In some ways, Africa is a real-estate investor's dream. Today Africa's level of urbanization almost matches China's (28% of Africans lived in cities in 1980; 40% today; projected to rise to 50% by 2030) - important because Africa's largest cities generate a disproportionate amount of its internet traffic. Statics show that Around 58 million people will move to cities in sub-Saharan Africa in the current decade according to a report by the United Nations and the discretionary income will be 128 million by 2020.
Nigeria is at the heart of this urbanization. The country's economy, powered by a booming oil-and-gas industry, is expected to expand by over 6.6% in 2014—significantly above the average for the region. Lagos is predicted to reach a population of 20 million by 2020, up from just fewer than 8 million at the last census in 2006, which would make it one of the world's biggest cities. Why then has Africa suddenly gain popularity when it comes to destination for investments?
Aside from been Africa's second-largest economy with an emerging middle class eager to shop in modern stores, it is attracting many of the world's largest companies, which need offices. The country has a shortage of all types of modern space, raising the likelihood that the market will favor landlords for years to come.
According to the McKinsey Global Institute, Africa’s consumer spending next year will be in the region of $1 trillion and by 2030; Africa's top 18 cities could have a combined spending power of $1.3 trillion. With Africa’s exploding middle class (over 300 million people) always looking to be serviced with new products, Africa’s fast moving consumer goods sector is promising. There is a huge and ever-growing opportunity for manufacturers and retailers of FMCGs like food, beverages, home care and personal care products. But speed is critical. Investors who can quickly step in and get a grip on the market will be the dominant players in the years to come.
Foreign players like Actis LLP have made use of this opportunity. The London-based private-equity firm has $1.7 billion invested in Africa. The Ikeja City Mall, one of its projects in Nigeria is a 307,000-square-foot mall in Lagos which cost $100 million and opened in 2011 and currently is occupied with tenants such as Africa's largest food retailer Shoprite Holdings Ltd which put it high up in the pyramid of real estate investors in Nigeria. Actis also has plans of spending about $100 million to develop the 194,000 square-foot Heritage Place office building in Lagos, which is set to open in 2015.
Procter & Gamble Co last year announced plans to build a $250 million plant in Ogun, just north of Lagos. If that asset—and others like it—came up for sale, it could attract more large-scale foreign investors into the market. While this is just an overview, what really is the future of rent yields?
Looking at Nigeria’s prime rents yield according to Knight Frank Limited Industrial property, at US$12 per sq m per month a 13% yield is expected. Industrial properties at US$9.50 per sq m per month will yield 10%, 11% and 13% respectively over the coming years showing a steady increase in industrial property values and to aid and increase the possibility of foreign investments which will improve the rent rate of industrial properties, the Federal Government is driving far reaching reforms aimed at transforming the economy. Reforms cut across transport (rail, airports, road and ports) power, agriculture, pensions, the electoral system, civil service and the judiciary.
The Central Bank of Nigeria’s (CBN) tight monetary stance has had a positive outcome in that inflation declined from 12 per cent in December 2012 to 8 per cent in September 2013. Inflation has fallen to single digit rates through 2013 at an average of 8.7 per cent since the start of the year compared to an average inflation rate of 12.24 per cent for 2012. The current rate of 8 per cent for September is the lowest rate of inflation since early 2008.
It is hoped that by mid-2014 dividends of these initiatives will become obvious. For now, credit flow for real estate developments remain limited and new construction and infrastructure projects are almost non-existent. The impact of the financial reform is expected to be widespread. The real estate sector will benefit from the availability of competitively priced medium long term funding and investors/developers are poised to take advantage of this.