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Investing in Africa, Good News, Bad News and Faux Pars

Accra Mall Ghana

As people around the globe eye Africa for potential investment and South Africans head north there is some encouraging news to feed those ambitions, worrying reports to temper our enthusiasm and some mistakes to learn from.

Ghana’s capital Accra is awash with educated, well-dressed young up-and-coming people, driving top-of-the-range cars living in stylish houses. It’s indicative of Ghana’s economic growth, 14.4% last year. According to the World Bank many African economies are forecast to be among the world’s fastest growing in 2012. Top of that list are the DRC, Nigeria, Ghana, Liberia and Ethiopia.

US-based business consulting company Ernst & Young reports: “There is a new story emerging out of Africa: a story of growth, progress, potential and profitability.”  US secretary of state for African affairs, Johnnie Carson is quoted as saying that Africa represents the next global economic frontier. China’s trade with Africa reached $160 billion in 2011, making the continent one of its largest trading partners.

London based magazine The Economist reported last month: “Since The Economist regrettably labelled Africa ‘the hopeless continent’ a decade ago, a profound change has taken hold.” Today “the sun shines bright … the continent’s impressive growth looks likely to continue.”

Africa’s trade with the rest of the globe has skyrocketed by more than 200% and annual inflation has averaged only 8%. Foreign debt has dropped by 25% and foreign direct investment (FDI) grew by 27% in 2011 alone.

Despite projections for growth in 2012 being revised downward due to the so called Arab Spring , Africa’s economy is expected  to expand by 4.2%, according to a UN report earlier in the year. The International Monetary Fund (IMF) is expecting Sub-Saharan African economies to increase at above 5%. Added to that, there are currently more than half a billion mobile phone users in Africa, while improving skills and increasing literacy are attributed to a 3% growth in productivity.

According to a UN report the think tank,  McKinsey Global Institute writes, “The rate of return on foreign investment is higher in Africa than in any other developing region.”

An end to numerous military conflicts, the availability of abundant natural resources and economic reforms have promoted a better business climate and helped propel  Africa’s economic growth.  Greater political stability is greasing the continent’s economic engine. The UN Economic Commission for Africa (ECA) in 2005 linked democracy to economic growth.

All this growth and urbanisation is putting a strain on social services in the cities, it has also led to an increase in urban consumers. More than 40% of Africa’s population now lives in cities, and by 2030 Africa’s top 18 cities will have a combined spending power of $1.3 trillion. The Wall Street Journal reports that Africa’s middle class, currently estimated at 60 million, will reach 100 million by 2015.

Then there’s the more sobering news.  “A sustained slowdown in advanced countries will dampen demand for Africa’s exports,” writes Christine Lagarde, managing director of the IMF. Europe accounts for more than half of Africa’s external trade. Tourism could also suffer as fewer Europeans come to Africa, effecting tourist dependent economies like Kenya, Tanzania and Egypt.

The South African Reserve bank warned in May that the financial crisis in Europe, which consumes 25% of South Africa’s exports, poses large risks. Adverse effects on South Africa could have severe consequences for neighbouring economies.

Another worry is the resurgence of political crises. Due to the so called Arab Spring, economic growth in North Africa plummeted to just 0.5% in 2011. Recent coups in Mali and Guinea-Bissau could have wider economic repercussions. “Mali was scoring very well, now we are back to square one,” says Mthuli Ncube, the AfDB’s chief economist. Ethiopia, Kenya, Uganda and other countries have militarily engaged in Somalia, which may slow their economies. And Nigeria is grappling with Boko Haram, a terrorist sect in the north of that country.

A cause for concern what many are referring to as Africa’s “jobless recovery.” Investors are concentrating on the extractive sector, specifically gold and diamonds, as well as oil, which generates fewer employment opportunities. 60% of Africa’s unemployed are aged 15 to 24 and about half are women. In May, UNDP raised an alarm over food insecurity in sub-Saharan Africa, a quarter of whose 860 million people are undernourished.

But none of this is deterring South African business interest north of the border. One may ask why? South Africa’s domestic market is not providing local companies with enough growth opportunities, prompting many of them to look at the rest of the continent. This according to Ernst & Young’s Africa Business Centre’s leader, Michael Lalor in an online press conference recently: “While South Africa is still growing well compared to the advanced economies, it’s certainly not keeping up with some of the other rapid-growth markets.” Says Lalor.

Analysts are pointing out that many of the other emerging markets, such as China and South America, are difficult to enter, making the rest of Africa the obvious choice. Asia is seen as almost excessively competitive. Latin America ventures mean dealing with a very strong and ever present Brazil. Therefore Africa, given its sustainable growth story and its potential, is an obvious region for South African companies to grow into.

Quoted by howemadeitinafica.com Lalor says that most Johannesburg Stock Exchange-listed companies are currently developing strategies for the rest of the continent.   Ernst & Young is experiencing strong interest from foreign companies to invest in the continent. “The response from our clients and from potential investors is overwhelmingly positive, to the extent that we simply cannot keep up. So there’s no doubt that we are seeing significant interest, both spoken, interest in spirit, but also people putting their money where their mouths are,” he said.

These sentiments are confirmed by a survey done last year by Price Waterhouse Coopers. A CEO survey published by PwC found that 94% of South African company heads expect their business in Africa to grow in the next 12 months. PwC interviewed 32 South African CEOs in the ICT, financial services, and consumer and industrial products and services industries.

With this in mind it’s worth turning to Raymond Booyse, founder of consultancy firm Expand into Africa, who identified four mistakes often made by South African companies venturing into the rest of the continent.

The first was: Not doing your homework. South African firms are frequently not prepared to spend money on market research. “Go and look if there is a market for your products or services. After you’ve established that there is indeed a market, find out who your competitors will be,” says Booyse.

Booyse points out that South African companies underestimate transport costs and ignore how local laws and regulations influence doing business.

Secondly: Ignorance. Many South African business people are ignorant of local cultures and attitudes according to Booyse. By way of example, ignorance doesn’t realise that just because they’re both former Portuguese colonies, what works in Angola’s capital Luanda, doesn’t necessarily mean it will work in the northern Mozambique. In a recent report, research firm Nielsen noted that African consumers’ attitudes towards technology, fashion and how to spend leisure time vary greatly. No prizes for that one.

Thirdly: Arrogance. Booyse says that South Africans sometimes think they know what people in the rest of the continent need. “In the rest of Africa, South Africans are often regarded as arrogant.”

Finally: Not being prepared for the high costs of doing business in Africa. Many South African companies are not aware of the high costs involved in doing business in the rest of the continent. “If you want to spend two weeks in Angola it will cost you R40,000 (US$4,700),” notes Booyse. “It is not cheap and easy.” Flights for example, from South Africa to either Kinshasa or Lubumbashi can be costly, and hotel rates are also very high.

It’s clear that Africa is a fertile place to plant seed. But Africa is not for the faint-hearted as business is done in a very different way to elsewhere in the world, with all manner of social and political hoops to jump through. South African companies have a potentially bright future and definite advantages if they are prepared to take risks, stay humble and do their homework.

Africa is the Next Big thing

Investment into Africa as the next big thing seems to be all but established. But investment into property developments has been stop start, with some notable exceptions. Experts on the ground are expecting investment to pick up as Africa’s hunger for shopping malls and commercial office space continues to grow.

Many retailers that have set up operations in Africa have expressed that their expansion on the continent is being held back by the lack of suitable shopping malls. This begs the question that if there is such a strong demand for modern retail locations, why aren’t we seeing new malls being developed at a more rapid pace?

There are some worthy exceptions: South Africa’s Manto Investment Group is to construct a US$30 million shopping centre in Ndola, Zambia. Construction work is expected to commence after feasibility studies have been completed.

West property, Augur Investments and McCormick Property Development, are planning the building of a 68, 000sqm shopping mall in Zimbabwe located in Harare’s up market Borrowdale suburb. According to The Zimbabwean online (UK), this represents the biggest shopping mall in Africa, outside South Africa.

The Financial Mail reports that Resilient Property Income Fund Ltd plans to spend more than 1 billion rand building 10 shopping malls in Nigeria.  The malls, 10,000 square meters and 15,000 square meters in size, will be built over the next three years in the capital, Abuja, and the city of Lagos respectively, the main commercial hubs. Shoprite, Africa’s largest food retailer, will be the major tenant. Bloomberg reports that Standard Bank Group Ltd, Africa’s biggest lender, and construction company Group Five Ltd. (GRF) are also partners in the deal.

Recently, emerging markets private equity firm Actis has been at the forefront of a number of Africa’s more high-profile property developments. The company is behind Nigeria’s arguably first modern shopping malls and has recently announced that it will invest in East Africa’s largest retail mall to be situated in Nairobi.

How we made it in Africa asked Kevin Teeroovengadum, a director for real estate at Actis why we aren’t seeing new malls being developed at a more rapid pace. Teeroovengadum believes there hasn’t been significant enough interest from international property developers to invest in sub-Saharan Africa. South African developers were focused on the local market due to the football World Cup, while European firms were concentrating on Europe and the Middle East. However, the recession in Europe has prompted some European real estate companies to look at Africa for growth opportunities. Post-2010 many South African property players have also turned their attention to the rest of the continent.

Something that players in the industry point out is that the development of shopping malls is time consuming. This referring to the red tape involved with dealing with multiple countries, different regulations and laws and political interference.

Teeroovengadum said. “But if I look at today, and compare it with five years ago, there are far more players involved in the real estate sector. We can really see that happening on the ground. I think if we fast-forward two or three years from now, you are going to see more shopping centres being built in places like Ghana, Nigeria and Kenya – the big economies. You are going to see a fast-tracking of property development happening in Africa.”

Africa south of the Sahara, not including South Africa, has a little in the way of  the modern shopping mall experience. Most shoppers still have to frequent a variety of places for their shopping requirements.

However, there appears to be an inclination towards convenience where a variety of products can be found in one location. “Clearly we are seeing in all the markets where we have invested a type of evolution of people moving from informal to formal shopping centres.” Says Teeroovengadum.

One of the challenges continues to be access to funds for property developments in much of sub-Saharan Africa. With the exception of many of South African developments that are funded with up to 100% debt, the rest of the continent developers often need to put down around 50% in cash.  Currently there are few banks that are willing to lend for 10 to 15 years. However it is reported that this is improving, as markets become stronger, local banks become stronger, and changes are occurring in markets like Ghana, Zambia and Nigeria in this regard.

Although Africa is drawing the attention of increasingly greater numbers of international investors, interest in the property sector remains relatively passive.  On a macro level, more investors are looking to invest in Africa.  Barely a week goes by that one doesn’t see an article about Africa, and its growth opportunities and increased foreign direct investment.

However when it comes to property it is a different situation says Teeroovengadum. He refers to the number of investors who made poor returns over the last decade due to the asset bubbles in the US, Europe and Middle East. They are very hesitant about investing more into property. Those who are willing are typically development finance institutions, those institutions that have long-term money for Africa. There are a couple of international pension funds who are looking at investing in Africa, but there are very few these days.

When the question was posed to Actis directors about how they decide which African countries to invest, in they replied that at a basic level they look for a ‘strong economy’ like Nigeria, Ghana Kenya, Uganda and Zambia. This indicates that these countries have good fundamentals, a large population, GDP growth and increasing GDP per capita etc. A Strong legal system was also referred to.

Africa wants shopping malls and companies like Resilient and Actis are gearing up to deliver.

Africa is not an island and is subject to the ebbs and flows of the world economy and its whims and fancies. Nevertheless for whatever reasons Africa is emerging as the next big thing in world investment and economic growth. But is the time right while the world is reeling from financial crisis upon financial crisis. Time will tell if those who were brave enough were foolish or wise.