From the capital, Pretoria, in the north-east, to the far south-western Cape, South Africa was once the economic jewel in the continent’s crown. Now GDP growth stands at just 2.6% – one of the lowest in Africa. But as the property sector starts to adapt to a shortage of prime stock and a saturated investment market, opportunities await the savvy investor. Emily Wright travelled to the country to find out more
“There is no doubt that the South African economy has slowed considerably. And there is no doubt that this has put the country’s property sector under strain. But what are the developers doing to counteract that? They are creating their own demand.” So says Engelbert Binedell, divisional director of Growthpoint, South Africa’s biggest listed property company. No nonsense, no sugar coating and spot on.
The South African economy – once the strongest on the continent – now comes second to Nigeria’s, and GDP has slowed right down to 2.6%. Add to this the fact developers and investors are being forced to contend with a country-wide shortage of prime stock and a near-universal move away from traditional central business districts to new business and retail hubs and it is clear how crucial the adaptation will be when it comes to future projects.
The big question is whether these shifts in demand – including a move from single to mixed-use schemes – are being tackled fast enough. Fast enough, that is, for the country to attract sufficient overseas investment against a backdrop of rocketing growth rates and fresh opportunities emerging in countries such as Kenya, Nigeria and Ghana.
Traditional ties
South Africa has historically been a good option for UK investors and developers looking for opportunities – and a soft landing – in Africa. There is a shared culture and language, only an hour’s time difference and South Africa has a sturdy legal system. Over the past decade the country has attracted more overseas investment than any other African country – $59.1bn (£35.1bn) over 836 deals, according to law firm Freshfields. In second place, both in value and volume, is Egypt, which received $46.5bn for 266 deals, and then Nigeria, which attracted investment of $22.1bn across 90 deals.
The country was formally invited to join the BRIC grouping of Brazil, Russia, India and China by the Chinese government in 2010, although this surprised many economists across the globe, including Jim O’Neill of Goldman Sachs, the man who coined the BRIC term. He was quoted at the time as saying: “South Africa is nowhere near constituting a BRIC, and without staggering productivity improvements and major immigration or improvements in birth rates, it is never going to get there…it makes no sense to me.”
While it would be unfair to say South Africa has performed notably poorly since the invitation, it has not seen the sorts of leaps in economic growth that might be expected from a country included in the list of the world’s fastest- emerging powerhouses. World Bank figures show South Africa’s GDP grew by just 2.5% between 2009 and 2013. The bigger issue affecting the country now is the revelation that, according to the International Monetary Fund, the GDP figure is predicted to remain at a level of 2.6% between 2014 and 2017.
Compare that to Nigeria’s expected growth rate of 7.1% for the same period, Ghana’s 8.2%, or Kenya’s 5.1% and it becomes clear that, as far as where growth will be in the next five years, South Africa is nowhere near the top. In fact, it has one of the lowest GDP forecasts on the continent.
The opportunities
But while investing in South African real estate may not be as obviously attractive as it once was, there are sectors and individual projects delivering impressive returns of up to, and in some cases above, 15%. IPD’s latest South Africa figures show the country’s commercial property offered an income return of 8.2% last year‚ compared with yields of less than 6% in most other countries the research group tracked.
And, as the country adapts to a shortage of prime stock and a saturated investment market, the opportunities springing up as a result are potentially some of the biggest and most lucrative in Africa.
Projects such as the 4,200-acre, $4.5bn Waterfall City scheme, a mixed-use project halfway between Johannesburg and Pretoria, and the $80m Melrose Arch campus development in Johannesburg, are likely to boost the South African economy and property investment market significantly over the next five to 10 years.
These are two major examples of the growing trend in South Africa to embrace mixed-use schemes – crucial for ensuring there is ready-made on-site demand for retail and residential offerings in an otherwise rapidly saturating market. It is a country-wide problem that is also affecting the investors.
“Here in the South African market, the funds are struggling to grow,” says John Jack, Galetti Knight Frank’s director of Gauteng, the area encompassing greater Johannesburg and Pretoria.
“They can’t find quality assets. What they can buy is too small and doesn’t have a strong enough covenant, so the only way they can grow is to develop or buy smaller funds. That’s what we are seeing at the moment. Lots of consolidation and lots of big developments across the country, but mainly here in Gauteng, in Cape Town to a degree and in Durban.”
As for fears that domestic funds are looking outside the country, in some cases into sub-Saharan Africa, in order to “be able to achieve the yields they used to be able to achieve down here”, there is still a lot of caution surrounding these sorts of moves, Jack adds.
“Ultimately, in all cases, if deals outside South Africa are not underpinned by the dollar, investors are not interested,” he says. “And there are some huge projects and opportunities coming online here.”
Growth areas
In terms of sector growth the South African market is diverse. But there are some hotspots. “It’s mainly industrial and regional shopping malls attracting the most investment,” says Errol Taylor, an asset manager at Growthpoint. “In industrial we have seen capital appreciation that has been better than our income growth.” Indeed, industrial in both Cape Town and Johannesburg is the strongest-performing sector, with yields of 10% and 9.5% respectively, according to Knight Frank research. And in Durban there is a five-year industrial development pipeline in place valued at £2bn. It is expected that forthcoming spending on infrastructure – the South African government has committed £47bn to upgrading the country’s entire rail network and its roads (congestion is a major issue) and extending Gauteng’s high-speed Gautrain rail network – will have a positive impact on growth in this sector.
Office and retail are more erratic. When it comes to prime office space, unlike most traditional European markets, a lack of space and a dearth of substandard stock in old city centres are helping to push rents up on new developments as companies move away from CBDs across the country.
In Johannesburg there is demand for prime office space and development has been moving increasingly away from the old CBD, where a lack of space, high levels of crime and a generally run-down public environment are major issues. Thirty years ago the current business district of Sandton was nothing more than farmland but today it is congested and expensive. This is fuelling demand for big, new campus-style mixed-use schemes even further north towards Pretoria, such as Waterfall City. In Cape Town there is also a move away from the CBD as, once again, a new 2.7m sq ft campus development, Century City, has prompted a mass relocation.
Retail performances tie in with the aforementioned trend for shiny new campus developments and, to a degree, are being driven by major international retailers entering the market.
Francois Staples, director at Galetti Knight Frank, says that tenants such as Zara, Wal-Mart and TopShop are moving into South Africa as it is a relatively soft landing compared with other African countries. “These firms see an opportunity on the continent with its growing middle class and are using South Africa as a springboard to establish themselves before going north.”
“The super-regional shopping centres are totally bullet proof,” adds Galetti’s Jack. “They are one of the best investments in South Africa. But as a result the outlying neighbourhood centres are a risky business now. Once a new super-regional comes along, you will just lose all your business overnight.”
So the opportunities are there. It’s just a case of knowing exactly where to look. And Growthpoint’s Binedell adds that while the South African market might appear quiet right now, it should not be underestimated.
“It’s like being in a submarine,” he says. “When times are tough you close all the hatches and dive down for a while. But we’re still here working hard just under the surface. South Africans are extremely resilient.
“I don’t think that’s a bricks- and-mortar thing. It’s intrinsically very South African. We will come back fighting. And until then we are adapting, changing and addressing the challenges in the market head-on.”
emily.wright@estatesgazette.com
Africa special:
• South Africa: a property overview
