Given the macroeconomic headwinds affecting West Africa, where are the investment opportunities? This was among several topics tackled at the SuperReturn Africa conference in Cape Town last week. For four days, investors, venture capitalists and entrepreneurs in sectors ranging from agriculture, healthcare, finance and of course real estate met and brainstormed on the approaches to dealing with these headwinds, while at the same time looking at new opportunities.
General themes emerged. Most investors agree that the fundamentals in West Africa remain the same. There is a large and growing consumer base of over 300 million people who are seeking the same basic needs – from clothing and food to power and housing. Hence, despite sectors such as oil and gas experiencing declines, the demand for other goods and services is still strong and so are the opportunities within these other diverse sectors.
The key to unlocking these opportunities for investors remains the nature of the investment fundamentals. First and foremost is the skill of the managers. A good company with a solid management team and strong cash flows will always be able to attract investments. The investors also need to better manage their internal processes, especially during this period of economic downturn. Maintaining on-the-ground resources to better identify opportunities and perform due diligence is important, and so is the management of their working capital.
The recession economy in parts of West Africa has also brought opportunities for local players. As some institutional players are driven out by the negative perception in key markets, such as Nigeria with commodity price pressures and devaluation challenges, local players who are nimble and knowledgeable about the market are able to fill up the empty slots. Sources of local funding need to expand. National sovereign wealth funds or pension funds with deep pockets and long-term play strategies are now poised to play a bigger role in these markets.
One sector particularly impacted by these macro-economic changes is the real estate sector. For institutional investors, the typical country selection criteria remain the same: namely demographic growth, rule of law/legal systems, sustainable rental streams for the future, clarity on title and other ownership documentation. The challenge now, however, is the delivery of suitable products given the existing economic limitations – such as the FX challenges and policies.
For real estate investors to weather the storm and still deliver viable products, creativity is a must. One example is the design of the product. In the commercial space, given the cost constraints among corporate occupiers, they are now seeking smaller office floor plates as a way to keep their costs down. Investors as such can focus on developing smaller or more divisible products that appeal to a wider occupier audience. Developers can also manage their costs, particularly construction costs, by limiting their finishes (which make up a significant portion of their construction costs). They can also consider other solutions such as engaging in renovation projects instead that have the benefit of shorter life cycles and hence lower cost. Construction delays are a key cost component for development projects.
For the retail space, restructuring or redesigns are also being considered. Consumers are seeking a blend between destination retail (usually larger and further away from urban centres) and centrally located strip malls. As a result, neighbourhood malls that offer the benefit of both destination shopping and the central walk-in convenience are now making their debut in Nigeria. A recent example is the Maryland Mall which offers an additional benefit of other revenue sources through its large LED screens that provide advertising income. Even as new retailers such as Pick n Pay, Carrefour, and Game are still making waves or expanding in the Nigerian market, neighbourhood malls can take advantage of these new entrants while at the same time targeting smaller local player. This results in an interesting and sustainable mix within the retail space.
The residential sector still has its share of challenges due to the sources of funding from the tenant’s point of view. Reform in terms of mortgage financing or affordable mortgages may be required to spur the kind of development required to meet the large demand. (Over 90% of the population still live in rented homes).
In every business, there is a real estate component. For real estate investors and developers, the challenge is in identifying the unique role that they can play. Some have begun to form joint ventures with operating partners such as schools or healthcare facilities and hospitals. Such ventures allow partners to pull their resources together to bring a project to life, while each at the same time can focus on their core competencies within the ventures. A continuous focus on frugal practices and creative solutions will establish sustainable real estate products that will be beneficial to the West African economies in the long-term.