Chinese investment in African infrastructure is opening up opportunities for real estate developers on the continent, said panelists at the ULI Europe Annual Conference in Paris.
Dale Ramsden, managing partner of RMB Westport—which has been investing in sub-Saharan Africa since 2008—said China’s investment in new roads was opening up prospects for the firm. “Shopping centers have always had to be positioned next to major roads, but the government has been slow at getting them in place. Two opportunities have been created for us due to China’s involvement,” he said.
China has been a major financier of new infrastructure in Africa in recent years, contributing billions annually toward railways, roads, electricity, ports, and improved telecommunications. The Export-Import Bank of China said in November that its interest was set to continue, announcing it would provide $1 trillion to build African transnational highways, railways, and airports over the next decade.
Fellow panelist Neil Cunningham, senior vice president, real estate investments at PSP Investments, which has 1 percent of its $11 billion real estate portfolio in sub-Saharan Africa, said: “Our emerging market strategy is really a China strategy. We went into Brazil because of China’s involvement and we’re now in Africa for the same reason,” adding that it was “their investment that’s driving the economy.”
As foreign direct investment and domestic demand surges, gross domestic product (GDP) growth in sub-Saharan Africa is on the rise: the World Bank estimates it will reach 5.3 percent this year and 5.5 percent in 2015. “It is getting easier to do business on a relative basis, but the scale of modern office and shopping center stock outside of South Africa is extremely limited,” said panel chair Jon Zehner, global head of client capital group at LaSalle Investment Management—and a former head of sub-Saharan Africa at JP Morgan Chase & Co.
“The opportunities emerging in sub-Saharan Africa are significant,” said Samuel Ogbu, chief executive of Liberty Holdings Nigeria, which is pursuing a “dominant presence” in Africa as urbanization and an emerging middle-class population drive economic growth.
But, he added that much still needed to be done to create a fully developed transportation system. “We are seeing better roads, wider roads, and new bridges in various stages of completion. Transport is definitely an issue; the distances people have to travel in Lagos, for instance, aren’t huge, but it takes a long time for people to get to places,” said Ogbu. “Four-by-four cars are the only way you can get through the potholes. We are a long way from having a mass transit system.”
Panelists said retail was a key area of focus as international retail occupier interest in the market grows. South African brands such as Woolworths Holdings, Pick ’n Pay stores, and Shoprite Holdings have all been expanding in the market.
Ramsden said RMB’s 243,800-square-foot (22,650 sq m) Ikeja City Mall in Lagos, Nigeria, was the largest shopping center in the city. “We had 800,000 of footfall in December. Lagos has 21 million people, and Ikeja is only its third shopping mall. That is the kind of supply–and-demand mismatch that our fund is focusing on.
Johannesburg-based RMB Westport raised $200 million for its Real Estate Development Fund in October 2012 to develop retail and commercial assets in West Africa. Nigeria, Ghana, and Angola are key areas of its focus.
Asked if RMB had made money on its projects so far, Ramsden said: “Nigerian shopping centers attract a net development yield of around 12 percent. Our target IRR [internal rate of return] is between 25 and 30 percent, which is why we’ve created a development fund; you make money on yield compression.”
However, he added that bank debt was “a big problem.” “The margins are so big. We pay between 11 and 15 percent on our debt. We’re hoping international players will come to the market.”
Panelists said the growth of the institutional market had helped combat corruption issues. “In the last seven years, there have been changes in legislation which have made it possible to invest in real estate. Institutions have been sucking up money, and they have to go through a rigorous process when dealing with that. As a consequence, officials have less opportunity to exert their influence,” said Ogbu.
Ogbu added that the key for new investors to the market was to “be clear about one’s principles.” “There are enough opportunities to pursue legitimate routes and remain true to your values; corruption is an issue, but it is a choice to deal with it.”
Cunningham told delegates that partnering with firms that had “zero tolerance” corruption policies had helped PSP’s board “get comfortable with committing investment to sub-Saharan Africa.”
Asked about exit strategies, Ogbu added: “There is so much development needed today. If you wanted to sell, there are institutions and wealthy individuals who will buy; an exit is reasonably reliable.”