only very small parcels of agricultural land per family. Fertile grounds in this country are almost utilized by 100%, so that there is no further expansion possible.
As a result of this unpleasant situation, many young people are forced to leave their parents’ farms and will move into the cities looking for a job, or any informal business activity, that will allow them to earn a living. Urbanization will definitely accelerate in those countries. Right now, more than 80% of the overall population of the East African countries of Rwanda, Burundi, Uganda, and Ethiopia is still living in rural areas. Consequently, rapid growth of the primary cities of those countries can be anticipated with very high probability.
View over Kampala, capital of Uganda
Uganda is an excellent example for the extreme dynamics of future urban growth. The country has one of the youngest populations worldwide. Regarding fertility (6.73 children born per woman) and birthrate (47.55 births /1,000 population), Uganda is ranked second, according to the World Factbook. The population growth rate is approximately 3.6% per year, according to 2010 estimates. The median age is 15, which means that half the population is younger than 15 years. One can anticipate the transformation of this high youth population - from too young to being productive citizens, from a burden to a benefit - when the majority of youth reach adulthood. What is called the “demographic dividend” will begin to pay off.
One can easily imagine the future exponential growth of urban areas. In 2008, only 13% of the Ugandans were living in cities. Over the next 20 years, the urban population will well exceed the 20% level, leading to rapid growth of the capital city of Kampala, which is also the economic and financial center of the country.
The rapid growth of African cities
will both imply major problems and create outstanding opportunities.
The challenges are obvious. They range from
infrastructure gaps and missing capacities for power, water, and food
supply to loss of agricultural land and chaotic traffic situations,
not to mention
the huge health problems originating from air pollution, lack of sanitation,
and huge piles of garbage.
Clever entrepreneurs, who understand problems are also opportunities, will find a large variety of promising business concepts by proactively dealing with the aforementioned challenges in city development in Africa. Sophisticated city planning methods, innovative waste management procedures, cost efficient water treatment technologies, and independent power plants belong to this category of opportunities.
Increasing Land Prices
Studying past history reveals another set of opportunities. When we look back to urban expansion in Western countries, we find some business cases that should work in Africa as well. Land prices will increase when the plots move closer to the city. Many farmers in Europe became millionaires just because their farmland was converted into building land.
From an investor's point of view, we will take a look at some glaring opportunities that are connected with the megatrend of urbanization in Africa. There is a significant unsatisfied need in residential housing in all major African cities. The gap between demand and supply is still increasing, offering numerous opportunities for real estate developers, prefab house suppliers, and construction companies. In Latin America, households need 5.4 times their annual income to buy a house. In Africa, they need an average of 12.5 times their annual income.
The market environment is completely different from the situation that we are familiar with in the Western economies. An example is if you want to rent a flat in some cities like Lagos, Douala, or Luanda, you have to pay the rent for up to 24 months in advance. For real estate developers, such down payments from future renters will provide a solid base for financing ventures.
However, it is not so easy to tap into this kind of business opportunity. In practical terms, it can be very difficult, costly, and time-consuming to get the necessary licenses for starting operations. Corruption is known to exist. Securing and maintaining ownership rights might also be difficult, depending on the rule of law, the availability and reliability of title deeds, and the handling process in general.
The more well developed real
estate markets are found in North Africa, including Egypt and Morocco, Cape
Verde, and South Africa to namea few. Because they
are more developed, rates of return may not be as high though.
There are online resources to help decipher the investment and business
climate related to land across countries.
In some countries, where there is no private ownership of urban land possible, lease holds can be obtained for a period of 25, 49, or even 99 years.
In many countries, leasing is the only possibility of getting agricultural land. However, lease rates can be very inexpensive and be negotiated for a long period. This might be very attractive for long-term investors.
Investors that want to find out which cities would offer the best development perspective and the biggest potential for future price increases will have to look for a number of parameters. The most important factor is location. This is true for selecting the right strategic location (i.e., in which city the property should be bought), as well as choosing the right quarter within the city. If you intend to buy property outside the big cities in order to benefit from lower prices, there should be a positive outlook for the future development.
Selecting locations along important national or transnational development corridors is a good idea. Examples of these corridors are:
• Mombasa – Nairobi – Kampala – Entebbe
Zimbabwe's capital Harare is located at the crossroads of several development corridors
Along these major transnational road connections, many business opportunities will emerge. Truckers want to eat and to sleep. Commuters will visit shopping centers. Minibuses will stop at many places along the road. Those highly frequented places are good locations to sell goods and services. The overland roads carry further business opportunities like public transportation, logistics services, international border controls, and road construction and maintenance.
Rapidly growing cities will accommodate an increasing number of inhabitants, workers, and consumers. If everything goes as anticipated based upon history in other nations, prices should increase and all stakeholders would be able to prosper.
However, African reality might be different. As long as economic growth is outpaced by demographic growth, income per capita will decrease, which will lead to more poverty. Reaching the millennium goal of poverty alleviation is only possible when economic growth is superior. This is the major reason why high economic growth over a long period of time is an essential prerequisite for sustainable development in Africa. Good governance, business friendly reforms, a reliable financial and fiscal environment, and political stability are needed to initiate, support, and sustain this process. And as indicated in Chapter 1 – Introduction: The New Africa, Africa has demonstrated good progress in these areas for the last 15 years or so as a whole.
With regard to national and transnational development corridors, there are
many business opportunities:
• Road construction & maintenance
• Shopping Centers
• Real Estate Development
• Public transportation
• Logistic services
• Agricultural estates along the corridor
• Food processing plants
• International border controls
Urbanization Impact on Construction
As indicated before, the construction sector is a key business and investment opportunity. New city dwellers need appropriate housing facilities according to their financial power. Upper, middle, and lower class residential houses are in high demand in almost all African cities. In Angola alone, one million houses are needed - this for a country with a total population of only 13 million people.
The Angolan government is actively pursuing a gigantic house building program and is looking for construction companies and experienced real estate developers that can handle complex operations and deliver several thousand units at the same time. Lack of financing is the biggest problem in this sphere of business, along with high levels of corruption. However, there are ways to navigate these environments as well. For example, the U.S. has a bilateral agreement with Angola covering trade and investment, which offers certain levels of support and protection for U.S. companies.
Of all the subsectors in residential housing, low-cost housing is the most challenging because of high-volume, low-margin operations, but the rewards can be very high. The environment of the construction business in Africa is very different from the situation in the U.S. and many European countries: there is no oversupply, no real estate price bubbles, and definitely not a decrease in demand. Instead, there is enough to do for thousands of companies over several decades. It's incredible, but it's true.
It has to be mentioned that large areas of urban settlements are informal. The majority of urban residents in sub-Saharan cities are living in slums. Some years ago, Brazil introduced a good method of unlocking values in informal settlements. They just formalized these settlements and gave title deeds to the tenants which enabled them to get mortgage loans. This might be a good blueprint for Africa as well, at least for those countries that allow private ownership of property.
The population boom in Africa will continue to drive urbanization in Africa. Young people will seek opportunities in the cities.
This explosion in urban population is a serious challenge to urban planning and sustainability. In the case of Johannesburg, it wasn’t that the city did not have plans for growth, but the rapid growth of informal settlements, as people came looking for work and opportunities, was overwhelming. In an area allotted in planning for one family, you might find four.
For the entrepreneur on the other hand, urbanization is a bonus in many ways. First, you have a large consumer market in a densely populated area, which can provide lower costs of delivery to customers compared to other areas. Second, there are opportunities in solving the problems faced by rapid urbanization. Third, there are diverse sector opportunities in hubs of economic activity from retail to transportation to education to communication.
From a strategic perspective,
key urban centers can be used as market entry points because of the microcosm
of the national economy located within them.
As urban centers spread, firms can follow the natural flow of economic
activity to extend their markets. And finally, key urban centers within a region
be chained together to establish a regional presence.