Eris Property Group launches African Real Estate Fund venture

High stakes for high return, if you can stick it out for the long term – investors are buying into a boom in sub-Saharan African real estate.

Forecasts for 20-per-cent net annual returns from investing in shopping malls, office blocks or industrial complexes in countries from Zambia to Kenya are drawing in new investors, despite more immediate concerns in some countries about Ebola, terrorism or political stability.

In that vein, Eris Property Group is currently involved in launching a R2.6 billion (US $250-million) African Real Estate Fund in collaboration with Momentum Global Investment Managers, a fellow subsidiary in the MMI Group.

The investment vehicle, will focus initially on shopping malls and office buildings in key African locations including Zambia, Namibia, Botswana, Mozambique, Ghana and Rwanda.

Commenting on the venture, Warren Schultze, CEO of Eris Property Group (Pty) Ltd, said “Many African economies are growing at a rapid rate with GDP growth of approximately 7% per annum in certain African economies. Any dramatic change to the landscape creates investment opportunities.”

Schultze adds that there is currently a shortage of office and retail space in many African countries, and these countries may offer investors potential returns in excess of what is currently achievable locally in South Africa.

“The South African IPD Index reflects average total returns from property of roughly 17.5%, but this may be difficult to sustain and thus investing in Africa may be a more viable option,” he said.

As Africa’s fast-growing population gains spending power and moves into cities, demand for real estate will grow, fund managers say. Urbanization and population growth will boost the number of people in cities globally by 2.5 billion over the next three decades, with much of that growth in Africa and Asia, a recent United Nations study said.

“The No. 1 reason [to invest] is return – 18 to 20 per cent on an annual basis, if you are in for the full eight years,” said David Lashbrook, head of Africa investment strategies at Momentum. “The investors we are looking at targeting are institutions who can be locked up for the whole eight years.”

According to David Morley, head of real estate at private equity firm Actis, “The desire of the increasingly middle class to meet, socialize, shop and spend their leisure time in facilities or retail developments that are on a par with what you find around the world is not going to abate, it is going to continue.

Why real estate?

Building costs in many African countries are high, real estate specialists say, partly because many materials have to be imported. But potential rents are also high – at a monthly $25 to $30 a square metre for high-end office blocks in cities like Rwanda’s capital Kigali, or Ghana’s capital Accra, compared with less than $20 in Johannesburg.

There are currently eight Africa-focused, unlisted real estate funds targeting $1.25-billion in capital, according to data provider Preqin.

Around 69 per cent of capital raised for African real estate funds between 2009 and 2013 was focused on sub-Saharan Africa, excluding South Africa, up from 40 per cent from 2006 to 2009.

Private equity funds look to attract institutional investors and traditionally do offer higher returns, due to the risks of investing in unlisted companies which may be less transparent.

But Ghana and Nigeria already have real estate investment trusts – similar to mutual funds – which can be listed on stock markets and make it easier for retail investors to access the sector. Kenyan legislation to allow REITs is expected to go through this year.

The REIT market worldwide totals more than $1-trillion, according to consultancy EY, in more than 30 countries. The market is less well established in emerging markets, but countries such as Mexico and Brazil have REITs.

Stanlib is among fund managers looking to set up a Kenyan REIT. It already has a fund listed in Johannesburg, which focuses on listed African real estate in countries such as Botswana, Zimbabwe and Mauritius, as well as South Africa.

Keillen Ndlovu, head of listed property funds at Stanlib, said the 200-million-rand ($18.82-million) fund had trebled in size this year and was accessible to retail investors.

Investors are focusing on commercial properties rather than residential due to a limited supply of private housing and the lack of mortgage markets in Africa.

“We are not at that stage, we have been shown quite a few residential projects, there might be a chance – we have seen a few mixed developments,” said Mr. Lashbrook at Momentum.

“If you are building residential, in a lot of these countries there is no mortgage market.”

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Returns of 20 per cent or more don’t come without significant risks. Africa has been hitting the headlines for the Ebola outbreak in West Africa and attacks in investment favourites Nigeria and Kenya, including last year’s attack by the al-Shabaab Islamist group on Nairobi’s Westgate shopping mall.

But real estate specialists say that while Ebola may devastate countries like Sierra Leone and Liberia, it is a short-term issue, whereas they seek long-term gains from property.

Sierra Leone, Liberia and Guinea also do not rank among the main sub-Saharan markets targeted for real-estate investment.

Terrorism may add to the building costs of shopping malls, due to security and insurance costs.

“There is a concern, that’s one of the first questions that come in – you do get more political risk,” Mr. Ndlovu said.

But the risk of terrorism is not unique to Africa, investors point out. A bigger issue is land security, with documentation varying widely from country to country, and within countries.

That adds to the risk of investing in residential property, although Stephen Bailey-Smith, head of Africa research at Standard Bank in London, who recently built a beach house in Ghana, says the residential sector will eventually open up to investors.

“If you go into any city in Africa, you can see the need for decent housing is infinite,” he said.