Insights on Africa’s Real Estate Market

According to the World Bank, Africa’s median age was 19.7 years in 2012, and it is expected to increase to 25.4 in 2050, making Africa the continent with the youngest population.

The global megatrend relating to the ageing population and the consequent increase in the demand for retirement homes is therefore not expected to have a significant impact in Africa. This young population on the continent will drive growth in the demand for housing.

In response, African governments have continued to promote new urban development through the creation of satellite cities, to offset pressure on existing urban centres.

Ambitious plan to bridge housing deficit in Nigeria

The Nigerian real estate market presents substantial opportunities as well as several specific risks for property investors. There are existing problems with access to finance; with a lack of long-term debt financing and an underdeveloped mortgage market (mortgage loans represent less than 1% of the nation’s GDP). Cumbersome and time-consuming processes for land acquisition and ownership documentation can make acquiring land difficult, while land in urban areas is astronomically expensive. Building materials and construction costs are high in addition to the huge reliance on expatriate workers, resulting from a shortage of expertise in the local construction industry. Security considerations as a result of local unrest should also be factored into investment decisions.

The residential real estate market is driven by the growing population in Nigeria, as well as the increasing ruralurban migration, strong economic growth, and a growing middle class. It is estimated that Nigeria has a housing deficit of 17 million houses estimated at US$363 billion. This number is expected to increase by two million houses per year at the current population growth of 2.5% per year.

The World Bank estimates that 44, 000 mortgage loans were granted in Nigeria between 2004 and 2010, with an average size of US$31,500, amounting to a ratio of home loans to GDP of 0.6%. Interest charges on prime mortgage rates among commercial banks ranged between 15% and 25% with maximum mortgage rates being between 16% and 30% which, when combined with equity requirements of 10% to 20%, heavily restricts market access for low- and middleincome families. Lagos is considered

to be Africa’s second most expensive property market.

The industrial real estate market also contributed to the growth of the total real estate market in Nigeria with the expansion of industrial activities. The country currently has about 25 approved free zones (schemes set up to strategically improve the investment climate by stimulating export-oriented business activities), although less than half of these are operational.

The growth in the Nigerian middleclass population and retail activity is driving demand for warehousing units as well as infrastructure-enabled industrial clusters and free zones. This can be attributed to manufacturers and suppliers seeking premises from which to meet growing consumer demands. of urban population growth currently exceeds the rate of development of new houses. Kenya’s state-run National Housing Corporation estimates the current housing shortage at 2 million units. The current production of new houses is estimated at 30 000 units per year.

Kenya’s government is currently looking to the private sector to address the housing deficit and in 2012, it introduced new regulations to allow PPPs to be used to develop new housing projects. Three PPP housing projects for public servants totalling 76, 000 units are currently in the development pipeline. In the private residential market, urban developers in Kenya are currently adopting a ‘high-density approach to scheme design – such as apartments – and a bigger plot ratio to make optimal use of available land.

Real Estate Investment Trusts (REITs) are also being promoted by the Nigerian Exchange Group (NGX) so that investor funds can be pooled to develop much-needed real estate assets and provide mortgages.

The REIT structure was introduced in Nigeria in 2007 and three types of REITs currently exist – equity REITs, mortgage REITs, and hybrid REITs.

Some of the REITs currently in Nigeria are Union Homes PLC, SunTrust Hybrid, UPDC, and Skye Shelter Fund. Skye Shelter Fund REIT and Union Homes Hybrid Real Estate Investment Trust were launched in 2007 and 2008 respectively. Union Homes had a market capitalisation in January 2015 of US$60 million, 128 whilst Skye Shelter had a market capitalisation of US$10.6 million.

Growth in Kenya’s urban population driving demand for real estate

The growth in Kenya’s middle class has led to an increase in demand for residential real estate, and the speed The government has big plans and Kenya’s ‘Vision 2030’ provides a blueprint for future development. Some initial success has already been achieved with institutional and business reforms, which have improved the business environment. The country’s trade strategy looks to encourage greater exports of processed goods, so there is potential for growth in the manufacturing sector.

Kenya has flexible labour regulations and investment laws that allow foreign investors to receive the same treatment as local investors. The nation’s financial sector is considered the most developed in East and Central Africa, which facilitates access to debt and capital market funding. However, Kenya has a fairly restrictive tax regime.

Ghanian government has doubled down on mass housing

Ghana’s demographic profile might not be as favourable as that of some other African countries, it makes up for this by having a less restrictive business environment and progressive macroeconomic policies. Strong protection of civil liberties improves Ghana’s investment attractiveness, as does the country’s developed legal and regulatory framework.

Ghana’s labour market is efficient. The country’s laws make it relatively easy to appoint or retrench employees – although it may be quite costly when severance packages are taken into account. Property rights, however, are poorly protected due to overall weakness in the rule of law.

Setting up a company in Ghana is a lengthy process that involves numerous government departments and agencies. The HFC Real Estate Investment Trust (HFC REIT) tax structure has been in existence in Ghana since 1994. Financial information for 2013 shows HFC REIT held US$8 million in net assets, of which US$1.8 million was in land and property.

South Africa continues to attract big-ticket real estate

South Africa has one of the most sophisticated business environments in sub-Saharan Africa and relatively well-developed government institutions. The low cost of starting a business, estimated at 0.3% of per capita income, means that entrepreneurs and developers can respond quickly to developing opportunities. The country is acknowledged for its resilient and stable banking sector.

The tax and financial regulatory climate is robust, and the tax regime progressive. Special development zones introduced by the Department of Trade and Industry (DTI) make provision for tax concessions for infrastructure development in certain areas of the country, resulting in the formation of new industrial zones, such as Coega, Saldanha Bay, and Dube Tradeport. South Africa introduced

a REIT framework in 2013, and currently, 33 REITs are listed on the Johannesburg Stock Exchange.

Growthpoint, with a market capitalisation of US$5.6 billion as of January 2015, is South Africa’s largest listed REIT. According to the SA REIT Association, the listed property sector in South Africa has been the top performer of the four traditional asset classes over the past 15 years. It has outperformed equities by 6.4% and bonds by 13.3% per year.

The purchasing power of Africans remains an issue

The key challenge for African cities, however, has been the comparatively low growth in per-capita income, which limits the resources that households have to consume or invest in housing. At the same time across the region, the formal channels through which quality housing is produced and financed face major constraints that limit access to a large share of urban households.

Recent research finds that for households in low-income SubSaharan Africa countries, food expenditures alone account for 50-60 percent of total monthly expenditures, which leaves very little—and comparatively much less than in other regions—for housing or other necessities such as fuel, transportation, education or health care.

Government subsidy programs have done little to promote wide-scale housing affordability. For example, over more than 40 years, Nigeria’s Federal Housing Authority has met only 15 percent of its goal of supplying 261,000 units. An alternative subsidy program of discounted credit to developers has encouraged land speculation rather than housing production.

Across the region, the majority of residents do not have formal savings accounts and are not able to obtain mortgages for housing consumption. Only 24 percent of adult populations, 15 years or older in Sub-Saharan Africa, hold an account at a formal financial institution. The same goes for 12 percent of adults in the bottom 40 percent of income levels. Only 6 percent of adults received a loan from a financial institution in 2014.

Lack of savings reduces the amount of finance available for lending institutions to develop consumer mortgages or other lending products.

The major source of housing investment is from household savings and government investment, rather than capital markets. This can crowd out public investment in other important sectors such as education, health, and infrastructure.

The lack of credit for development finance limits investment in domestic construction activities that could provide housing at scale.

Sound policy interventions need to focus on improving the functionality of both the supply-side and demand-side value chains in formal and informal housing arenas.

Housing affordability will improve not only with general economic expansion and income growth but also with a housing policy that both supports the incremental improvement of informal housing conditions for the majority of people and strengthens the function of the housing sector to bring down costs and expand the reach of the formal housing sectors to lower-income groups.

Enhancing institutional capacities both in government and within the capital markets will be critical. Governments and other decisionmakers in Sub-Saharan Africa should be equipped with a comprehensive understanding of the housing sector in the region and their countries.

Governments have a particularly strong role to play in ensuring housing affordability through targeted investments in infrastructure for lowincome groups and through regulatory measures, to improve the function of value chains.

They should prioritize the scarce resources available for housing and invest them in the expansion of basic services (land and infrastructure) for low-income households.

Complementary to this, governments should seek to address core bottlenecks in the regulatory framework for both formal and informal housing and introduce initiatives that improve the markets for housing inputs (land, building materials, and finance) that. This will enable households in all income segments to improve their housing and move up the housing continuum.

Experience shows that governments across the region have had difficulty promoting sustainable, broadly affordable housing through a direct supply of units due to targeting problems and cost constraints.

The key challenges for improving the quality of existing housing stock and expanding new housing at affordable levels are to lower the costs of inputs for housing across the entire sector, while at the same time expanding access to different types of credits needed, including commercial mortgages, and developer and secondary finance.