From African Law Business. Story by Paul Dineen, a partner in the London office of law firm DLA Piper. He works in office, retail, logistics, residential and hotel sectors.
Although Africa is home to countries with some of the fastest-growing gross domestic products in the world, investors can be difficult to find and the risk is often high.
Investors recognize these risks and expect to be rewarded for taking them.
African real estate has become an increasing part of real estate investment portfolios over the past 20 years. What are their prospects for the next five-to-10 years? Is it a good time to invest?
While acknowledging market volatility, there is consensus that there are attractive opportunities in African real estate, according to survey results in a report by DLA Piper and CBRE.
Urbanization and favorable economic and demographic characteristics in some countries underpin good long-term fundamentals.
Much of the current investment is undertaken by private equity funds. Several other investor types are deterred and largely absent due to legislative restrictions, risks around money laundering and the inward-looking nature of African markets. Overseas pension funds, for instance, initially held back because of legislative restrictions and only sought exposure to certain African markets once these were lifted.
Chinese investment in infrastructure projects appears to be diminishing across Africa. Some infrastructure plans, however funded, frequently fail to materialize. For example, building corridors cross continent would open up multiple countries for investment, but the level of cross-national coordination involved is a frequent stumbling block.
Which African countries are attractive to investors?
Ethiopia, Zimbabwe, Côte d’Ivoire, Senegal, Mauritius, Uganda, Zambia and Tanzania are among the African markets highlighted as attractive for prospective investors. Reasons include large and growing populations, strongly positive GDP growth, shrinking dependence on commodities, improving political and social context (in some cases), and greater stability in currency exchange and inflation rates.
Côte d’Ivoire is expected to see strong economic growth. Combined with restricted supply of office, retail and hotel space, this could tempt investors.
Steps necessary to raise the attractiveness of markets for investment include improved information availability and due diligence including legal frameworks and legal registration of property transparency in valuation, easier capital repatriation, the development of local mortgage markets, moves towards democratization and improving tourism and access to visas.
Liquidity is a key issue for prospective investors, covering everything from methods of getting capital into and out of markets, to related issues of currency volatility and cross-currency debt-raising.
Nigeria, Mozambique and Zambia are examples of countries with regimes in place which guarantee that all capital, interest and dividends can be repatriated as long as there is a local presence in the relevant country. It can be just as difficult to get money out of other global markets outside Africa.
Given the volatility of some local currencies – and the effect on profits of repatriating revenues at increasingly unfavorable exchange rates – currency devaluation is a significant concern.
Nigeria’s central bank has introduced restrictions on foreign exchange in an attempt to increase the use of local currency. The law states that a landlord cannot reject payment in the local currency and so rent can be stated in USD but payable in any currency, including USD. Failure to understand this position can produce major short-term distortions in the rents payable.
There are regulatory and foreign exchange restrictions in place in some countries such as Ghana, where the central bank makes it difficult to transact in USD by imposing transaction fees. It is also possible to take advantage of currency fluctuations. For example, in Zambia, the hotel sector offers a good hedging opportunity because charges are in USD but costs are in the local currency.
There are many reasons to view the real estate market in Africa positively. Economies are growing; demographics are improving and there is increasing political stability. Stock is improving and many markets are becoming attractive investment destinations. Investors can realize good returns.
Read more at African Law Business.
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