by Gerhard Zeelie, Nedbank CIB Divisional Executive: Property Finance Africa
If there is one thing property investors in Africa can be certain of during the Covid-19 pandemic, it is that nothing is 100% certain. While a measure of normality finally seems to be creeping back into global markets, property in Africa went into Covid-19 in a relatively uncertain state, and there can be no doubt that the pandemic has both intensified and prolonged this uncertainty.
The impact of Covid-19 and the resulting lockdowns was felt to varying extents across the different property subsectors. Hospitality, retail and commercial offices were hard hit and many participants in these sectors are still struggling to find their way out of that impact zone. On the other hand, while the warehousing and logistics industries in most parts of the continent undoubtedly suffered and continue to suffer, the impact was not nearly as severe or as long-lasting. And while residential property arguably took the lightest blow, the effect of Covid-19 on economies and incomes means that demand for residential properties will likely be muted for some time.
Given this mixed bag of consequences, prospective investors are asking which property sectors in Africa currently make for the most compelling investment cases. Unfortunately, there is no easy answer, particularly given that the continent, and indeed the world, has by no means seen the back of Covid-19 yet.
Against this backdrop it is necessary to try to predict the likely demand, and altered requirements, for different types of property assets in the eventual post-Covid-19 world. Obviously, this will become a little easier as we progress through the pandemic, but there are a few assumptions we can make. For one, the hospitality sector will almost certainly recover, but it is likely to be a very slow process – at least until a vaccine is developed. The recovery is also likely to create very different hospitality and travel sectors, with a focus on investing in experiences rather than merely visiting destinations. Business travel will be very different in years to come, as the realisation sets in that remote business dealings are viable and much more cost-effective than physical travel.
The retail and office sectors are also unlikely to ever return fully to what they once were. While the shift to remote working arrangements may not be as widespread as was initially predicted, the role of offices will change, and organisations will probably require smaller spaces to house their remote workforces. Further, retail is set to undergo a similar shift – particularly on the back of the expected online shopping outbreak – with the focus of physical retailers moving from pure shopping to entertainment and community-focused convenience.
Even residential property may be in for a transition. Given the greater focus on working from home, demand for homes close to workplaces and CBDs could well reduce, with more importance placed on proximity to family and lifestyle requirements like schools and leisure facilities. As is evident from all the above, any attempt to predict future African-property trends is little more than speculation. And this lack of certainty makes diversification even more important than normal for all but the most highly specialised of property investors. It is also worth considering that the economic impact of the pandemic has brought about a significant shift in funding models, especially in Africa.
For one, in a higher-risk environment, we will no doubt see lower levels of gearing in play than we did previously. Debt has always been cheaper than equity, so investors have largely attempted to maximise the debt portion of their property finance deals. And until the second quarter of 2020, banks were open to higher levels of leverage. However, the lack of flexibility in debt-based finance makes it less appealing now – for investors, developers and finance institutions alike. As a result, it is very likely that the equity-to-debt ratio of most African property finance transactions will shift from the typical 40:60 level of the past to something closer to 60% equity and 40% debt.
This is not merely a risk avoidance strategy by the banks. Rather, it is a sound way of driving a much-needed investor focus on a smaller number of higher-quality investments. Given the circumstances, this is preferable to a far more dangerous shotgun approach of scooping up properties purely because they are cheap, and without regard for their long-term resilience and return potential. Put simply, investors in African property who are serious about building resilient portfolios for a post-Covid-19 world have to prioritise quality over quantity.
They also need to be prepared to put their money where their mouths are when it comes to structuring their finance.