Kenya’s property industry is seeing unprecedented growth. Retail and office space is in very high demand. Foreign investors and local business are seeking out and snapping up opportunities across the country especially in Nairobi. But there are challenges as well as rewards.
Players in the construction and property industries refer to last year as a year of equilibrium in demand and supply. Though there was a reported slowing down toward the end of last year in anticipation of the elections. Looking back to 2007/2008 elections where there was violence, foreign capital stayed away and is eyeing the situation this time around with caution.
Those watching the property/development sector are doing so with interest in the extraordinary amount of international companies moving into the country. This naturally results in a greater demand for buildings.
A saying has emerged: “everyone in Kenya has become a real estate expert.” So looking for skilled advice is a little more challenging. This is where Actis owned Mentor Management comes in. In an interview with HowWeMadeItInAfrica, James Hoddell, chief executive explained that to his mind there are very few competitors in this market, at least those who do the full development and project management. “We are experiencing a real estate boom that is set to continue for years.” People are realising that you can’t just build whatever you feel like and sell or rent it.
Mentor Management has two notable developments currently on the table. One is the Garden City development. Upon completion it will be the largest mall in East Africa. It includes residential units, a public auditorium, a hotel and offices. The other is Nairobi Business Park, which has a substantial waiting list. Hoddell is at pains to point out that projects like these are bringing in much needed foreign capital.
Foreign retailers in particular are sitting up and taking notice. Last year Mentor signed the first unit for Massmart in Kenya that will employ several hundred people. They are currently touring South Africa and Dubai to meet retailers winning them over to Kenya. Retail is a big growth area in Kenya.
It’s clear that the expanding population coupled with the growing economy is driving this property boom. If there weren’t tenants for these buildings, no one would be building them. Hoddell points out that for 20 years there was inadequate availability of property, there was very little development and the economy had stalled. But now, there is a renewed impetus in re-starting the economy. There is growth in Indian and Chinese investment as well as other international money, like the Actis fund.
“This is a relatively cost effective market to operate in. It is a cheap country to build in; it has a developed construction industry with developed sets of consultants and a functioning real estate market, which a lot of African countries don’t have.” Says James Hoddell.
One challenge faced by developers is the acquisition of land is becoming punitively expensive. The expectation of owners some may argue is unrealistically high. It gets to a point where profitability is reduced such that it is not worth developing. This despite the rise of rentals. Regardless the property and retail sectors in Kenya are alive with the sound of investment.
[Main Source HowWeMadeItInAfrica]
Africa for so long a collective of querulous bankruptcies and killing fields has seen its coffers increasing and democratic advances reaping peace and prosperity. The International Monetary Fund predicts sub-Saharan Africa growing at 5.4 per cent this year compared to 1.4 per cent for developed economies.
Africa’s is home to some of the world’s fastest growing economies and rapidly rising disposable incomes. A decade of relative political stability has also helped the case for African investment.
New investors come expecting bargains because the continent is still seen as poor. However investors looking to buy into future growth are now paying a premium due to sellers savvy to opportunities being fewer and further between.
Sub-Saharan Africa’s attractiveness as an investment destination has risen to fifth place in 2012 from seventh in 2011, according to a survey by the Emerging Markets Private Equity Association. Opportunities traditionally existed in mining but speakers at Reuters Africa Investment Summit in September have pointed to consumer and banking services sectors as the next big thing.
Africa’s largest telecoms operator MTN is a perfect example of a company that paid what was considered a weighty price at the time, for the right to commence operations in Nigeria 11 years ago. It paid $285 million for a mobile license, now it has over 41 million subscribers and banked revenues of 34.9 billion rand ($4.47 billion) in 2011.
Actis, a private equity firm in emerging markets, said it was recently outbid in a North African deal by a trade buyer that offered 12 times EBITDA (Earnings before interest, taxes, depreciation and…). Valuations on the continent are, however, cheap compared with price demands in bigger emerging economies in Asia. Speaking to Reuters, John van Wyk, the firm’s co-head for the region said: “Valuations, depending on the sector, can be quite high but … compare that to the 16 times EBITDA multiple you are being asked for in India or China, that’s kind of stratospheric stuff.” “We are quite bullish about the continent but Africa doesn’t come without its challenges,” van Wyk said.
It seems that it is not unusual for new investors on the continent to make the mistake of coming with preconceived ideas of where valuations should be.
The world’s biggest retailer Wal-Mart bought a majority stake in South Africa’s Massmart for $2.4 billion in 2011, a 19 per cent premium to the 30-day volume weighted average price. With that has come a great deal of political and legal manoeuvring that remains to be finalised.
Even where companies are willing to pay a premium for a good target, companies of the right size are hard to come by. Every big African brewer, for example, has been nailed down, according to SABMiller’s head for the region, Mark Bowman. “No one is getting anything for a reasonable price any more; you are paying for a future opportunity a significant premium. Anything that would become available would be aggressively priced and one would have to take a view if it’s worth it,” he told Reuters. Diageo, consumer goods companies with a portfolio of world-famous drinks brands, dug up a heavy $225 million for an Ethiopian state brewery last year, months after Heineken paid $163 million for two other beer makers in that country.
Emerging Capital Partners is opening an office in Nairobi, its seventh office on the continent, to grab east African opportunities. Alex-Handrah Aime, a director of the Africa-focused ECapitalP: believes that one way of bridging the valuation gap is for buyers to start with a convertible bond, instead of taking up equity at the onset. Private equity firms need to avoid auctions to keep a lid on valuations, she told Reuters. “It’s a competitive process. If you end up in an auction situation … the person who pays the most is going to win. That’s not necessarily the valuation that is going to be most sensible.”
Some investors have turned their backs on what they see as inflated prices. South Africa’s second-largest banking group First Rand dropped its bid for Nigeria’s Sterling Bank last year after the two disagreed on price.
Interestingly Middle East investors, though slow to join the fray, are competing for investment opportunities on the continent. Not short of oily billions and short of investment opportunities in the developed world, Africa is looking attractive.
However challenges have been quickly recognised. One is the relatively small size of potential deals. “The Middle Eastern sovereign wealth funds are very interested in Africa, the challenge that they face is the increment at which they need to invest is way too large for the continent at the moment,” Diana Layfield, Africa chief executive at Britain’s Standard Chartered Plc. told Reuters in an interview on the side-lines of the World Economic Forum on Africa.
“Definitely there will be more (investment) coming to Africa,” Saudi Arabian Minister for Agriculture Farad Balghunaim told Reuters. “With the clear vision that is building up in African leadership now, there will be more and more investors from Saudi Arabia,” he said in Addis Ababa.
However accessing growth is not a given. There is a lack of liquidity in public capital markets. For private equity bankers, there is often a shortage of deals that can meet their mandate when it comes to size. For example, emerging markets private equity firm is reportedly aiming for individual deals of $50 million or more in Africa, meaning it has to focus on the continent’s biggest economies – South Africa, Egypt and Nigeria – to find deals.
Dubai’s Abraaj Capital is in the process of acquiring UK-based private equity firm Aureos Capital, which invests in small and medium-sized businesses in Africa, Latin America and Asia. “We tend to have a sweet spot at around $10 million, but we have investments as low as $2 million and going up to about $35 million,” Davinder Sikand, Aureos’ regional managing partner for Africa told Reuters.
“Our focus has been to build regional champions. So we’ll take positions in businesses that can demonstrate management vision and build (them) out, recognising that each of our markets other than Nigeria and South Africa are fairly small markets, and you need to build that scale.”
Due to the constraints in their home markets, Middle East investors are familiar with Africa’s challenges, such as the poor infrastructure, the shortage of a highly trained workforce and the lack of liquidity in capital markets.
Frederic Sicre, a partner at Abraaj Capital told Reuters: “Behind us are 200 of the wealthiest merchant families, royal families from the Middle East, and sovereign wealth funds from the Middle East. We can pull them in to looking at the infrastructure development space, or the big utility development space, into looking at the opportunities here.”
Clearly the continent has become a far more competitive place than it used to be. Despite many target deals being on the small side for the bigger players, the expected returns are considered reward enough in the long term. Africa, -keep doing what you’re doing and you’ll keep getting what you’re getting. If democratisation continues, peace will abound and prosperity should follow the necessary hard work buoyed by investment.