07 JUNE 2021
The hunt for yield
As demonstrated during the 2008/2009 Global Financial Crisis, capital flows to emerging markets typically accelerate following global recessions. With developing markets recovering on the back of increased vaccine roll-outs, Africa will be a likely beneficiary from the increased hunt for yield. The impact of Covid-19 on the world economy underpins the potential for rejigging business fundamentals, especially in the way providers of capital think about risk in emerging economies. Expansionary developed market monetary policy, demand for commodities, and effective vaccine roll-outs have created a groundswell of global capital flows to emerging markets that is likely to overshadow the challenging domestic fundamentals among African markets and restart growth.
Through the cycle
From an infrastructure development point of view, Public Private Partnerships (PPPs) will no doubt continue to make the biggest impact, even though these large scale projects are hampered by long lead times, opportunity for corruption and infrequency. The more the African continent can take advantage of the positive impact of PPPs and leverage the knowledge available in the private space, the better. A 2020 report by the African Development Bank Group (AFDB) shows that five African countries accounted for more than 50% of all successful PPP activity from 2008 to 2018, being South Africa, Morocco, Nigeria, Egypt, and Ghana. It is however arguable that more PPPs will come online as governments are looking to kick-start their economies post Covid-19. According to the AFDB, several countries had multiple PPPs in the pipeline towards the end of 2020, with Burkina Faso leading with 20 and Botswana planning eight projects.
Private equity investments into Africa, on the other hand, has remained stable through the cycle. The Africa Private Equity and Venture Capital Association (SAVCA) 2020 Annual African Private Equity Data Tracker report (the SAVCA report) shows that the value of PE deals declined only marginally from US$3.8 billion in 2019 to US$3.3 billion in 2020, despite the economic fallout precipitated by the Covid-19 crisis. Interesting though, the report shows the number of deals within the same period increasing from 230 in 2019 to 255 in 2020. According to the SAVCA report, PE fundraising dropped to US$1.2 billion in the final closes of 2020 from US$3.9 billion in 2019, however, SAVCA’s overview of industry activity and capital-raised indicates that investor appetite in African PE has remained robust with $18.1bn of fundraising between 2015-2020.
Notwithstanding ongoing appetite, Africa’s challenge lies in attracting the correct type of equity that is sustainable for the continent – not quick money that seeks maximum returns at any cost. Those who have been around long enough have seen time and again how short-term benefits offer little to no gain for the growth of our continent. In terms of sectors, Financials, Information Technology and Consumer Discretionary reported the most activity in 2020 attracting 47% of deals by volume. Deals in technology-enabled companies represented more than half (55%) of the investments recorded in Africa in 2020.
Bespoke developments for long-term tenants
This has some interesting, indirect implications for the built environment across the continent, with the rise of niche property asset classes such as data centres, warehousing & logistics, education, and healthcare overshooting the more traditional asset classes of retail, corporate offices, and industrial developments. Most of these developments are private equity funded and with exceptional interest from international and local development funding institutions, sovereign wealth funds, pension funds, asset managers, international family offices and high-net-worth-investors, it is highly plausible that bespoke, niche developments such as these will continue to drive real estate development on the continent for the foreseeable future. I still believe that there is not enough capital being deployed into sustainable real estate and so much more can be achieved through collaboration between professionals on the continent. The more we partner, and create larger platforms, the better the investment case for African real estate will become.
Development beyond the fence line
Bespoke, niche developments do not necessarily have less of a socio-economic impact compared to large-scale PPP projects. Reputable developers on the continent go to great lengths in partnering with local suppliers, professional services companies, and contractors. Notwithstanding the considerable employment opportunities created throughout the build phase, the impact of skills transfer and ongoing local employment post the completion of projects have much further reaching benefits. In addition, developments across the continent are increasingly beyond the fence line, with upgraded road, water, power, and effluent infrastructure benefitting the surrounding community.
According to SAVCA, most PE investors exited their investments by selling to trade buyers, followed by exits to PE and other financial buyers, although this is still limited in Africa. The recent trend of using Special Purpose Acquisition Companies (SPACs) to acquire unlisted companies is providing an exciting options for property developers and investors alike. In layman’s terms, a SPAC is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process.
Although yet to take off on the African continent, SPACs provide interesting funding mechanism for developers to upscale, whilst offering an exit opportunity to seed investors through conversion into public companies. Despite headwinds and fundamental shifts in the sector, the future for Africa’s built environment remains bullish, but will require continuous adaption, collaboration, and innovation.
– About the author
Greg Pearson, CEO, and co-founder of Gateway Real Estate Africa\
Greg Pearson is the co-founder and CEO of Gateway Real Estate Africa. He combines his passion for the continent with a strong business drive, entrepreneurial flair, and high doses of adventure, always keeping an element of fun in whatever he does.
He has worked in property development and management across all countries on the continent bar three. Greg’s unassuming and easy going manner has helped him collaborate and build a network with global and local property developers, heads of state, institutional investors as well as influential industry role players on the continent and beyond.