The ‘First-Mover Advantage’ in Africa

All eyes are firmly on Africa as an emerging investment market. Home to 54 countries and 15 percent of the world’s population, it is the most youthful continent on and by 2035 will have the world’s largest workforce.

Yet as a real estate investment destination, Africa—not least sub-Saharan Africa—is still in its infancy. There are just eight unlisted real estate funds targeting $1.25B of equity for Africa investment, according to data provider Preqin, compared to 91 Africa-focused private equity funds that were on the road as of October 2014. “It’s edgy,” says one global emerging market GP who has spent several years researching and travelling through the continent.

But the rise of institutional-quality real estate assets, combined with the relatively few global managers and investors targeting institutional real estate investment in South Africa and sub-Saharan Africa, makes the region a compelling one for investors, says Soula Proxenos, managing partner at International Housing Solutions (IHS). “There is a significant first-mover advantage in Africa, but there are a limited number of deals to be done, and people who come to the table late [won’t find the best pricing],” she says. IHS targets affordable for-sale and rental housing development in South Africa and sub-Saharan Africa. The firm’s first fund, which raised $230M in 2008, was focused on South Africa. With its second fund, IHS is expanding its focus to include Namibia, Botswana, Ghana, and Mauritius. “You have a growing middle class, high urbanizing population, smaller household size, and housing stock no longer where you want it to be,” says Proxenos, who formerly ran the international consulting group of U.S. mortgage giant Fannie Mae. “There are some very interesting and unexpected opportunities in the market.” There are also significant challenges to investing in, and operating across, multiple African countries. One of those is the local real estate market absorption rate. “If you have a significant amount of money to deploy in Africa, it’s going to be very problematic to do it,” Proxenos says. Barend de Loor is the director of property development at Eris Property Group and the operating partner to the $250M Momentum Africa Real Estate Fund, which is targeting Ghana, Kenya, Nigeria, Rwanda, Mozambique, and Zambia. He says that in some countries it can be easy to “overshoot the market.” “Ghana is a case in point,” he says. “There are a number of players that have simultaneously embarked on speculative office developments, having made certain assumptions on the absorption rate of office space of Accra. Relative to the size of the office market and Ghana’s economy, you may end up losing your boots if your assumptions are proven wrong.” However, de Loor says the challenges of operating on the ground are more than offset by the continent’s growth story. “This growth is being driven by the shift towards domestic demand and the rise of the middle class,” he says. “People tend to underestimate the sophistication of the African middle class. They are generally well-educated, highly sophisticated, and want consumer products offered in a well-designed quality retail facility that you find in Europe or the U.S. The problem for sub-Saharan Africa is that it doesn’t have the facilities. This is an opportunity to provide them.”