Real estate investing in Africa and the transition from the mighty dollar

With May being Africa Month, Moneyweb’s guest on this latest edition of The Property Pod is Kevin Teeroovengadum, who is Mauritian-based but has extensive experience in the property sector, not just on the island, but across several countries in Africa.

Teeroovengadum currently heads up his own consultancy, KT Africa, but he’s also the co-founder of PropTech Africa, a non-profit association that connects the PropTech ecosystem across the continent. Besides being on several boards of real estate and hospitality companies, he is the former head of AttAfrica (Atterbury Africa) and has also been involved in the financial services and telecoms sector.

Last year Teeroovengadum wrote a very interesting feature for SA-based Asset Magazine on the dollarisation of African real estate assets.

In this episode of The Property Pod, we chat to him on this topic, as well as on other issues and opportunities around investing in the African property sector.

Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts. 

Kevin Teeroovengadum. Image: Supplied

Highlights

“I think it’s a very important theme [the dollarisation of African real estate assets] … To understand it one needs to go way back, probably 20 years. When I started my career in the late nineties/early 2000s, when deals were being done on the African continent excluding South Africa, it was really difficult to raise money.”

“I’m talking about pre-2010, basically. You had very little money from overseas coming into real estate in multiple markets in Africa, so money was extremely expensive and, whenever you had recourse money you had to borrow in dollars or you had to raise equity in dollars, US dollars.”

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“That’s been the primary currency that investors have been using in pouring money into these real estate assets on the continent. But way back then money was so expensive that when you were doing a project, for example – whether it was an office building or a hotel – the payback usually was around five years or even seven years.”

“When you compare that with sophisticated markets like South Africa or Europe, where the paybacks are 15 or 20 years or even longer, that’s the reason why investors started using the dollar, because that was the only thing that was available then, even though it was expensive.”

“Over the last 15 years or 20 years, investors have been continuing using the dollar as the reference.”

“Having said that, I brought this up six years ago in 2016, saying it’s not sustainable for the continent. We’ve also seen the same trends in South East Asia pre-1990s, where assets were pretty much dollarised. And then, with the financial crisis or the Asian crisis in 1997, we’ve seen the transition from dollarisation of assets in Asia to using local currency. We haven’t reached that in Africa [yet].”

“But I do believe going forward we need to put our heads together to ensure that we can use our local currencies to basically invest in real estate – as opposed to relying 100% on dollars.”

But we still see the dollar being punted in many African countries instead of local currencies?

“It depends on different countries. Take the example of Zimbabwe, [however] more unsophisticated it is as a market, what happens is people have recourse to [the] dollar because you cannot rely on the local currency, especially where you’ve got super-inflation in those markets.

“But then, if you look at other markets – I’m going to give you my hometown, for example – in Mauritius it’s more sophisticated. You can raise local money. There are quite vibrant and domestic capital markets there, so most of the transactions are done in local currency, which is the local rupee. That’s Mauritius.”

“Now, if I move back to mainland Africa, if we take an example like Kenya, Kenya is sort of interesting because it’s not as sophisticated as South Africa, it’s not as sophisticated as Mauritius, but it’s getting there.”

“So what we [have been] seeing over the last 10 years in Kenya, we [have been] seeing deals moving away from the dollar to Kenyan shillings. It’s not 100% – as we speak today – in Kenyan shillings, but we are seeing more deals going forward being done in the local currency.”

“Local investors obviously understand that. Because they earn local shillings, they don’t have a problem in dealing with local currency … But we are also seeing a new trend now, where global investors are also taking a view on the local Kenyan shilling; so that’s very Kenya-specific.”

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“Then, if you go to West Africa, Francophone Africa, for example, we all know the local currency, which is the franc CFA [and] is fixed to the euro. That’s been there for the last 20 years. So when you do deals in Côte d’Ivoire or Senegal or Cameroon, basically investors – be they global investors or local investors – are using the local currency.”

“The only places where we see investors using the dollar are markets like Ghana, Nigeria or Zambia, the likes of Zimbabwe totally, and then the likes of Mozambique and Angola.”

“Going forward we are going to see a transition to local currency and I believe it’s going to happen.”

“I think also in Ghana it has started. We’re not there yet, but we see the trend. I believe in the next 10 years we’re going to see more countries basically pushing for local currency usage here.”

Africa has been talked up for several years as having tremendous potential for property development and investment, but many investors have been burned. Give us some insight on the real estate investment landscape in Africa over the last five to 10 years? 

“If you go back… from 2000 to 2005 it was really hard to raise money, to do real estate development. It was pretty much impossible. It would take you probably two years to raise $10 million for a real estate asset.”

“Then, after the financial crisis that happened in 2007 and 2008, remember the US crash – in the US in the UK, in Europe, in the developed world. So money had to come back to Africa, chasing for yields. That’s when we started seeing global investors – be it the likes of CDCs, the likes of Actis, the likes of DFIs [direct foreign investors] coming to Africa – looking for yields.

“The theme was [that] Africa was the last frontier. The theme was also about the rising middle class. And on the back of these themes we started seeing money come onto the continent.”

“That’s where we’ve seen the developments of great shopping malls, the first malls in Lagos, first malls in Accra, in Nairobi, in Lusaka. And that’s also when we started seeing money getting into the development of a A-grade office developments, commercial assets. For example, the likes that you would find in Sandton in South Africa are the ones that we started seeing as well 10 years ago in multiple cities in Africa.”

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“But what happened – and [it] happens not only in Africa, it happens around the world – so when somebody starts to invest and starts to make good returns, you start seeing other investors coming in. I think post the World Cup in South Africa, from 2012 onwards, we’ve seen a lot of money from South Africa and from overseas coming into Africa.”

“But I guess what happens is when you’ve got too much money coming in at the same time – it’s the basic principle of inflation, too much money chasing too few goods – we’ve seen a rise in land prices. Land prices in Lagos or Accra have gone [up] five-fold, 10-fold over the space of a couple of years.”

“Then the rises of construction prices. And when we got to around 2015/16 when these projects became live, unfortunately we didn’t see the actual rise of rental levels to what were expected.”

“That’s where we started having a fall from 2015/16 onwards, because rentals were basically 50% less than what developers were expecting. We saw a crash of the market in Ghana, we’ve seen this in Lagos, we’ve seen this as well in Nairobi and even in Lusaka. That’s where we saw a number of players who came in in 2012 start leaving the continent around 2016/17/18.

“I think in the last couple of years [we’ve been] seeing a restructuring of the real estate market in Africa, and now we’re seeing new breeds of investors coming in.”

Are there still opportunities in Africa, and where do you see these?

“Absolutely. There are always opportunities, even in moments of crisis there are always opportunities. But I think the amount of investment that we see today, in 2022, is a fraction of what’s needed.”

“My view is, until such time as Africa and African countries develop their own capital markets, we are not going to see the full flow of investment that we need in real estate assets because, at the end of the day, global investors, when they come in, have a choice of investment jurisdictions…”

“Unfortunately, because we still have a lot of barriers in Africa, we cannot deliver the kind of returns that global investors expect, or rather the kind of premium they expect… I’ve spoken about this as well at different conferences.”

“Africa needs to develop its own capital markets…

“We need our own pension money to basically go and invest in our own real estate, because at the end of the day with a rising middle class, you’re going to have increasing amounts of pension fund money, eventually, and we need that money to go into those real estate asset classes.

“That’s where you will see [it] in some of the countries like Mauritius; we’ve seen in Kenya, we are seeing now in Nigeria, for example with the enactment of Reits [real estate investment trusts], as you’ve had it in South Africa for many, many years now. South Africa’s vibrant.”

“We are now seeing the enactment of Reits and I’m hoping in the next five or 10 years we’re going to see more local money going after local assets. I think that’s really what’s needed going forward to create a vibrant real estate sector on the continent.”

Do you see more headwinds? How will spiking global inflation, for example, higher interest rates and perhaps even the Russia/Ukraine situation impact property investment in Africa, if at all?

“I was in London a month ago and, and I was saying this to friends: Africa is a very special continent because it’s a continent where we struggle from the day we are born. In everything we do we’ve got hurdles, whether it’s a hurdle of getting the permits, a hurdle of getting electricity on [for] 24 hours – including South Africa with your load shedding – a hurdle in terms of raising money.”

“Inflation is not new. We’ve dealt with double-digit inflation in multiple African countries, even before pre-Covid.”

“So the impact psychologically – and that’s very important because a lot has to do with psychology – is less of an impact [than] what you would see, for example, in Europe. When you’ve got a rise of 50 basis points on the rates, or you’ve got a rise in inflation from 2% to 5%, it’s kind of chaotic psychologically in Europe or elsewhere as opposed to Africa.”

Geopolitical risks

“Having said that, my biggest worry going forward for the continent – besides the barriers that we do have, which we need to get over – is geopolitics. [With] what’s happening in the West versus the East, Europe and the US on one side, Russia, China, India on the other side, my sort of worry is whether this will play down into Africa and whether this will become geopolitical risk on our continent, because our continent is the continent that supplies the most commodities and resources to the world.”

“When the fight is currently happening about resources in the West versus the East, my sort of worry is whether this will lead to further geopolitical risk on the continent, and whether this will lead to terrorism in the future. So that’s the biggest risk that I see in the next couple of years for the continent.”

Suren Naidoo

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