Net Zero, Focus on Niche Specific Sectors and Technology Innovation are the key trends affecting African Real Estate

According to insights shared at the 13th Annual Africa Property Investment Summit, Net Zero, Niche Specific Sectors and Technology Innovation are the key trends affecting African Real Estate. The event, which took place in Johannesburg after a two year hiatus, brought together industry leaders and stakeholders with interests across the African real estate market.

Below we highlight some of our key takeaways from the numerous panels and presentations made.

The next growth frontier for Africa is about niche specific sectors

Despite recent headwinds that have faced Africa, the continent remains a strong value proposition with market resilience continuing to be a key story. However, there has been an evolution in the sectors to more niche specific  sectors apart from the traditional sectors. This is according to Niyi Adeleye, Head of Real Estate Finance, Standard Bank- Africa Region. Niyi noted that across Africa, capital is being deployed into niche specific sectors such as cold storage, student housing and digital infrastructure. 

These sentiments were echoed in the Estate Intel’s deal flow tracker presented by Tilda Mwai, Research Associate, Estate Intel, where the data points to a debut of data centres and industrial sector into the top sectors attracting deals across Africa over the past five years. These sectors formed part of  the over $4Bn worth of transactions recorded across the real estate market during the same period. Tilda noted that looking ahead, investment drive in the Development Finance Institution landscape will continue to impact the level of interest we see in different sectors. This can, for example, be evidenced by the US Development Finance Corporation (DFC) interest and investment across the African data centres market.

On his part, Ken Osei, Principal Officer, IFC – South Africa, noted that DFIs such as the IFC have been particularly keen on the emerging sectors in Africa. This is mainly because DFIs take a long term view of property and its role in the larger economy. As such, sectors like retail are viewed as  aggregators of the FMCG sector and inadvertently trade enablers, while Industrial is mainly a driver of the larger manufacturing sector of an economy.

African Capital and Finance Landscape is evolving

Currency fluctuations and rising interest rates have continued to impact the financing landscape. For example, the Ghanaian Cedi has rapidly depreciated by over 47% against the dollar since the onset of the year making it the second worst performing currency after the Sri Lankan rupee in August. Inflation levels also remained within double digits recorded at 31.7% in July 2022.

Similarly, the Kenyan Shilling, Nigerian Naira, and South African Rand have continued to depreciate against the backdrop of rising inflation levels and external pressures.

Fabio Nava, Director-Capital Markets, CBRE Excellerate noted that with most domestic currencies under pressure and rising interest rates, there has been an increased cost of borrowing resulting in a consolidation rather than spending on new projects.

Still, Niyi noted that there had been a shift in avenues of capital deployment with more involvement in domestic capital sources. This has presented an opportunity to develop an international level debt market, with debt lower on the risk scale than equity. However, Thomas Reilly, Managing Director, Lango noted that the reality is the local debt markets are not developed to allow for longer cycles of financing, however, there is an opportunity for more nuanced products such as green bonds.

Interestingly,sustainable financing is presenting a new reality. In a forum on the state of the market, Wayne Godwin, Managing Director, JLL-East Africa posed to the panelists on how industry players can elevate Africa into the global sustainable funding world. 

In response, Funke Okubadejo, Director-Real Estate, Actis – Nigeria, noted that Actis had already been first movers in the space by raising the first green financing facility across Africa, and are already seeing savings in terms of margins. Furthermore, Funke noted that in addition to financing, green buildings are now actively affecting tenant choices, hence resulting in a competitive advantage for Actis in the market.

While commenting on their green bond oversubscription, Cheick Sanankoua, Managing Partner, HC Capital Properties noted that increasingly, local players are becoming equally sophisticated, but just need the product to be structured and presented to them. In the long term, certified green will no longer be a nice to have but a requirement for investors.

Reset is about Net Zero

As a sector, real estate is heavily dependent on hard to decarbonize materials. As such, financial incentives and increased regulation have increased Net Zero commitments by real estate players. Overall, Aimée Girdwood, Co-founder, Stories Evolved, noted that at the core, Environmental Social and Governance (ESG) aspects are about a business managing its externalities and taking account of them. However, there has been a clear disconnect between speed of commitments and actual implementation. This is because a lot of people do not understand how Net Zero relates to a lot of the systemic risks that underpin the real estate sector being resilient in the long term.

 

In addition there was a general consensus that the cost implications of net zero have always appeared prohibitive. Speaking on this, Deelan Govender, Associate Director – Whole Life Cycle Costing Lead, Turner & Townsend, noted that as a solution Turner and Townsend have adopted whole life cycle costing instead of just capex consideration while evaluating net returns of a development. This involves, taking into consideration, not just construction but also operations of the building as well as disposal. 

Echoing these sentiments, Chilufya Lombe, Founder & Partner, Solid Green Consulting noted that Net Zero is a lot more stringent and at its core it is about energy efficiency and quantifiably so, resulting in lower costs for buildings in the long term.  As such, Net Zero Carbon is emerging as a big driver to occupiers and tenants demands.

On the Net Zero downsides, panelists noted that  greenwashing remains the biggest risk to Net Zero adoption  with most companies using it as a means to appear more attractive to investors without actual underlying numbers.

REITS are a reflection of market maturity

Across Africa, REITs have struggled to pick up. With an estimated market capitalization of approximately  US$19Bn, South Africa remains the lead REIT market in Africa. Notably, Kenya and Nigeria have been the other active REITS markets. However, their combined market capitalization is only US$ 300 million, pointing to the opportunity for growth in the market according to Niyi Adeleye. 

Overall, the focus by investors has remained on quality assets and delivering yields consistently. As such, countries such as Nigeria have struggled with growing their REITs market because the majority of the assets do not underpin value. This was according to Tolu Sokenu, Director-Real Estate, Actis – Nigeria. Interestingly, Nigeria’s largest REIT, UPDC, recorded yields at 8% on average in 2021 lower than the 12.6% yield recorded for the 10 year Government Bond but higher than the 5% yield recorded for the 1 year bond as at December 2021.

Furthermore, Tolu noted that this trend had impeded the growth of different types of REITs Nigeria such as Development REIT because investors remain yield hungry.

Echoing these sentiments Raghav Gandhi, Managing Director, Acorn Investment Management Limited noted that REITS can only scale up with access to good quality assets. As a country, Kenya remains fragmented in terms of players in the development side resulting in a credibility gap. Ideal investors in REITs such as pension funds are players themselves therefore exercabeting the challenge. As such, Acorn is taking on this challenge  and has provided a solution through their Development REIT. The REIT acts as a feeder of good quality assets for their Income REIT ensuring value to investors.

Interestingly, markets such as Morocco are on a growth trajectory when it comes to REITs. In just under 3 years, Nasser Benjelloun, Head of Investment, REIM Partners , noted that at the moment REITs in Morocco have US$4 Bn under management, representing only less than 10% of the commercial real estate market. This is expected to grow to US$20 Bn in the near future as investors get familiar with the REITs framework. 

Africa can be the Proptech hub of the World

Globally Real Estate has been slow to adopt tech despite being the largest asset class. However, across Africa, the sector is gaining momentum.

Dolapo Omidire, CEO, Estate Intel noted Proptech is still small and only accounted for $5.2M out of $3.7Bn startup funding raised in 2021. However, 2022 is emerging as a standout year with funding growing five fold compared to the past 3 years.

While tech may sound complicated it is really about the benefits it brings in terms of their  improved user experience, saving on costs,easier transactions, better security. Amelia Bettie, CEO, Liberty 2 Degrees noted that data and technology on its own does not really do much. However, it can underpin an institution’s strategic value drivers. In their instance, they use technology across multiple facets such as through tenant experience, enhancing customer experience, ensuring world class security through their safe spaces and management of Net Zero Strategies.

Overall the Proptech Forum’s general consensus was that Proptech is gaining momentum across African real estate and it is imperative that industry players and not tech developers drive this innovation and momentum

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