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 farther between.
Sub-Saharan Africa’s attractiveness as an investment destination has risen to fifth place 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 15 years ago. It paid $285 million for a mobile license, as of 30 June 2016, MTN recorded 232,6 million subscribers across its operations. Although MTN operates in over 20 countries, one-third of its revenues come from Nigeria, where it holds about 35% market share.
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 back 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 (now Anheuser-Busch InBev) head for the region, Mark Bowman. “No one is getting anything for a reasonable price anymore; 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 a few years back, 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 FirstRand dropped its bid for Nigeria’s Sterling Bank 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 sidelines 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 into 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.
Reports abound of more and more South African companies doing business in Africa, but why are they not investing that money locally, are there challenges to making development work locally? Looking back over the last few quarters some disturbing stories have emerged.
It can’t be a good sign when you hear the news that a company like Resilient is looking elsewhere to do business.
Johannesburg-based real-estate investment company Resilient, which has a local market capitalization of 11 billion Rand is looking to Nigeria to expand its business. This on its own is not a worry since many SA firms are expanding into Africa. However it’s the stated reasons and comments from its executive that raise some eyebrows.
According to The Citizen’s Micel Schnehage, Resilient’s Director Des de Beer explained that it’s the firm’s struggle with local government. “(Resilient) is hampered by extensive bureaucracy and red tape, resulting in expensive delays.” He went on to state that the era for Resilient to develop non-metro malls was over.
What seems to have been the last straw was the loss of documents pertaining to the Mafikeng Mall by local authorities 17 times. “They’re not accountable to anyone so they don’t really care,’’ said de Beer.
Unlike South Africa, is the implication, Resilient believes there is a sincere intention in Nigeria to see the country raised up and that officials are largely positive facilitators of the investment process.
Another big player in the industry, Redefine, the second largest listed SA property loan stock company by market cap on the JSE, with assets exceeding R37bn, claims to be hampered by red tape.
The value of the group’s properties declined by 1.7% in the review period while the South African portfolio valuation increased by R260million. Red tape involving local authorities and other government departments are holding back developments in rural areas.
Redefine’s CEO Marc Wainer announced last year that Redefine intended to launch a shopping centre of between 20 000m² and 30 000m² in a rural area which could create between 4 000 and 5 000 jobs. This includes cleaners, security guards and other workers needed by retailers.
However, Wainer said instead of the authorities welcoming these developments, processes are being frustrated by officials wanting their palms greased before setting the ball rolling.
The Redefine head said retailers are keen to enter into rural areas with a growing segment of the market’s buying power increasing in terms of social grants, but are now rather opting for Africa. Wainer cited a recent announcement by Liberty Properties to opt for its new growth in Zambia. “It’s easier to do business in Africa than South Africa,” Wainer told reporters. He added that money being spent offshore should be spent locally, but conditions frustrate this.
In an interview with CitiBusiness Wainer lashed out at government, criticising the administrative practices of local authorities. At the time he added Redefine was not going to invest in areas where bribes were expected, citing the former Hammanskraal as an example.
But this doesn’t mean everything’s rosy in Africa either, doing business where local authorities are concerned can be a red tape head ache for developers in general. By way of example consider Steven Singleton’s story.
Steven Singleton wrote to the Daily Maverick about his struggle in setting up a Private hospital in Zambia where he was frustrated at every turn by Zambia’s top banker and business mogul Rajan Mahtani: “Business in Zambia is very much like this and magnates such as Mahtani make sure it stays that way and he retains control.
In my case I offered him what I considered to be “a project on a plate” and, instead of rewarding the provider, he not only took the project, but the plate as well. Why? Because he could, and there was no recourse to be had.
This is all too often the nature of doing solo business in Africa. Powerful and politically connected parties are able to move with relative impunity as long as their alliances are intact or until a change of regime shifts the balance of their power base.”
Although not the same situation, the dynamics are similarly reported when trying to do business involving local authorities in South Africa it seems. Whether this is an African challenge or a South African challenge, developers have their work cut out for them as they try to invest and develop under
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.
If not in South Africa, where does future expansion lie for the Johannesburg-based real-estate investment company Resilient, which has a local market capitalization of 11 billion Rand?
Despite the World Economic Downturn South Africa has continued to successfully build and fill new shopping centres with both tenants and shoppers. Resilient has been at the forefront zeroing in on non-metropolitan shopping malls outside of the major urban nodes. Towns like Tzaneen, Rustenburg and Klerksdorp come to mind.
Resilient also holds strategic interest in Jabulani Mall in Soweto (55%), Highveld Mall in Emalahleni (60%), 70% of the I’langa Mall in Nelspruit and 60% of the Mall of the North in Polokwane . The firm also owns the Diamond Pavilion in Kimberley and the Tzaneng Mall in Tzaneen. Resilient holds 12.9% of the Capital Property Fund, 22.0% of the Fortress Income Fund – B and 18.6% of New Europe Property Investments plc. It also owns Property Index Tracker Managers, the company that manages the Proptrax exchange traded funds.
Now Resilient is looking to Nigeria for its future. This may have some people worried to see a big player like Resilient apparently ‘abandoning’ the local market. But looking offshore is nothing new to Resilient. Back in 2007 it was involved in the establishment of New European Property Investments, seeing shopping malls being built all over central Europe. The fund was initially listed on the London Stock Exchange, but went on to acquire a secondary listing on the JSE in 2009.
But looking locally, Patrick Cairns for Moneyweb writes: “Resilient’s strategy of managing shopping centres outside of the major centres in South Africa has been a very successful one. By focusing on under-serviced areas, the group has tapped into a growth story that has delivered excellent returns.”
Some would say this is due to a variety of reasons: for one, the reduced competitive playing field in small town retail nodes. Secondly shoppers in these towns are less likely to be debt-laden in comparison to their counterparts in urban areas. Increased levels of government social spending have also given more buying power to rural dwellers. This translates into a consumer group with high levels of disposable income available to use at Resilient’s shopping centres.
So what’s changed? According to The Citizen’s Micel Schnehage, Resilient’s Director Des de Beer explained that it’s the firm’s struggle with local government. “(Resilient) is hampered by extensive bureaucracy and red tape, resulting in expensive delays.” He went on to state that the era for Resilient to develop non-metro malls was over.
What seems to have been the last straw was the loss of documents pertaining to the Mafikeng Mall by local authorities 17 times. “They’re not accountable to anyone so they don’t really care,’’ said de Beer to the Citizen.
Apparently a partnership with the Sasol pension fund will result in the continuation of the development of malls in Secunda and Bergersfort.
But why Nigeria? Better yields is the short answer. De Beer is expecting returns of greater than 10%, and in dollars too. Resilient believes there is a sincere intention in Nigeria to see the country raised up and that officials are largely positive facilitators of that process. One may wonder if the company is being naive but recent reports of land being donated to developers to ensure development takes place certainly shows intent.
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.
The FM reports that De Beer would like to list the shopping centre fund in Nigeria once it reaches the right critical mass. This would be a similar approach to Resilient’s entry into Romania back in 2007 through New Europe Property.
One can’t help being a little concerned that if a big local player has chosen to go fishing elsewhere what are South Africa’s prospects as far as foreign investment goes? Time will tell.
It seems Africa’s gain is South Africa’s loss.