If you like brain-grenades about commercial real estate, try this one…
Africa has a GDP of $2.6T. Applying the global CRE:GDP ratio of 34%², current economic activity can support an extra $648B of commercial real estate. In other words, on current GDP values, African CRE is under-supplied. To meet its needs, African needs an additional $648B worth of CRE to be developed by property investors.
With an assumed total built CRE value of c.$250B³, this comfortably means a tripling in built African CRE.
The total market cap of all property funds operating in South Africa, listed on the Johannesburg Stock Exchange totals c.$15B¹ (source: Moneyweb).
This value of $648B is 43 times greater than the current JSE value.
Imagine for one moment the cranes, the labourers and skills transfer, the steel and concrete, the supporting infrastructure and services a boom of this nature will support… And the economic activity that this built environment will sustain, and further activate.
At the same time, such development of CRE will do tremendous good. It’s a rare and virtuous combination.
High quality commercial real estate (CRE) – made up of office, retail, industrial, high density residential and other – is a key driver of commercial activity and the prosperity of a country.
Logistics enables goods to get to market cheaper, with higher product security. (Per African Logistics Properties, the cost of moving goods in Africa is estimated to be up to two or three times higher than in developed countries. Further transport costs can count for as much as 50-75% of the retail price of goods.)
Decent office space increases both the quality and productivity of white collar work.
Improved retail offerings delivers time and cost savings for consumers.
Every day Africans know this. They feel the pain of over-priced goods, inefficient consumption experiences, poor working environments.
An investment surge for commercial property in Africa would not only activate economic growth and improve the lives of consumers. It would also spawn the creation or growth of a range of enormous, Africa-focused commercial property funds.
²The maths is simple. Country GDPs are known. The in-country value of commercial real estate, courtesy of sources like Savills, Statista and MSCI is also known.
The global GDP in 2021 was $96.1T (source: the World Bank). According to research (Savills, Oxford Economics), in 2020, the total value of built CRE was $32.6T (projected to grow to $34.3T by end of 2021).
This establishes an easy-to-calculate global built CRE to GDP ratio of 34%.
The variances by country are interesting – please see the table below.
The ratio of commercial property in Africa to GDP is approximately 9%. This lags far behind that of the world’s most mature CRE market, the USA, at 68%.
The mature economy of South Africa, with the services sector contributing 62.7% of GDP (ahead of the average Sub-Saharan Africa ratio of 47.2%), boasts one of the largest country-level CRE values in Africa.
Investment is all about timing.
Africa’s populations is destined to grow 80% by 2050. Currently sized at 1.4B (roughly the same as India, and a fraction behind China’s of 1.45B) Africa will boast 2.5B citizens by 2050. By 2050, one in every four people in the world will be African. These consumers, to work and to live, will all need even more commercial real estate.
Savvy tech investors, normally agile and adept at seeing where the puck is going, are moving into Africa. Per Africa: The Big Deal, with a predicted $7B in VC funding in 2022, Africa is on track to set another record this year – up 60% from last year’s total of $4.3B raised.
For the first time ever, American tech startup accelerator, Y Combinator, has boasted an African country in the top 3 of their latest batch. (Nigeria, is placed third, behind USA and India.) According to The Big Deal, the top 10 VC investors in Africa are well known names such as Launch Africa, Y Combinator, LoftyInc, Kepple, Flat6Labs, Google For Startups, Techstars, Future Africa, 4DX Ventures and Musha Ventures etc.
Technology is destined to have a net positive effect on Africa. Long-established barriers to growth are being eliminated. Power generation, and access to education, finance and the internet is being decentralized. Remote working is providing opportunities for local African workers to, directly or through BPO businesses, service foreign countries. This article unpacks the uplifting thesis.
Timing the market is hard. To date, highly sophisticated property funds seeking to invest in commercial property in Africa have experienced mixed results.
Not all GDP values are equal when it comes to CRE. Extractive industries like mining and oil (which comprise an over-sized proportion of maturing countries like Africa’s GDP numbers) require a relatively low ratio of CRE to operate. This is the same for primary industries like agriculture. (According to data from the World Bank, in 2020, 81% of the USA’s GDP is comprised of economic activities in the services, value add sector. While in Sub-Saharan Africa, the same ratio dropped to 47% of GDP. South Africa, Mauritius and Botswana are the only African economies with annual GDPs greater than $10B that boast service sector ratios above 60%).
That is, is a mature CRE environment a pre-requisite for growth? Or is a mature CRE environment merely a symptom of economic growth? Or is the truth somewhere in between?
Further, in a negatively-reinforcing cycle, because Africa lacks the CRE and infrastructure to supply raw materials, are development costs higher? And, in turn, with these higher development costs, are yields on CRE developments unattractive – constraining the development of CRE?
Because CRE is a bricks and mortar asset, it is subject to political risk, rent-seeking behaviour and thuggery. Where public sector is incompetent in preventing or complicit in such behaviours, this repels investment.
If you, as reader, have strong thoughts on what’s holding development of Africa’s CRE industry back, your opinions will be most welcome
Key
¹ Market cap vs value of property is not an “apples with apples” comparison.
Gearing is used as a key lever to boost property fund returns.
Due to gearing (at various LTVs), the value of built assets owned by a property fund will be far greater than the fund’s market cap.
Sources
Notes to sources
This is a key number in South African commercial real estate (CRE). After a lot of hard work, we are able to deliver a firm, defensible value to SA – relevant to businesses (who almost all operate out of CRE), policy makers and the industry itself.
For a South African CRE industry buffeted by Covid, weak economic growth and public sector incompetence, is solar power too good to be true? Is solar indeed one of property’s unicorns – a positively geared investment with increasing cash flows – and what are the risks associated with it?
Apple, one of the most profitable businesses in the world, is the king of outsourcing. Its brains reside in California, while its grunt work is spread to specialists all over the world. Is CRE missing a trick? Like the strategic minds at Apple, can it farm back office services to cheaper, specialist hands – and drive greater profitability?
