Investors have been told of the “supply-demand imbalances” that create opportunities in the African real estate market. However, correcting and profiting from such imbalances means focusing on property development and this entails tackling the risks of project delivery.
Current conventional wisdom says there is persistent unmet demand for housing, high-grade office, and modern retail and industrial real estate assets. This is backed up by statistics from Christian Benimana, the founder of the African designer-training initiative MASS Design, who stated that Africa needs to build 60 000 houses per day for the next 35 years to meet its needs.
New home dwellers will need space to work, shop, and receive healthcare and schooling. It is widely recognised that not all demand will be met through government initiatives.
The private sector
Therefore, the role of private sector investors and financiers will be significant. However, market participants have learnt that the reality is more nuanced than conventional wisdom and the raw numbers might indicate. Being specific about what assets will actually meet the real demand requires deeper understanding that anecdotal generalisations and market-level numbers do not provide.
For example, where demographic information might show that there is capacity for more formal retail space in a city, it may not explain what particular assets will succeed. There may already be an over-supply of large regional centres populated by branded line-stores. Real demand may only require smaller local neighbourhood centres with strong grocery retail anchors.
If supply-demand imbalances exist, then development of new assets is the great opportunity available to investors in African real estate. This, in turn implies development risks are key to addressing the investment challenges in the African real estate market. Financiers must acknowledge and tackle these risks if they are to fully participate in the growth of the African real estate market and to serve the key players in this market.
Development funding is riskier than funding for existing income-earning assets: a failed development project may be almost worthless even after substantial time and funds have been spent. In addition, it may be difficult to predict the success of a development. Even experienced developers encounter obstacles and sometimes fail to deliver.
Both options of opting-out and name-lending underserve the market, bank investors, and all stake-holders looking for more development to take place. We propose that banks and other financiers (such as Development Finance Institutions and niche funders) need to have project capabilities in place. They should also consciously take on the role of property development lenders, acknowledging that this requires a different approach from conventional investment lending.
At Barclays Africa, our approach is to retain a dedicated multi-disciplinary team dedicated to assessing and monitoring construction projects. The team works closely with design consultants, quantity surveyors and project managers based in our jurisdictions. Their involvement in projects that we are banking usually starts well before construction commences. They review contracting documentation and ensure that construction and financing needs are consistent.
Some clients have volunteered that they feel additional comfort from oversight provided by the bank’s team, giving an additional, objective, expert-view on design and delivery elements of their projects. In addition, by building experience of a variety of projects in multiple jurisdictions, Barclays Africa is able to assist the spread of ideas and technical knowledge between our target markets.
This approach may not be available to all potential financiers but it offers an idea of what we believe is necessary to deal effectively with the opportunity and challenges of property development funding in Africa: partnership and continuous expertise-building.
Selwyn Blieden is the Head of Commercial Property Finance (CPF) Coverage at Barclays Africa