Back in 2005 a UK expat, Alexander Andrewes, set up a business in Kenya dealing in interactive media services. Having scoured office space in the capital Nairobi for serviced offices he came up empty handed. That didn’t stop Andrewes who now heads up Eden Square Business Centre (ESBC) a business he started that is the leader in the field of serviced and virtual offices in Nairobi.
Back in the beginning Andrewes was looking for a firm that provided serviced offices, meeting rooms, virtual office packages and administrative support. He told HowWeMadeItInAfrica in an interview that what he wanted back in 2005 was the convenience of walking into an office that is fully serviced, complete with furniture, internet, telephone networks and other administrative services.
As an entrepreneur Andrewes quickly spotted the gap in the market and acquired financing to the tune of US$150 000 with which he launched ESBC. In April 2006 he procured 14 offices at the Eden Square building the Nairobi Westlands and was open for business. All the client needs is his/her own computer when moving in, everything else is taken care of right down to the teaspoons.
On the Virtual Office side of the business, companies that are not in a position to handle huge overheads can acquire offices too. These clients are set up with a fully functioning office, though only at agreed time slots.
Both types of clients are freed the burden of water, electricity, security and other administrative aspects of running a business. This frees them up to focus more on the main core of their business. Andrewes told HowWeMadeItInAfrica that they had seen small entrepreneurs that started at ESBC with virtual offices, move on to serviced offices and eventually relocated to their own office premises.
But it was not all roses in the beginning. Andrewes explains that at the initial start-up property owners were reluctant to lease to him, selling the serviced office concept to locals was a heavy task. From humble beginnings ESBC now have 180 office units in five locations with plans for a further two locations.
The ESBC client portfolio has grown to over 200, comprising big corporates, non-governmental organisations (NGOs), as well as small business start-ups. Some of ESBCs former and current clients include, Grey Marketing Limited, the Louis Berger Group ,General Motors, Rockefeller Foundation, Google, General Electric and Ericsson.
Now there are other players in the market who have cottoned on to the whole serviced and virtual office concept. But Andrewes seems unfazed by the competition. He reckons the market is big enough. In fact the growth in the industry has affirmed the necessity for it which is good for business as the office community is becoming conditioned to the need for such a market.
The grass doesn’t grow under Andrewes feet though. His plans for ESBC is to provide a service offering financial and strategy business advice to start-ups, NGOs and international firms opening branches in Kenya for the first time. He has his eyes on Uganda and Tanzania next. So watch this space.
The World Bank has likened the doubling of African manufacturing output over the last decade to China’s position thirty years ago. Emerging Markets Investment firm Actis’ real estate director Louis Deppe believes that South African investors who ignore the potential in African markets do so at their own peril.
Ivor Ichikowitz, founder of Paramount Group, a privately owned defence and aerospace company, believes South Africans have looked to Asia and the West for the best ideas and viewed them as their natural competitors, as opposed to our African neighbours.
Louis Deppe told Moneyweb at an Africa Property Investment Summit in Sandton. “You have no choice not to care about Africa. It’s on your doorstep. Some significant economies are going to overtake South Africa in a very short space of time. They’re growing faster and have far more potential to grow.”
An example Deppe probably has in mind would be Ethiopia, their economy is expanding at 7.5% annually and that’s not just traditional industries like mining and agriculture, it’s also manufacturing. An example on the periphery of Addis Ababa is Chinese shoe maker Huajian, which has built a factory employing around 500 workers.
An economist at the World Bank who recently wrote a report on light manufacturing in Africa cites this as an example of how Africa could overtake Asia to potentially become the world’s next manufacturing hub. Low labour costs, the availability of natural resources, and preferential access (duty-free and quota-free access) to the US and EU markets are all some of the advantages of operating in Africa.
It is predicted that Nigeria, with a growth rate of 7% should overtake South Africa by 2015. Louis Deppe warns that up until now, South Africa, being, arguably, the most democratic and stable country on the continent, has been able to attract foreign direct investment (FDI), often getting the lion’s share compared to other African countries. Once other countries also start fulfilling some basic requirements, this will no longer be the case.
South Africa used to be the gateway to the rest of Africa. If foreign investors wanted to set up and go into Africa, the FDI would come to SA first, before moving up north. This is no longer happening and foreign investors are now moving directly into Africa from China, Europe and the United States.
By 2035, the continent’s work force will be greater than any individual state on earth. Nigeria and Ethiopia will add over 30 million workers by 2020, whereas South Africa is looking at adding 2 million.
However, it’s not just manufacturing that Africa is excelling in and challenging South Africa. The Economist recently (August 2012) named Nairobi an “African tech hub” because of the hundreds of start-ups that have sprung up in the last few years. Kenya’s exports of technology related services have risen from $16m in 2002 to $360m in 2010. It is also a world leader in the adoption of mobile payments technology – and is far ahead of China and India.
According to Ivor Ichikowitz, within a few years Kenya could soon emerge as a world leader in mobile payments and export the technology to countries across the world.
He also refers to the African film industry. The Nigerian movie industry, which has overtaken South Africa’s to become the strongest on the continent worth £500m and producing more films than Hollywood every year. The films may not be international blockbusters, but they have huge appeal across Nigeria and Africa, and prove that Africans have the creativity to compete in non-traditional industries.
Clearly we need to be at least aware of what our neighbours are doing if our market is shrinking or stagnating and the world around us is getting bigger, we risk becoming less relevant in the grand scheme of things. Alas it seems the South African economy is sliding backwards while the rest of the continent is in first gear. Most African markets that Louis Deppe’s Actis group invests in are experiencing 7% GDP growth. “Despite claims of corruption, a lot of that money still filters down into the economy, there’s a lot of economic drive and growth.” he said. He added that on the development side, Actis was getting returns of between 13% and 14%.
But Ivor Ichikowitz has a positive spin on this: “it’s a positive opportunity for us to export our products and knowledge and generally expand trade with other African nations, which in turn will generate jobs for the youth of our country.”
South Africa has some great assets – its infrastructure, mature private sector, well developed services sector, stock exchange – that give us the opportunity to provide a range of goods and services to help grow our own economy, but we can work harder to maximise these advantages.
Ichikowitz says that countries like Ethiopia, Kenya and Nigeria are rushing forward and emerging as serious competitors for destinations of foreign capital.
This is pressuring our government and business leaders to look more closely at their policies and approach to business. The harsh reality is that if South Africa is to retain its position as the leading economy on the continent it can’t for a minute ‘rest on its laurels’.
Ichikowitz doesn’t see South Africa as being in competition with the rest of Africa, but rather in a position to learn from and impart learning to neighbouring states, which is why it is essential that we share technologies and collaborate to build strong regional industries that bolster inter-Africa trade.
Deppe looks more into the nitty-gritty glancing back to what he refers to as a watershed year for property investments in South Africa, 2010, after the World Cup. “We had all these infrastructural projects, the economy had withstood the 2008 global recession. Then suddenly: what’s next in SA? There’s not much left in South Africa, we are a saturated market.” Deppe said by way of illustration that vacancy rates had increased in many shopping centres across the country. As a result, investors’ returns at 7% or 8%, which were not great to begin with, are shrinking and are likely to be impacted further. He said with GDP growth in South Africa being below 3%
“you’re not even going to get out of the starting blocks. You’re actually going backwards in real terms.”
The troubling dynamic among South Africa investors is their reluctance to invest in Africa stems from an unfounded conservatism. “With the South African base not as strong as it was, it’s forcing people into a mind-set to look abroad. I don’t think they have a choice.” Deppe said.
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.