Rapid economic growth and an expanding private sector reshape Tanzanian real estate

 

The real estate sector in Tanzania is relatively young, with large-scale commercial development only taking off in the 1990s. The 1970s and 1980s witnessed the imposition of rent caps, which acted as stumbling blocks to large-scale building. In the 1990s a structural adjustment resulted in the opening up of the housing sector to private investment and the abolishment of rent controls.

Historically, public sector actors handled the largest development projects in the country, but more private sector investors are now playing an increasing role in residential, office and commercial space.

Recent years have seen a raft of new tower projects in Dar es Salaam, which, with a population of 5m, is the largest city in Tanzania. However, as is common across Africa, the largest demand is found in the residential segment, where a shortage of dwellings, estimated at 3m, makes new building a priority across the country.

Construction over the past decade has comprised high-rise buildings in downtown Dar es Salaam meeting demand for office space, whereas in Mtwara, in the south, development has been based on expectations that offshore gas will create energy and industry hubs in the city, as well as boost local demand from service providers to the industry. However, it now appears that may take longer than initially expected following the slump in energy prices since 2014.

In other news, demand for facilities catering for the tourism industry has grown significantly across the board and continues to do so, from budget accommodation such as mid-range guesthouses to luxury lodges in the game circuit, especially in northern Tanzania’s Mount Kilimanjaro, the Ngorongoro crater and the Serengeti National Park.

Master plans are currently in development for the two cities and for Dodoma, in the hope of anchoring future development to demand projections and optimised land-use decisions. Though Dodoma has formally been Tanzania’s capital since 1974, many government functions have remained in Dar es Salaam. With President John Magufuli pledging to finally complete the administration transfer by 2020, it too will become a key real estate market.

Indicators

The real estate industry in mainland Tanzania is growing more slowly than the economy overall, with its contribution to GDP declining steadily in the past 10 years, sliding from 6.1% in 2006 to 3.2% in 2015. For the archipelago of Zanzibar, the figure has hovered around the 6% mark, and accounted for 5.7% of GDP as of 2015.

Cost sensitivity is a significant concern for the real estate sector, not only directly in terms of house sales but also indirectly in terms of demand for formal retail and commercial space. Approximately three-quarters of the population live on $2 or less per day, which means the sector is targeting a small segment of middle-class earners.

However, there is ample demand: the country has a population of 50m people and beyond the conurbation of Dar es Salaam there are three other large cities made up of roughly half a million people or more, including Mwanza with 2.8m, Arusha with 500,000 and Dodoma with 400,000.

Most of the value created in the real estate sector is in Dar es Salaam, which remains the country’s economic capital. The total economic value of buildings in the city was pegged at $12bn as of early 2017, with 20% of that value found within 1 sq km of the central business district (CBD).

Costs & Yields

For investors, Tanzania offers an attractive yield on assets, although in certain classes, such as residential and retail, creditworthy tenants are limited. According to property consultancy Knight Frank’s “Africa Report 2017”, monthly prime rents in Dar es Salaam hovered around $21 per sq metre for office space – well above that in more established markets like Cape Town, at $17 per sq metre, or even Nairobi, where prices stand at $16 per sq metre. Yields for office space were around 9%. Industrial rents in Dar es Salaam were also slightly above Cape Town and Nairobi, coming in at $6 per sq metre per month, as opposed to $5 and $4.70, respectively. Residential rents were more or less on par with most other urban markets in the region, coming in at around $4500 per sq metre, below that of Maputo and Cape Town, but equal to Johannesburg and above Nairobi.

However, those yields may begin to drop in the coming years, as cost pressures and market slowdown due to investor movement begin to take effect. The introduction of a value-added tax on property and construction materials is pushing prices higher for building – a unit that would have cost $16,000 to construct in 2011 cost almost $21,000 by 2015. This may have a particularly significant impact on projects within the lower-income segment.

Other expenditures remain relatively competitive. Registering a property takes eight procedures over a period of six days, which is above the regional averages of six and 52.6, respectively, for the Southern African Development Community. The cost of the process, however, at 4.4% of the property value, is lower than the regional average of 6.9%.

Furthermore, Tanzania appears to remain inexpensive in a regional context. The IMF created specifications for a model house and attempted to calculate the cost of building it in 15 African countries, both in the capital city of each country and in a secondary city. The range found Tanzania was the least-expensive place in which to build, at $30,000 in Dar es Salaam. Nairobi was the most expensive city in which to build, at $60,000. The fund expects to further develop this analysis, but early conclusions indicate that variation comes more from labour costs than materials costs.

Sector Organisation

All land is publicly owned in Tanzania, vested in the office of the presidency, and with administration handled by the Ministry of Lands, Housing and Human Settlements Development. Land access is limited to leases, which are for up to 99 years and available only to citizens.

Foreigners can gain land rights only for investment purposes, by entering into joint ventures with locals to access land, or leasing it through the Tanzania Investment Centre (TIC), the government’s investment promotion agency. This option requires selecting land from the TIC’s land registry, or applying to reclassify land desired if it is not included in the TIC’s list of properties.

There are three land categories: general, reserved and village. The first two are governed by the Land Act; the latter by the Village Land Act. As of 2016, some 650,000 title deeds had been released, with another 400,000 made available in 2017. When the documents are ready, however, banks may recognise them as security to borrow money for development, such as through a mortgage.

Residential

As is the case across the continent, there is a robust market for high-end residential units, driven by high-net-worth individuals, foreign expatriates and diplomats, and a limited upper-middle class population. Much of this upmarket real estate is in Dar es Salaam, mainly in neighbourhoods such as Oyster Bay, Masaki and Mbezi Beach.

A number of developments look set to add to the supply in this segment. One of the most visible private sector projects is Viva Towers, a mixed-use building with high-end residential units on Ali Hassan Mwinyi Road, the main artery between the CBD and Dar es Salaam’s northern neighbourhoods.

Similarly, Arena Real Estate, a domestic developer, which announced plans to list about a third of its equity on the local stock exchange, is also constructing a commercial residential complex, Falcon Towers, in Tegeta, located to the north of Dar es Salaam.

While the high-end market is relatively durable, it is beginning to see the start of an oversupply, with dwellings in high-rises or in the Msasani villas fetching lower monthly rents. Prices have come down from approximately $10 per sq metre per month to around $6-7 as of mid-2017. This has been primarily due to a sudden fall in the number of expatriates living and working in Dar es Salaam, brought about by a reduction in oil and gas activities and other large investment projects in the country since 2015.

Affordability

However, with a housing shortage estimated at 3m dwellings, and an additional 200,000 units of demand annually, affordable housing is perhaps the biggest segment in the country, but also, with its rising costs and low margins, one of the most difficult to cater for. In 1990 there were 40 informal settlements in Dar es Salaam, and that number has climbed to more than 100 now, on the back of increasing urbanisation.

There have been some proposals from private developers to address the issue. The Aviation Industry Corporation of China, for example, has announced plans for a master-planned community with middle- and lower-income units: Avic Town, 28 km from central Dar es Salaam. The firm, which has also built smaller residential buildings in Dar es Salaam neighbourhoods including Oyster Bay and Upanga, will look to sell units for between $130,000 and $550,000, along with more affordable units.

However, this is still out of reach of most of the middle and low-income market. The IMF’s survey found Dar es Salaam to be a low-cost place to build, but its numbers also show that even if its model structure cost $10,000 instead of $30,000, it would be affordable for just 2.4% of Tanzanians.

The state has sought to close the housing deficit at the lower end of the market through a number of means, including via the publicly owned Watumishi Housing Company (WHC), which manages a real estate investment trust (REIT) called WHC-REIT, a first of its kind in Tanzania. It was capitalised by six pension funds, and aims to build houses that cost between $10,000 and $40,000. This is lower than the general range of $30,000 to $150,000 in Dar es Salaam for middle-class housing. To date 800 units have been built, typically by small builders. Watumishi began as a closed investment among the country’s pension funds, but is set to be traded on the Dar es Salaam Stock Exchange by 2018, and may seek outside funding to scale up its activity.

WHC’s structure – as a state fund and developer – is hardly unique. State investment funds have played a major role in developing housing in the country, including major pension funds such as the National Social Security Fund and the Parastatal Pensions Fund. These units are sometimes offered to pensioners whose money the fund manages before they are made available to the public.

Furthermore, these vehicles often function as developers and landlords, although national audits have found significant levels of dysfunction in the system: projects undertaken without market studies to determine suitability; projects with houses that fail to sell; and a struggle to collect rent on properties owned by the funds.

Other major state-owned developers include the National Housing Corporation, a self-funding parastatal, and the Tanzania Buildings Agency. The latter provides housing for civil servants and is expected to have a significant focus on Dodoma. For investors in the private sector, the current administration of President Magufuli may potentially represent an opportunity for them to play a larger role.

Mortgages

The state has aimed to cultivate a market for mortgages, and one response has been the Tanzania Mortgage Refinance Company, created by lenders in 2010 with donor funding to provide low-cost liquidity that can be used to lower rates charged to customers, and to extend maturities. The hope is for growth from a small base – the ratio of outstanding mortgage debt to GDP stood at 0.33%, as of end-2017. In Rwanda, Kenya and Uganda the ratio is at least 2.5%. The figure was unchanged from 2016 to 2017, according to the Bank of Tanzania’s mortgage market update in May 2017. The average mortgage interest rate has fallen since 2009 from 22% to 16%, but indicators have been mixed in the past year. The number of active mortgages fell 14% from the first quarter of 2016 to the first quarter of 2017, to 3469; while outstanding mortgage debt stood at TSh344.8bn ($156.8m) as of end-2017. Scaling up may require an even greater degree of concessional finance, and microfinance as well is being considered as a potential solution. An estimated 41% of Tanzanians who have used microcredit have done so for home building or improvements.

A housing microfinance fund was established in 2011 with the aid of capital from the World Bank, but was not able to disburse money until 2015, when a TSh3bn ($1.4m) credit line was extended to DCB Commercial Bank, which has evolved from a microcredit lender to a universal bank.

Retail

As is the case throughout East Africa, formal retailing is in its early stages in Tanzania, with a few malls, offices with concourse retail space and supermarket-anchored plazas dotting Dar es Salaam. The two modern shopping malls are Mkuki House, at 25,000 sq metres, and the $80m Mlimani City Mall, which encompasses 19,000 sq metres, and they have attracted retailers such as South African big box stores Game and Mr Price, KFC and Dubai’s Landmark Group. Mlimani City Mall has plans to expand in the coming years, having announced that it will open two new office towers, with some 50,000 sq metres of gross leasable area (GLA).

As of May 2016 there was a total retail stock of 153,000 sq metres of GLA in Dar es Salaam, renting in a range of $25-35 per sq metre per month, according to research from property consultancy JLL. As of 2014 total retail spending in Tanzania accumulated to $17.8bn, in comparison to $25.8bn in Kenya, despite Tanzania’s larger population.

Maintaining tenants can be challenging. Mlimani City Mall’s anchor tenant had been Shoprite, the South African supermarket chain with locations across sub-Saharan Africa. However, it recently exited the country, selling its stores to the Kenyan supermarket Nakumatt. Shoprite cited difficulty in making a profit in Tanzania; Nakumatt has since begun to grapple with similar cost-cutting pressures.

However, this has not stopped new retail projects from entering the pipeline. Among the announced developments is a proposed expansion of Mlimani, a mall project called Dar Village, and a $68.7m development, Peninsula Plaza, which, when completed, will offer approximately 35,000 sq metres of GLA. “Demand for more formal retail exists, but retailers need to be pragmatic about their approach to this market,” according to a March 2016 report by PwC. “Tanzania is still a low-income economy and retailers have to offer value for money.”

Office Market

Dar es Salaam has long suffered from a shortage of office space, but a building boom in the past decade has helped to address the problem, with new fixtures on the skyline including Viva Towers and the twinned PSPF Commercial Towers, built by the Public Service Pensions Fund. The city now offers 180,000 sq metres of GLA, renting for an average of $18 to $21 per sq metre per month in the city centre, and $22 to $24 on the Msasani Peninsula, home to an upscale district of villas, shopping and hotels and low-rise office developments.

The city still suffers from a lack of grade-A office space, but that has not translated into fast rising rents: escalation rates do not exceed 2% a year. Likewise, in the hotels sector, new additions have not saturated the market. Dar es Salaam has 14 five-star hotels, with an average cost of $131 per night and occupancy rates of about 70%.

Outlook

The flat numbers in the mortgage market and the softening rents at the higher end are not unique to Tanzania; however, demand remains significant. Tapping that demand is the biggest issue, given that the bulk of it is for either small-scale retail or affordable housing, neither of which offer attractive returns for large developers.

As a result, the country will most likely have to depend on government intervention and innovative financing to help address demand at the lower end of the real estate market. This means that the higher-end residential and commercial spaces will be left in the hands of private sector developers.

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The Report: Tanzania 2018

Construction & Real Estate chapter from The Report: Tanzania 2018

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