The brilliant thing about working in Africa is the continent’s ability to change – and adapt – almost instantly. While at first glance this is often interpreted as a challenge or a risk, the importance of adopting a, “glass-half-full approach has never been more essential than in Africa’s current real estate environment”, says Gerhard Zeelie, Head of Real Estate Finance, Africa Regions, at Standard Bank.
In Africa, things can change very quickly.
In May last year, for example, Nigeria was in the throes of a US dollar liquidity crisis. Barely 12 months later this is largely resolved. Just as tweaking foreign exchange regulations along with positive market changes improved liquidity in Nigeria, an uptick in the oil and copper prices coupled with market-friendly, transparent forex regimes could, equally as easily, change Luanda or Lusaka’s commercial real estate prospects – overnight.
Similarly, large global energy investments touted for Mozambique are currently dispelling default-driven negative sentiment as investors again turn positive about the region.
“The variables that threaten risk in Africa are equally what contributes to making the continent such a rich landscape of opportunity – especially in the continent’s real estate sector,” says Zeelie.
Africa’s commercial real estate sector is currently, without doubt, a tenants’ market. Despite a more settled Naira and easing US dollar liquidity in Nigeria, challenges importing goods – until recently prohibited for foreign currency allocation – is keeping smaller businesses and retailers under pressure, forcing landlords to continue offering tenants discounts, or capped US dollar-based deals. New malls remain at 50-60 percent occupancy levels as, “tenants shy away from the more expensive US dollar-based rentals, or remain unsure of whether they will be able to get prohibited, non-essential, stock through ports”, says Zeelie.
Similar concerns follow Africa’s office rental environment, as businesses adopt a wait-and-see attitude, deferring office moves, upgrades and corporate office expansions.
These kinds of challenges mean that commercial real estate developers are struggling to convert Africa’s resilient consumer demand into competitive rentals. “This is not only constraining income in the sector but also leading to a depreciation in the value of the continent’s real estate stock as, increasingly, space in new developments stands empty or achieves lower rentals than before,” observes Zeelie.
The intensity of the storm in the continent’s commercial real estate sector varies.
In Nairobi, for example, “a better regulatory setting, an easier business environment more generally, and a more diverse economy – with multiple earners of foreign exchange – collectively contribute to a more resilient tenant profile and higher occupancy, even though vacancies exist in certain nodes and sectors”, says Zeelie.
Kenya, or, more correctly, Nairobi’s commercial real estate market, is, however, the exception rather than the rule in Africa. When projects do not perform as anticipated, African commercial real estate developments require more patient funding structures which can be achieved through the correct ratio between debt and equity.
“Projects conceived in earlier, more positive, business environments on very different numbers, for example, should be restructured,” says Zeelie. While a restructure will often involve a higher level of equity finance, “the bank should also display some flexibility in its approach”, he adds.
For example, if financiers have a view on how long negative conditions may last in certain markets they may be able to extend the tenors or repayment terms of financing facilities – provided there is not a significant deterioration in the risk. Or, if clients have access to shareholder funds, it might be cheaper to put more hard currency into the structure. There may also be options to convert debt into local currency, provided there is enough liquidity in the market.
“Another solution could be to negotiate upfront payment of the present value of all lease payment with key tenants,” says Zeelie. Over the long term this provides these tenants with predictability – and probably a discount – while injecting much-needed capital, now, into commercial real estate financing structures, enabling landlords to manage rentals with smaller clients in the short term.