Interview: David Morley
How do you expect the interest in consumer-facing industries in sub-Saharan Africa to evolve?
DAVID MORLEY: The consumer story in Africa has many years to run. Investors can access that through a broader range of sectors than those traditionally defined as consumer-facing. We invest primarily in six sectors through three investor products, of which real estate is one. There are consumer-driven aspects of real estate, particularly retail and residential, but it extends to other parts of the business. The interface between consumer and infrastructure is a productive theme. Power generation and distribution is another, as is financial services.
How would you describe investor interest in residential versus commercial properties in the region?
MORLEY: In offshore capital there is a focus on commercial. A key reason for this is scale of investment. The commercial sector offers larger projects that lend themselves to a multi-country approach. Second, the underlying building blocks of a successful investment often involve international participants, particularly anchors, which also lend themselves to a cross-border approach.
Residential projects tend to be smaller and attract private rather than institutional – and local rather than international – capital, though there are exceptions. Residential development lends itself to backing platforms rather than investing in projects. Residential developer platforms in West Africa operating on any sort of scale are still underdeveloped. This market is at an early stage from the institutional investor’s perspective, and the primary opportunity is in ground-up property development. As the market and supply chain reacts, there will also be opportunities to acquire, reposition, refurbish and upgrade assets. Yet for the foreseeable future, the main opportunity will be in opportunistic strategies, as in other emerging markets.
Are large-scale land transactions a big challenge?
MORLEY: Globally cities are expanding rapidly, with infrastructure struggling to keep up. This is not confined to the developing world. Due to land scarcity around centres of economic activity, the tendency is for developers and investors to look further and further afield to acquire land priced at a level to allow them to deliver more affordable products. Industry players often acquire tracts of land far away from the city centre, but are then faced with the challenges of effectively creating a new town, rather than just a residential development. Policymakers need to marry these conflicting objectives and enable the development of high-density housing closer to where people work.
What role do you see for investors in the lower end of residential real estate in the region?
MORLEY: The evolution of these products in other emerging markets is such that the investor interest starts at the upper end where margins tend to be higher, then migrates down to where the real scale can be found, which is the middle- and low-income bracket. The growing number of people with access to reasonably priced mortgages are all potential customers of so-called affordable housing. It is by far the largest real estate asset class globally and, in theory, should offer the most long-term potential.
However, unlocking the lower end of the market requires the development of businesses that can deliver a product more cheaply. That usually means internalising the delivery process. Second, the development of an affordable mortgage market is necessary to unlock this asset class. The number of people in Accra who can pay a 25% deposit and pay the 12% interest rates on dollar-denominated mortgages is very limited.
Private equity can play a role, not in directly investing, but by creating a platform that will be able to deliver scale. Investors see what has worked in markets like India, Brazil, Mexico and China, and can emulate it, but only if the other pieces of the jigsaw are in place. Land acquisition is a sine qua non, as is the mortgage industry. They tend to be investment products, to date. So this is just the tip of the potential residential demand.
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