ARE AFRICA’S REAL ESTATE MARKETS DEEP ENOUGH TO BE SUSTAINABLE?
8 min read
As an asset class, African commercial real estate is largely in its infancy, with rapidly changing dynamics and an evolving status quo. Investments therefore have to be prudently selected to stand the test of time. If there is one thing that COVID-19 has exposed in many companies, it is that growth at any cost is not sustainable. Now, more than ever, investment strategies need to consider which asset classes and geographies will best stand up to economic pressures and be resilient in the long term.
Historically, challenges around security of land tenure, political stability and local currency repatriation riskhave introduced complexities in commercial bankability of real estate transactions in Africa (versus more established markets such as South Africa and abroad). Over time, buoyant and growing African consumer markets are attracting increasing levels of both foreign operators and capital seeking higher yields and growth which is improving availability of both new funding sources and access to quality tenant counter-parties.
From an investment perspective, recent history has demonstrated the need for diversification as Africa has experienced multiple cyclical changes at both country and industry subsector level. The extent to which a property company aligns their growth prospects to specific asset classes (sub-asset classes), and in particular industries is proving to be a key differentiator between funds.
As a leading pan-African real estate company listed on the London Stock Exchange, Grit Real Estate Income Group’s portfolio is differentiated through its diversification across geographies and asset classes. Considering the shifting dynamics, real estate investment in Africa requires a strategy that is built on core fundamentals, but also is diverse and adaptable enough to continuously evolve. COVID-19 will no doubt present attractive opportunities for growth, however patience is required in order to best capitalise on the depressed markets that are likely to follow. Grit is positioning itself to capitalise on such opportunities, while remaining patient where required.
An asset class that has proven to be particularly resilient and is outperforming currently is the light industrial and logistics space, which presents an attractive and market defensive opportunity for the company to grow over the long term. The company particularly sees an opportunity in North Africa and East Africa in this regard where it is well positioned in terms of its existing assets and network to unlock further deals. Grit has a proven track record in the ability to unlock ‘sale and leaseback’ transactions alongside quality counter-parties and will continue to pursue such transactions in this space.
A second burgeoning sector, especially in the wake of the worldwide pandemic, is access to quality healthcare. Here Grit sees opportunities to participate in development pre-funding as well as partnership with international operators under long leases, especially across the African continent where there is a dire need for quality private healthcare.
Typically, such negotiations are accompanied with a re-development and/or refurbishment angle which allows the company to unlock attractive capital growth prospects while also repositioning the asset in line with the tenant’s ideal requirements for the long term. The hands-on asset management of Grit’s existing portfolio to unlock value, alongside the focus on sourcing investment opportunities with a development/re-development angle will be a large focus in the group’s investment strategy going forward.
The promulgation of Real Estate Investment Trusts (REITs) in certain African countries is expected to attract significant capital markets interest considering the tax benefits and related incentives which such vehicles offer. The anticipated increased inflow of institutional, pension and sovereign wealth funding in these real estate markets will promote attractive yield compression prospects, further stimulating asset recycling, and will provide a more robust benchmark for asset valuations.
In markets where skills are difficult to be sourced and rather need to be trained over time, Grit holds a competitive advantage whereby it can attract strategic co-investors through offering a fully managed solution in line with international best practice. The company has built its in-country management expertise over a number of years and is now well placed deploy this skillset on the continent.
The impact of COVID-19 on commercial real estate in Africa has no doubt had a major impact to date, but the prospects of what is to come can be argued from two sides. The first argument is that the pandemic will delay the process of new investors entering the African market and creating that depth and stock that is much needed. Contrarians may argue that developed markets are however under pressure and that this situation may be prolonged, which will certainly accelerate investment into the relatively higher-growth economies in Africa over time.
Something that no-one disputes though is that Africa’s commercial real estate market will continue to deepen allowing for sector specialisation over time. The involvement of pension funds, capital markets and more companies like Grit with a long term Africa focus, are however needed to accelerate this process and will create a supply and demand balance that will create sustainable value.