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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 contents: 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

Property as an Asset Class

Real estate is one of the major asset classes for the creation and preservation of wealth, and Africa offers a host of opportunities in the real estate sector. This is especially true if you compare the current situation and outlook of African markets with the developed markets of the Western world. In order to fully understand the competitive advantage of African property markets, we should start with a global overview.

Since 2007, investors have experienced dramatic price changes in stocks and bonds, currencies and derivative instruments, commodities, and real estate. The major themes for 2012 and thereafter are:

Asset Classes under Attack

In the current unstable environment for financial markets, more and more people are looking for safe havens and fleeing risky asset classes in favor of financial instruments that are considered risk free.

The dilemma is that many traditional safe havens have lost their aura of being a secure place for building and storing wealth. U.S. property prices started to collapse in 2007, leading to the subprime crisis which marked the first stage of the financial troubles from which we are yet to emerge. The banking crisis was the second stage, commencing in 2008 and culminating with the default of the U.S. investment bank, Lehman Brothers. The subsequent deep recession and collapsing commodity prices in 2009 can be seen as the third stage. After a temporary respite in 2010, the fourth stage unfolded when the financial problems of several European countries triggered the sovereign debt crisis, and the Euro crisis followed suit.

There are many indications that the fifth and the sixth stages of these financial troubleswill be a new banking crisis greater and more dangerous than the last, with the breakup of the European Monetary Union as a potential outcome. Some banks from Italy, France, Austria and Germany with less capital may have to be nationalized if part of the sovereign debts of Greece and other Southern European countries cannot be cancelled, or if a bank default were to cause a sudden crash of the derivatives market as counterparty risk becomes relevant with immediate effect.

The writing on the wall cannot be overlooked. A silent bank run is in full motion in Greece and has started in Italy, too. Italy represents the second largest sovereign bond market in the world. The country is too big to be bailed out, even with the financial help of the combined Euro zone countries. This would send shock waves around the globe. However, Italy is not the only candidate for a default. € 8 trillion of sovereign bonds of the most important industrialized countries need to be refinanced by 2014. On the other hand, bond markets have already priced in Greece’s sovereign default, and the majority of market participants are waiting for Greece to abandon the euro and return to the drachma.

Therefore, many investors and politicians are hoping that the European Central Bank will start unlimited quantitative easing (newspeak for printing money). If that happens, it would be just a matter of time before the exploding money supply triggered major inflation. The excess money would have to leave the banking sector (which has so far proven to be a bottomless pit for absorbing it) and enter the real economy. Once the circulation of money finally accelerates, the onset of hyperinflation would be inevitable.

The financial world has been turned upside down. We are experiencing the worst and most dangerous crisis since the Great Depression of the 1930s. Authors of some famous financial newsletters have already heralded this as the “Greater Depression” for the developed economies.

Within the space of only two years, formerly “risk-free” assets became first “a little risky” and very soon “toxic.” The speed of deterioration is unprecedented in the history of financial markets. In addition, developments in the markets and decision making processes in the political arena are so intertwined that even the most talented analysts are unable to give reliable forecasts. The lifecycle of the validity of official announcements, political decisions, and financial statements has shortened dramatically.

The new normality

Uncertainty and fear that have become the new normality among investment strategists, portfolio managers, and traders have now reached the man in the street. Even the average person is starting to ponder which value will last and which will not. Hard assets come to mind: having something solid that will withstand the storms ahead is becoming desirable for many ordinary people.

Addendum September 2012:

After the Fed has released the QE3 program (which basically means unlimited printing of money) and announced the continuation of its zero interest rate policy until 2015, and the European Central Bank has announced unlimited purchases of government bonds, the direction has become even clearer: Sooner or later, inflation will come.

> Continue to part 2