By Gerhard Zeelie; Head of Property Finance Africa: Nedbank CIB
A combination of political volatility, regulatory uncertainty and economic stagnation has seen South Africa understandably falling out of favour with local and global property investors of late. However, much of the rest of Africa remains a relatively attractive investment proposition across a variety of sectors, including real estate.
Of course, lumping all of Africa together as a single investment destination is not only grossly incorrect, it is also very naive, and potentially disastrous for the misguided investor who makes this mistake.
Every African country is unique, and presents its own investment opportunities, challenges and quirks. So, assuming that an investor has fully assessed an investment opportunity in an African country, and established that it makes sense from a growth, viability and supply and demand perspective, there are a number of other fairly universal truths that such a prospective investor would be well advised to bear in mind when planning their financial foray into regions north of South Africa’s borders.
The first such consideration centres on the practicality of the opportunity from an ease of doing business perspective. There are a number of practicalities to investing in Africa that some global investors may never have had to consider before. For one, it’s important to assess how accessible the investment destination is, both from an air- and road – travel perspective. Then there is the issue of ease of entry into the country, and to what extent your movements and actions will be hamstrung by bureaucracy once you’re there.
Then there is the issue of corruption to consider. It’s no secret that corruption exists to a greater or lesser extent in many African countries, and the prospective investor needs to have a clear understanding of the level of corruption he or she will face, and how tolerant they are willing to be of such activities. This is of course not to imply that investors need to feed into corruption, but just that they need to be fully aware of it and accept that it may have the potential to delay or limit their investment or property development efforts.
The second fairly universal factor that requires consideration by prospective property investors in most African countries is the issue of tax incentives. While these can be a significant deciding factor when choosing an African investment destination, it is essential to bear in mind that not all tax incentives are created equal. So, while complete exemption from tax for a given investment period may be attractive initially, the financial benefits could be relatively short-lived if the investor is faced with inordinately high capital gains tax on exist.
In fact, for many of the uninitiated, or ill-prepared African property investors, what looks like an appealing tax deduction is often just a tax deferral, so it is imperative that tax incentives are carefully assessed to determine which offer represents the best, true value over the full term of the investment and, preferably, beyond.
The other aspect that deserves careful attention is how complex the tax incentive really is, how difficult it is to access fully, and how easy it is to deal with the tax authorities in the various countries or jurisdictions under consideration. Failure to fully assess and understand all of these components can very quickly dull the sheen of what may have initially looked like a very bright reason to pursue an investment opportunity.
Another aspect of investing in Africa that can be surprisingly challenging is getting to grips with the ins and outs of foreign exchange. Given that the majority of global investors will fund their African real estate investment in hard currency, an understanding of currency risk over time is essential. In a number of African jurisdictions, often volatile inflation and interest rates have a direct impact on local currency values against international currencies like the US Dollar.
Given that the factors that influence inflation and interest rates are often uncertain and unpredictable, the resulting currency volatility can be hard to predict as well. Add to this, the fact that foreign exchange regulations in many African countries can often be quite fluid, the challenges are clear.
That said, on the back of gradually increasing investor inflows, many African country foreign currency regimes are becoming more predictable and certain, with many linking more directly to global market forces, thereby allowing for more certain determination of flows and rates. In time, this should also open the door for the development of a more mature and viable derivatives market in Africa.
As any international investor will attest, there’s much more to legal matters than compliance and bureaucracy. In most countries, the legal environment determines the complexities involved in investment, and as a result, has a significant impact on overall investment costs. Africa is certainly not exempt from these legal ramifications and, in fact, the often significant legal complexities in many African countries prompt numerous investors and financiers to use Mauritius or the UK as the legal jurisdiction for their transactions across the continent.
Of course, this doesn’t remove the requirement for the execution of security to take place through the local legal system, which can add to costs, particularly when it comes to registering security to access bank funding and when assets are refinanced subsequently by a different financier.
As is clear from all of the above, Africa can be a challenging investment destination. However, none of these challenges or complexities are insurmountable. In fact, with the right investment partner, that has extensive knowledge of African property markets and experience in smoothing over the difficulties, taking advantage of investment opportunities in many of the countries on the continent is not only viable, it’s potentially lucrative.
Yes, it may require patience, tenacity, and a fairly strong constitution, but the potential rewards for the savvy investor with the right attitude, an eye for unique opportunities, and a thorough approach, far outweigh the challenges.
If you enjoyed reading this article, you might find this article ‘Nedbank supports footprint in Africa by securing ground-breaking property finance deals‘ relevant as well.
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