Challenges to opening the investment floodgates
Attracting meaningful volumes of institutional capital into Africa continues to prove challenging and recent global macroeconomic events appear to be hampering matters further. Indeed, total cross-border investment in African commercial real estate stood at US$ 274 million in 2021, down 49% from 2020 and 54% lower than 2019 figures.
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That said, certain real estate sectors on the continent have demonstrated relative resilience despite the unprecedented global economic headwinds albeit with a divergence in performance between those well-located, sustainable, core assets, hard currency income and the rest.
We believe, therefore, the next few years will see a boost in investment volumes in what has been a relatively immature market, providing investors with the opportunity to rebalance portfolios, execute business plans and further their strategic goals.
Though the traditional office sector globally is expected to account for just over half of all cross-border investment transactions, in Africa we expect to see a rotation of assets by investors, particularly private equity, into the industrial, residential, life sciences and data centre sectors. Investment managers and institutional investors are expected to lead the demand for these alternative sectors, while HNWI’s will demonstrate strong interest too, particularly into the more stable markets, such as South Africa and Kenya.
Factors that influence capital flows include political outlooks and environmental risk. In addition, monetary tightening in the United States and rising risk premiums associated with the war in Ukraine, have placed downward pressure on exchange rates across Africa, although real estate investors have mitigated this risk by deploying their capital in projects that have dollar denominated returns, where possible.
According to the 2022 IMF-Regional Economic outlook for Sub Saharan Africa, inflation is expected to remain elevated in 2022 at 12.2% before easing to 9.6% in 2023 though there is significant heterogeneity across the region. Real estate is traditionally seen as an inflation hedge and so an inflationary environment is likely to boost demand.
Separately, climate change too poses extreme challenges for the region given its exposure to weather-related events and the reliance on rain-fed agriculture; investment in adaptation is therefore of paramount importance, but the green transition also provides new opportunities for Africa given its potential for renewable energy.
ESG is an increasingly global focus for real estate investors, and we expect this to spur capital flows towards green rated buildings. Africa has 785 green-rated buildings, 641 of which are in South Africa alone.