Geographies in Depth

The 10 African cities poised for take-off

Mark Bradford
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Africa is on the move – economic growth is robust, foreign investment is growing and its expanding urban middle classes are creating an internal market of global scale. The continent is actively harnessing its natural resources, but Africa is not just about the commodities boom: growth in manufacturing, technology and telecoms, finance and business services, outsourcing, retailing and hospitality are all changing the face of the continent’s cities.

Sub-Saharan Africa’s commercial real estate sector has many of the ingredients for “lift-off”. Unencumbered by a legacy of existing stock, the continent has a real opportunity to “leapfrog” the normal stages and build high-tech buildings. Africa’s lead in mobile banking illustrates that it has the potential to be a ground-breaker. The reality, however, is that the future shape of Africa’s real estate market will be determined by its ability to tackle poor transparency, which will continue to be a major barrier in this sector.

Which cities offer the best opportunity will clearly vary by industry sectors – but at a composite level my company has identified 10 cities from a list of 40 that are likely to have the combination of critical mass of commercial activity and underlying growth factors to push them to the top of the continent’s city hierarchy.

The 10 African Cities on the international radar are:

  • Mature: Cape Town, Durban, Johannesburg
  • Emerging: Accra, Cairo, Casablanca, Lagos, Nairobi
  • Early Adopter: Addis Ababa, Luanda

Looking at the bigger picture, these are the 12 factors that we believe will underpin growth in Africa’s commercial real estate industry:

1.     Sustained Economic Growth 

The past decade has been a major turning point for the African economy. Economic growth in sub-Saharan Africa has matched or exceeded 5% for nine out of the last 10 years, and is expected to continue to exceed 5% per year over the next five years as the internal market expands. The balance of economic activity within the continent is shifting southwards into sub-Saharan Africa, home to some of the world’s fastest-growing economies, such as Ethiopia, Ghana, Nigeria and Angola. In terms of economic performance, sub-Saharan Africa holds up well compared to other emerging markets: eight out of the world’s top dozen fastest-growing countries over the next five years are expected to be in Africa.

2.     Favourable Demographics

Africa is becoming a market of global scale – its population, currently in excess of 1 billion, is expected to double over the next 25 years, the fastest growth rate of any continent. Its working-age population is growing especially vigorously, with 70% of the total population aged under 30, delivering a potentially huge demographic boost. By 2040, Africa’s working-age population will be larger than either China or India.

3.     Rapid Urbanization

The real estate sector will play a major role in shaping Africa’s urban future as city infrastructures strain under the pressures of “flash urbanization”. Africa is urbanizing more rapidly than any other continent, with its city-based population expanding by 3.5% per year. Some cities are growing considerably faster (such as Abuja at 9% and Luanda at 6% a year). Sixty cities across Africa have a population of more than 1 million; a total of 170 million city dwellers whose incomes are typically nearly double their respective country’s national average.

The continent is also home to four of the world’s megacities – Cairo, Lagos, Kinshasa and Johannesburg – each providing huge population catchments. Many African cities are showing remarkable economic dynamism. Accra and Addis Ababa are booming, and are among the world’s fastest-growing city economies. Luanda, Maputo, Lusaka, Lagos and Abuja are also expanding rapidly, while Kigali (in Rwanda) has ambitious plans to transform itself into “the centre of urban excellence in Africa”.

4.     Expanding Middle Classes

Sustained economic growth is creating an expanding urban middle class with growing discretionary income. Africa’s middle classes have been estimated at around 350 million people, although a more conservative estimate suggests that the total is closer to 150 million. The highest concentrations of middle-class populations are in South African cities (Johannesburg, Cape Town and Durban) and in North Africa’s main urban areas – Cairo, Alexandria, Casablanca, Rabat, Algiers and Tunis.

But the most rapid growth in the middle-class population is occurring in sub-Saharan Africa in cities such as Lagos, Abuja, Luanda, Accra and Nairobi. Sub-Saharan Africa has, to date, been “off the radar” of most international groups (with the notable exception of South African retailers); but this is beginning to change as international retailers, developers and investors seek to tap into the fast-growing consumer markets.
5.     Commodities and Energy Resources

Africa has an abundance of natural resources, and the continent will continue to benefit over the long term from the growth in global demand for its oil and commodity resources. But, more significantly, recent evidence indicates that several African countries are capturing greater downstream value from their resources, which will have a more direct impact on the demand for industrial and commercial real estate.

Africa’s proven oil and natural gas reserves have grown strongly. Nigeria, Angola and Algeria top the ranks of oil and gas exporters, but recent finds of offshore natural gas in Tanzania and Mozambique and the development of oilfields in Uganda and Kenya will result in East Africa also becoming a major exporting region.

6.     Innovation and Technology

Many African cities have strong entrepreneurship, and several innovation sectors are performing well. Some cities are positioning themselves as centres of technology and research on the continent. The rise of mobile telephony and mobile banking is creating pockets of excellence, with Nairobi – Africa’s “Silicon Savannah” – emerging as a regional powerhouse in mobile technology. Elsewhere, Accra is witnessing strong growth in its ICT sector, while Addis Ababa is emerging as a hub for IT start-ups.

7.     Increasing Foreign Direct Investment (FDI)

International investor perceptions about potential opportunities in Africa are slowly improving. The global search for commodities, a growing internal consumer market and better macroeconomic fundamentals have helped to boost foreign investment. FDI volumes into sub-Saharan Africa have risen by 41% since 2007 (bettered only by Latin America), although volumes have fallen equally sharply in North Africa.

High flows from China have contributed to FDI growth as it seeks to tap into Africa’s natural resources and contribute to infrastructure development. Malaysian, Indian and South African investors are also active. FDI from developing countries is growing, as well as from private equity funds, and there is a shift towards FDI directed at African consumers. Nigeria has become Africa’s favoured location for investment as the continent’s largest consumer market.
8.     Service Sector Growth

As Africa’s internal market expands, a huge requirement is building for personal banking services, business finance and microfinance. Currently, only one-quarter of the continent’s population has a bank account, presenting a significant growth opportunity. Retail banking in sub-Saharan Africa is expected to achieve 15% per year growth for the remainder of the decade.

New forms of banking, such as mobile banking, are emerging. This is being driven by platforms such as m-pesa in Kenya, which is now used by a reported 70% of Kenya’s adult population. Similar systems have been set up throughout Africa, working with major banks such as South Africa’s First National Bank. Johannesburg will remain the continent’s leading financial centre. Casablanca, Lagos and Nairobi are consolidating their positions as regional banking hubs, while Port Louis (in Mauritius) is evolving as an offshore banking centre.

9.     Offshore Jobs

In comparison with the more established offshoring markets in India, Central Europe and South-East Asia, Africa is a relatively recent entrant to the offshoring sector. The continent has, however, seen a strong uptick in activity in recent years, driven primarily by its low-cost proposition, ready availability of talent, English and French language skills, and favourable time zones for Europe.

Johannesburg, Cape Town, Cairo and Casablanca have evolved as the leading cities in terms of a critical mass of offshore services, while Nairobi and Accra are also developing in this area. Several African governments, such as Ghana and Kenya, are making concerted efforts to improve the attractiveness of the operating environment by creating technology parks and developing their skills base.
10.  Improving Governance, Economic Management and Transparency 

In a global comparison of transparency indicators for property investment and operational environments in 97 countries, South Africa ranked 21st, ahead of its fellow BRICS members and alongside countries including Italy, Austria, Malaysia and Poland. The fact that South Africa ranked as the continent’s only “transparent” market underpins its reputation among global investors and corporate occupiers as the most desirable location to do business in Africa.

Business operating environments in Africa are selectively improving and economic governance is, in general, becoming more rigorous. Nonetheless, investors’ concerns about a wide range of risks persist, and Africa will remain a challenging balance of risk versus opportunity. Within sub-Saharan Africa , Accra (Ghana), Lusaka (Zambia), Dar es Salaam (Tanzania) and Maputo (Mozambique) are judged to have the region’s most favourable risk profiles. Combined with their high rates of economic growth, they provide among the continent’s most attractive environments for investors. Property markets in countries such as Ghana and Kenya are improving in transparency, and are already proving themselves to be suitable regional hubs from which to reach the significant East and West African production and consumer markets.
11.  New Infrastructure … New Cities 

Poor infrastructure (in terms of transport, utilities and telecommunications) remains one of the biggest challenges for the African continent, but investment funding is steadily increasing. China, in particular, has become a major source of funding that includes hydropower projects in Nigeria, roads and railways in DR Congo, Mozambique, Tanzania, Kenya and Angola, and communications in Ethiopia. With many city infrastructures straining under the weight of rapid urbanization, there are several ambitious plans for new satellite “cities” on the edge of Africa’s major cities, including Konza Techno City outside of Nairobi and Eko Atlantic on Victoria Island in Lagos.

12.  Rapidly Evolving Commercial Real Estate Market

Sub-Saharan Africa’s commercial real estate sector is in an early, high-energy phase of development as the industry starts to respond to rapid urbanization and strong demand from businesses and consumers for a modern real estate infrastructure. Nonetheless, the continent remains severely undersupplied with high-quality commercial space, pointing to opportunities.

Commercial property in Africa is about to launch into a boom. Legislators across the continent need to focus on creating more transparent property rights and environments if city skylines are to keep pace with global interest and African ambitions.

Author: Mark Bradford is Managing Director, JLL South Africa.

Image: The Estadio da Cidadela stadium is seen with the skyline of central Luanda May 4, 2014. REUTERS/Saul Loeb/Pool
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