Real Estate Investor Magazine South Africa Dec/January 2020 | Page 21

INVESTOR INTELLEGENCE
Long-term approach to African real estate
As the African real estate market has matured over the last
decade, capital sources have evolved. While we continue to see
participation of domestic sources in key markets, where the
attractiveness is in new asset classes, there is also a widening of
international interest coming from sources in the US and Asia,
where investor focus has shifted to the continent’s real estate
market.
In the past, a number of South African investors – both
private and institutional – were significant drivers of real estate
development in African markets. This picture has changed over
the years with the continent now receiving limited, temporary
flows from SA while domestic players, including institutional
and pension funds, are participating more actively in the
sector by increasing their funding allocations for real estate
and infrastructure projects.
With the development of African economies comes demand
for real estate across all sectors of the market but specifically in
new asset classes such as student housing, storage, logistics,
hospitality and data centres. This has attracted the interest of
institutional investors, who expect direct increased investment
flows to these specialist real estate areas as they continue to
evolve, and the next growth phase plays out.
“It therefore takes a patient
investor with a long-term view
that can provide more permanent
capital funding structures.”
While the evolution of the sector is offering up opportunities,
investors are adopting a cautious and careful approach. This is
according to Dharmesh Kalyan: Head of Real Estate Financing
at Standard Bank Group, who explains that it is critical to
accommodate for volatility in the property and economic
cycles of African markets. “It therefore takes a patient investor
with a long-term view that can provide more permanent
capital funding structures.”
Kalyan adds that there is interest from lenders operating
in these markets who want to support the asset class. The
investment criteria are however more conservative than those
of the past. He says that it is of utmost importance for financiers
to understand and cater to the realities of individual markets.
“Without an understanding of each country’s local nuances
and different macro-economic issues, it significantly limits the
chances of success. Nigeria, for example, is slowly starting to
show improvements in its economy while Kenya and Uganda
are recovering with certain growth pockets being evident.”
With real estate financing capabilities in 15 out of the 20
African countries in which it operates, Standard Bank gleans
local insights through the bank’s regional focus in areas such
as Lagos in Nigeria and Nairobi in Kenya which is guided by on-
the-ground expertise. The group’s deep understanding of the
markets in which it operates empowers it with the specialist
knowledge needed to assist entities looking to tap into new
areas.
“Those investors with a shorter-term view who entered
previously were often met with disappointment as assets
in these markets are slower to perform,” Kalyan says. “The
understanding of the catchment around the specific
development is critical to support an investment decision.
The property fundamentals need to stack up under varying
conditions that may impact that particular property node.”
Tough operating conditions underpin South African market
The listed property sector in South Africa, as represented
by the South African Property Index, has fallen 28% since its
April 2016 peak owing to challenging market conditions in the
country, where the economy is struggling to grow.
This is a far departure from the sector highs seen during
2009 to 2016, when it placed as the best performing asset
class and rewarded investors handsomely. Market players
were expecting to see a recovery in 2019 but these hopes have
mainly dissipated as property fundamentals in the local market
remain weak.
“To survive these headwinds, some players have undertaken
to deleverage their balance sheets in order to reduce their
Loan to Value . This deleveraging has led to the sale of non-
core and underperforming assets, as well as prized assets that
will attract more interest and lower yields to unlock substantial
equity tranches.”
Kalyan expects the tough operating conditions to continue
for the next 12 to 18 months. “The real estate market lags the
broader economy. The challenging economic environment has
heavily impacted sector activity, ushering in an oversupply of
stock and subdued rental growth.”
High vacancy rates in SA markets
There are currently high vacancies in both the office and
retail sectors of the South African property market. “And an
improvement in oversupply is unlikely in the short-term given
the slow progress of the South African economy as there is a
strong correlation between economic growth and vacancies,”
Kalyan says.
In South Africa, according to the South African Property
Owners Association (SAPOA), office vacancies remain high at
around 11% across the board. Rental growth in this portion
of the market has largely been flat over the last 12 months. It
is then little surprise that development activity in the office
sector is sitting at a 13-year low. Meanwhile, in the retail sector,
vacancies are currently at 4.3%, which is above the long-term
average of 2.9%. This oversupply is largely visible in key metros
and pressure is likely to continue owing to consumer spending
constraints.
“With some international retail brands exiting South Africa,
local ones right sizing their stores and some closing shop
SA Real Estate Investor Magazine DECEMBER/JANUARY 2020
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