High returns attract real estate funds to Africa

High stakes for high return, if you can stick it out for the long term - investors are buying into a boom in sub-Saharan African real estate.

Forecasts for 20 per cent net annual returns from investing in shopping centres, office blocks or industrial complexes in countries from Zambia to Kenya are drawing in new investors, despite more immediate concerns in some countries about Ebola, terrorism or political stability.

Investors have already taken a liking to sub-Saharan African dollar debt, encouraging a record US$10 billion in sovereign and corporate issuance last year and US$5 billion this year, according to Thomson Reuters data.

But when even bonds from Kenya and Senegal offer yields of only 5 or 6 per cent, enthusiastic risk-takers may choose to invest on the ground in Africa.

Momentum Global Investment Management is launching a US$250 million sub-Saharan real estate fund later this year, focusing initially on shopping centres and office buildings in countries such as Mozambique and Rwanda. The fund has a life of up to eight years, so it will not be a fast way to make a buck - but Momentum expects it to be lucrative.

"The number one reason [to invest] is return - 18 to 20 per cent on an annual basis, if you are in for the full eight years," said David Lashbrook, the head of Africa investment strategies at Momentum. "The investors we are looking at targeting are institutions which can be locked up for the whole eight years."

As Africa's fast-growing population gains spending power and moves into the cities, demand for real estate will grow, fund managers say. Urbanisation and population growth would boost the number of people in cities globally by 2.5 billion over the next three decades, with much of that growth in Africa and Asia, a recent United Nations study said.

"The desire of the increasingly middle class to meet, socialise, shop and spend their leisure time in facilities or retail developments that are on a par with what you find around the world is not going to abate, it is going to continue," said David Morley, the head of real estate at private equity firm Actis.

Actis has raised and invested nearly US$500 million in two real estate funds, with markets including Nigeria, Zambia and Mozambique. Morley is also targeting annual returns of 20 per cent or more, about 5 to 10 percentage points more than returns seen in similar mainstream emerging or developed funds.

Building costs in many African countries are high, real estate specialists say, partly because many materials have to be imported. But potential rents are also high - at a monthly US$25 to US$30 per square metre for high-end office blocks in cities such as Rwanda's capital Kigali or Ghana's capital Accra, compared with less than US$20 in Johannesburg.

There are eight Africa-focused unlisted real estate funds targeting US$1.25 billion in capital, according to data provider Preqin.

About 69 per cent of capital raised for African real estate funds between 2009 and last year was focused on sub-Saharan Africa excluding South Africa, up from 40 per cent from 2006 to 2009.

Private equity funds look to attract institutional investors and traditionally do offer higher returns because of the risks of investing in unlisted companies which may be less transparent.