In early November, JLL SSA team members had the privilege of participating and speaking at the first West Africa Property Investment Forum in Accra Ghana held at the brand-new Kempinski Hotel that had recently opened its doors to the public – an ideal location for investors and real estate professionals interested in West Africa to meet, dialogue and exchange ideas. A key topic foremost on everyone’s minds remained what should investors expect from both Anglophone and Francophone West African economies in 2016 and beyond? Several speakers sought to shed light on this topic through-out the two days conference with a focus on the key countries of Nigeria and Ghana in Anglophone West Africa, and Ivory Coast in Francophone West Africa. Below are some of the key highlights:
Anglophone West African Economies (Nigeria & Ghana) – the waiting game
2015 has been a particularly challenging year for Anglophone West African countries starting with the news of Ebola earlier in the year and then the falling oil and other commodity prices post summer. This has adversely affected oil-producing countries such as Nigeria and Ghana impacting their currency values. Nigeria for one has seen its currency devalue by over 8% in 2015 with an expectation amongst investors of further value decrease.
To counter the risk of devaluation, the Central Bank of Nigeria (CBN) has sought to take steps to stabilize the currency by establishing Forex Controls. For instance they have eliminated the interbank FX markets, and established a restricted list of items that can be purchased using FX obtained from the CBN. The restrictions have had an opposing effect particularly on the retail space. With 46% of items on the list related to retail and a backlog of Form M applications (used to obtain FX) at the CBN, the changes have impacted inventory levels and restocking for retailers. Additional CBN led measures that have been put in place to restrict the use of FX based transactions in the economy has further “rattled” investors who have seen their cost of doing business in Nigeria suddenly increase.
The net result is a “wait and see” approach amongst investors in Nigeria for 2016. The Nigerian economy is still expected to grow albeit slower than in the past few years. The new administration has been seen thus far as focusing more on corruption vs the economy, but this is expected to change with the much anticipated announcement of the president’s cabinet. A re-prioritization by the government on the economy is anticipated with new policies to grow the economy and encourage the flow of investment capital to Nigeria. As such an increase in FDI investments in Nigeria is projected for 2016. In addition, President Buhari’s anti-corruption stance though stagnating the economy in the short-term, is expected to bolster a recovery in the mid to long term as some of these reforms take effect and begin to have a positive impact on investor sentiments.
Nigeria’s next door Anglophone neighbour Ghana has also been undergoing similar challenges. The Ghanaian currency experienced significant fluctuation in 2015, moving from a 3.3% decrease in value in Jan, to 4.9% in June with a recovery 3 weeks later to 3.2%. This volatility was due to hedging mechanisms pursued by currency speculators, the IMF 3 year Extended Credit Facility of 918M USD, and the increased cocoa inflows, all of which positively influenced the currency reserves and helped improve liquidity.
Nonetheless, further devaluation is expected for 2016 as the county continues to struggle with an energy crisis, high inflation and lower commodity prices for not only oil, but gold and cocoa as well. FX availability in Ghana remains a challenge. The scarcity of FX has begun to affect prices as investors prioritize availability over price. The effect has particularly been felt in the retail spaces as the erosion of purchasing power amongst consumers has had an impact on profitability. As a result, the Ghanaian currency is expected to further depreciate by up to 20% during the first half of 2016 – a 4.9% decrease. This will be driven by the poor availability of FX especially in the first half of the year as inflows tend to come in during the 2nd half of the year – another “wait and see” scenario.
Thera are certain measures investors can take to counter the effect of this currency volatility as they participate in the “waiting game” in Anglophone West Africa. Three potential solutions include:
- FX hedging: Take advantage of a forward contract that locks in exchange rate or the dollar equivalent of the local currency, at a specific point in time.
- FX Swap : If an investor needs the local currency today and not FX, arrange a swap where you can obtain back the FX at a pre-agreed rate.
- FX option- Here the investor has the right but not the obligation to buy FX at a certain rate.
By exploring these various hedging instruments, investors can better prepare themselves for the waiting game as they decide upon the right timing and entry strategy into these Anglophone West African economies.
Francophone West Africa and its shining star, Ivory Coast
Whereas several ‘gloom and doom’ theories were discussed pertaining to the Anglophone countries at WAPI, most of the speakers had a largely positive outlook for the Francophone West African countries – particularly for Ivory Coast which stood out as a shining example with strong growth expectations for 2016.
As one of the many francophone West African countries, Ivory Coast is a positive recipient of the established economic integration model in that part of the region. A member of both the UEMOA and the ECOWAS, Ivory Coast shares one currency with the rest of Francophone West Africa – the CFA. The CFA is pegged to the Euro hence is not exposed to “dollarization” issues faced by its Anglophone counter-parts in region. In fact devaluation risk is seen as quite minimal with the last devaluation occurring in 1992. These countries benefit from a common commercial/business law the OHADA and have a shared financial and banking system through their mutual central bank, the BCEAO. The commonality has the positive effect of establishing a consistent legal and financial framework which allows for ease of business entry and knowledge transfer.
The francophone West African countries have been making strides at diversifying their economies to include agriculture, mining, manufacturing. They have been working on enhancing their economic control drivers resulting in infrastructure and power improvement projects that have been launched in the region, such as the Trade and Economic zones in Senegal (Integrated Economic Zone Dakar) that is aimed at improving roads, port, land and sea transportation. The goal is to facilitate trade in the region and give economic incentive to investors to invest in these economies.
Benefiting from this financial and legal commonality and relative economic stability is Ivory Coast. Recently coming out of a 10 year war that had devastated their economy, Ivory Coast is now poised for growth with real estate investors clamouring for a position at the table. Why? The supply demand ratio for starters. A huge gap exists between the demand for commercial grade properties (of all types) and the existing supply that have been grossly affected by the war. The 500,000 residential housing deficits is just an example.
The availability of capital for project financing is also an issue that is currently being addressed. Banks in the past were unwilling to lend having had very unfortunate experiences with local developers. Now with the influx of more international and reputable development firms into the country, banks are now more interested in such partnerships. Fuelling this movement is also the government’s goal of separating the economic capital (Abidjan) from the political capital (Yamoussoukro). If Nigeria’s Lagos vs. Abuja scenario can be used as an example, then growth in development can be expected in Yamoussoukro as the demand for various real estate assets to house the movement of civil servants, government officials and lobbyists will increase.
Nonetheless, inherent challenges still exist. Availability of clear titles, construction risk and the need to do business in French still remain as major entry barriers to Ivory Coast. Some of these challenges can conversely be mitigated or ‘managed’. Local partnerships can be formed with title holders. Constructions risks can be alleviated by working with reputable international developers who have development experiences in the region and/or other francophone African countries. Finally most of the key leadership in organizations in Ivory Coast do speak English hence it will be important to deal directly with them – though a lack of a basic knowledge of the French language will remain a hindrance for day to business affairs.
To conclude the WAPI conference was a unique opportunity for investors and real estate practitioners to engage in healthy debates about the future of the Anglophone and Francophone West African economies. 2016 promises to be an interesting year for the region.