Understanding African Real Estate Markets

Aly Karam, François Viruly, Catherine Kariuki, Victor Akujuru, Aly Karam, François Viruly, Catherine Kariuki, Victor Akujuru

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000583960
• Edition: 1
• Topic: Architecture
• Subtopic: Urban Planning & Landscaping

This book brings together a broad range of research that interrogates how real estate market analysis, finance, planning, and investment for residential and commercial developments across the African continent are undertaken. In the past two decades, African real estate markets have rapidly matured, creating the conditions for new investment opportunities which has increased the demand for a deeper understanding of the commercial and residential markets across the continent. The chapters consider issues that pertain to formal real estate markets and the critical relationship between formal and informal property markets on the continent.

With contributing authors from South Africa, Ghana, Nigeria, Uganda, Kenya, and Tanzania, the book considers the achievements of African real estate markets while also highlighting the complex central themes such as underdeveloped land tenure arrangements, the availability of finance in both the commercial and residential sectors, rapidly growing urban areas, and inadequate professional skills. This book is essential reading for students in real estate, land management, planning, finance, development, and economics programs who need to understand the nuances of markets in the African context. Investors and policy makers will learn a lot reading this book too.

1 Sub-Saharan Real Estate Markets An Overview of the Contributions

François Viruly and Aly Karam

DOI: 10.1201/9780429279256-1

Real estate markets across the African continent continue to receive considerable academic attention, reflecting the evolution that these markets have seen over the decades. The academic output suggests that residential and commercial markets in Africa have characteristics that need to adapt to new economic and social realities. While early research that deals with African property markets was largely focused on the residential property sector and land titling, the literature has evolved responding to a wider research agenda that now encapsulates investments and development of direct and indirect commercial property. In understanding African property markets it is important to appreciate that the maturity of property markets varies widely between countries across the continent. While countries such as South Africa and Mauritius are relatively transparent, other markets remain opaque and constrained by formal and informal institutional arrangements that have failed to keep up with market dynamics. In many countries across the African continent the banking sector remains underdeveloped and unable to meet the changing needs of property markets.

The contributions in this book can be classified under several themes. The first theme deals with the broad and often unique characteristics of African property markets. The second deals with legal considerations, placing a focus on the legal frameworks that drive property markets in Africa. The third looks at the dynamics of both residential and commercial property markets. The fourth considers the adoption of technologies in Africa, and the final theme looks at real estate education across the African continent.

The book starts with a contribution by Anim-Odame which considers the unique legal and financial arrangements that define African property markets. It also considers the impact of such arrangements on decision making and market outcomes. Anim-Odame concludes that in recent decades, global market forces have defined the trajectory of African markets as well as the improvements in market transparency in these markets. He also argues that a fully functioning and well-regulated real estate market can make a considerable contribution to national economic and social development.

Madell and Karam consider the role that property markets play in defining growth, urban form, and structures of African cities. The chapter emphasizes the considerable development problems that African cities grapple with, while also reminding us of the considerable level of diversity existing between cities in Africa which in turn require unique interventions. They suggest that for city administrators the challenge lies in meeting the standards of a ‘World Class City’ while at the same time responding to an urban environment that often fails to meet the needs of the poor.

Gavu et al consider the institutional arrangements that characterize commercial property markets in West African property markets. The authors observe that governments can strengthen markets through the development of appropriate policies and stronger institutions, which result in increased market transparencies and greater domestic and international investment.

Several authors deal with land titling arrangements systems across the continent. Murigu deals with the evolution of legal land frameworks in East Africa, which range from leasehold to customary and freehold land tenure systems. She makes the critical point that in East Africa specific land tenure systems attempt to meet often unique socio-economic and sustainability objectives. The point is also made by Dugeri and Otegbulu who suggest that land tenure systems influence market outcomes and the potential to unleash value in property markets. They call for a strengthening of existing market arrangements in Nigeria. Mwangi places a focus on land administration systems and the potential impact that decentralization administration systems can have in meeting spatially defined socio-economic objectives.

Makathimo considers the relationship between land sustainability and legal arrangements in Kenya. The contribution considers the Kenyan constitutional provisions that require the state to respond to global sustainability objectives and agreements. The point is made that sustainability regulations have a considerable influence in the way that properties are developed, acquired, and disposed of.

Karam et al review the extensive literature that has dealt with the African residential property sector. They underline that the academic interest in African property markets has not only grown but has widened in scope and geography. The contribution identifies a literature that has, over the years, tackled numerous sub-themes such as affordability of housing, housing policy objectives, determinants of property values, housing finance, and the modelling of property markets. They also emphasize that the institutional complexities of African property markets retain a central position in the African real estate research agenda. They suggest that qualitative research remains constrained by a lack of data.

The dynamics of residential African property markets is also considered by Simbanegavi and Ijasan who posit that public sector interventions, such as inclusionary housing interventions, have a role to play in stimulating private sector investment through the reduction of risk. The duality of African property residential property markets is considered by Napier et al, who look at the dynamics that drive residential property markets. They argue that an accurate modelling of these would make it easier to identify market segments and fine tune public and private sector interventions.

Otegbulu turns to the commercial property sector, and in particular the impact that weak data, unreliable institutions, poor infrastructure, and an uncertain macro-economic environment have for property market outcomes. The commercial property sector is also considered by Olawore who emphasizes the importance financial markets play in developing markets in Africa. Akinsomi looks at the performance of REITS in South Africa and draws the conclusion that there is evidence that specialized REITs provide superior average returns.

The focus on technology in real estate is considered by several authors. Ogolla and Kiete turn to the technologies used in the management of properties and the specific role of Building Management System (BMS). They conclude that demand is constrained by the low level of market awareness that exists for these types of technologies. They also assess the cost of applying technologies that are available to the market. The focus on appropriate technologies in property markets is also raised by Green et al who consider the role of PropTech in improving market transactions efficiencies in South Africa, as well as the opportunities and risk associated with such technologies.

The importance of education in promoting property markets is discussed by Kariuki et al who emphasize the development of property markets in Africa needs to be reflected in the development of appropriate curricula. Property courses should reflect the growing sophistication of markets. They suggest that the development of a body of knowledge needs to reflect existing market structures and complexities. The role of education in developing African property markets is also considered by Akujuru and Deeyah who highlight that modern property courses should place an appropriate emphasis on finance, valuation, and economics, while at the same time finding an appropriate mix of both ‘technical ‘and ‘soft skills’. They underline that courses should reflect the interdisciplinary nature of the property body of knowledge.

The overarching theme of the contributions made in this book is that property markets in Africa are rapidly evolving and modernizing. These contributions also suggest that property market outcomes are influenced by the formal and informal institutions. These arrangements affect market efficiencies, market risk, and transaction costs which in turn influence investor confidence. As emphasized by several contributors, property markets in Africa need to meet diverse developmental objectives.

The challenge lies in developing an investment environment that can unleash economic as well as social value in African property markets.

2 Global trends and African real estate markets

Wilfred K. Anim-Odame

DOI: 10.1201/9780429279256-2

1. Introduction

This chapter treats the African real estate markets under four broad segments and focuses on the impact of global trends. First, it examines the globalisation of real estate as an investment vehicle and highlights the limitations of African markets. It further covers the fundamentals of real estate investment based on available literature on selected African markets. Second, it assays the development of real estate markets in sub-Saharan Africa (SSA) to identify commonalities and uniqueness. Here there is a large literature on land administration and land policy but relatively little work on rigorous quantitative analysis of markets maturity, which is of direct relevance to the objectives of this chapter. Third, and in more detail, the chapter examines global trends under nine thematic segments – macroeconomic regimes, migration patterns, urbanisation, demographics, foreign direct investments, remittances, PropTech, mortgage market and covid 19 pandemic – to elucidate their impact on real estate markets in SSA. Fourth, it draws conclusions to include that a fully functioning and well-regulated real estate market largely depends on a number of fundamentals such as infrastructure development, information technology, the law, and policies that do not change with change of governments.

The past decades have experienced an influx in cross-border flows of real estate investments and an even more dramatic increase in the flow of real estate capital from advanced countries into emerging markets particularly in Asia and the transition economies of Central and Eastern Europe. The globalisation of real estate investment is accompanied by a growth in real estate market research in emerging and transition economies, from both academic and industry sources. Firms of real estate intermediaries have also expanded the coverage of the standard market indicators available in mature real estate markets to embrace a widening range of “emerging” markets in Eastern Europe, Asia and Latin America.

The increase in global real estate capital flows is a major factor for the improvement in transparency and information of a set of “emerging” real estate markets (Anim-Odame, 2009). In all these interventions, African real estate markets have been less affected. The business environment and size of higher-quality real estate investment stocks in African markets, with the exception of South Africa, place them well outside the investment horizons of these investors. This narrative has to change while at the same time efforts are to be made to promote the real estate markets in SSA; make both domestic and foreign capital flows drive the process.

From a theoretical perspective and the limited evidence on actual values of the stocks, real estate plays a major role in the process of economic development. The lack of literature to explore this role is not only surprising but also suggests the need to investigate the operations of real estate markets in emerging economies. However, in developed economies, real estate is a large element of total capital stocks and of total personal and corporate wealth (Miles, 1990; Miles, Pittman et al., 1991; Miles, Roberts et al., 1994). At the global level, for example, Brown and Matysiak (2000) estimates that real estate – broadly defined as commercial and residential as well as farmland and other interests – accounts for 55 percent of the total value of wealth.

For developed countries, investible real estate value is set at the fixed ratio of 45 percent of GDP (Hughes and Arissen, 2005). For developing countries including emerging economies in sub-Saharan Africa, investible real estate value is rather a rising diminishing function of GDP per capita, tending towards the limit of 45 percent at the threshold of $20,000 per capita. Simplistic as it may be, the estimation method tends to exclude factors such as population density and planning regimes, which might plausibly be expected to lead to varying real estate values for given levels of GDP and GDP per capita. Nonetheless, the methodology quantifies the plausible propositions that, in terms of orders of magnitude, the value of real estate stocks is strongly associated with the size and wealth of economies.

Research and policy on the development of formal real estate markets in sub-Saharan Africa economies have concentrated on establishing land registration systems, on the assumption that improved security of tenure is the key element in the process. Other necessary conditions such as access to sources of equity and debt finance for development and investment, and the creation of clear rental contracts have not, however, been covered in the available literature. The attention of researchers and investors in income-producing real estate is heavily skewed towards developed economies, leaving emerging economies, particularly in Africa with small but rapidly growing formal markets uninformed by the standard market indicators such as rental growth, yields, total returns and market stock.

As demonstrated by a wealth of research in developed economies, a substantial benefit of the production of real estate indices is to inform investment markets of the case for the inclusion of real estate in mixed-asset portfolios. In emerging countries, and above all in African countries, information on the status of real estate as an investment medium – its market value against other asset classes, and its importance in the portfolios of institutional and private investors – is thin or non-existent. Similarly, there is very little literature on the availability of finance that was secured against real estate assets, or on the importance of real estate lending in the balance sheets of the banking system.

Data transparency is a key characteristic of a mature market, and markets that are able to demonstrate that they possess such data have a competitive advantage and are more likely to attract private sector investment funds (Adair et al., 2004). The most systematic and extensive classification of real estate markets by indicators of data transparency and other measures of “maturity” can be found in a “Global Real Estate Transparency Index” (GRETI) produced by Jones Lang LaSalle. This is the real estate industry’s most widely used and highly valued benchmark for assessing real estate transparency. The index covers a global list of countries that provide the most transparent operating en...