Here is a riddle: what does the price of a building have to do with foreign direct investment?
Put another way: which of Africa’s ‘emerging hubs’ will win the great second scramble for Africa and become the continent’s biggest FDI magnet? The race in Africa to become the next industrial hub has been taken quite seriously.
This year alone, the Ugandan government has allocated 32.8% of the country’s total annual budget towards infrastructure spending, Nigeria is allocating its highest-ever amount – 30% of its budget – to development projects and Tanzania has dedicated $19bn to its transportation infrastructure.
But what if something other than just these facts, something less straightforward, could determine who will be the first world’s next African investment darling? I would like to propose a rather madcap theory – that one of the factors of where foreign investment flows to in Africa will depend on who builds the tallest, most impressive skyscrapers the most frequently.
I was attending a stuffy fiduciary meeting in Johannesburg the other day and as chance would have it, it was the same day that the 2017 Africa Property Investment Summit and Expo was taking place. This reminded me of something important that we figures-obsessed finance types tend to forget.
Sometimes investment flows in or out of countries based on perception, not fact. And perception can be swayed by things like a new, glittering skyline to behold in an emerging city.
Finance writers tasked with proclaiming where the next African investment hub will be often look at the logical, empirical, rational factors.
Bottom-line figures and GDP analyses are as relevant to FDI as steel and glass are to skyscrapers. They make up the tangible product on which everything else is pinned, sure, but are not what the stuff is really made of.
The stuff of dreams
The truth is that intangible things like currency trade values, urbanisation and investments – particularly offshore ones – are made up of dreams, impressions, prejudices and subconscious judgments as much as any reading of All Share Index figures, if not more so.
Skyscrapers are nothing if not dreams made solid, literally built from the ground up. They are an important lesson in cost vs worth – the value of investing in an African up-and-coming city is not solely calculated on annual turnover and growth rate figures, although we may want to think so.
Of course, the figures we are so obsessed with do inevitably come in to it. It is no accident that Tanzania’s growth rate for 2017 is forecast at 8.2% – quite an achievement when you compare it to America’s current 1.2%.
This madcap realisation of mine may or may not also be because the world seems construction-mad right now – in 2016, New York City spent the most it has ever spent on construction in one year – $43bn.
There is a historic precedent for urban hubs being put on the global FDI map by some shiny, tall new buildings – and we’re not talking ancient history either. Kuala Lumpur’s Petronas Towers, was completed and then unveiled in 1998 right amidst the Asian financial crisis. Not only was Malaysia surprisingly resilient compared to its peers during 1999, but it reported a blossoming 5.5% growth rate in 2000 that did not slow down for eight years.
Dubai became a household name after its 2003 boom, which came directly after real estate firm, Jones Lang LaSalle’s naming of Dubai as a ‘World Winning City’ in 2002 and the opening of infrastructure marvel, the Dubai Internet City in 2003.
Going against the grain is the Skyscraper Index – described by Wikipedia as “a whimsical concept” put forward by Andrew Lawrence, a property analyst. He argues the world’s tallest buildings have arisen on “the eve of economic downturns” and that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is about to go into recession.
This is simply not true of most of Africa. Just look at economically woe beset South Africa – 10 skyscrapers currently under construction and another 14 proposed, with the behemoth 110-storey Symbio-City promised to go ahead soon.
So, then, who is building the most impressive buildings in Africa? Of the tallest skyscrapers in Africa built after 2010, just one is in the previously mighty South Africa. Seven or eight are in Dar es Salaam, five are in Luanda. Of those still under construction in the same category, Dar es Salaam and Johannesburg are neck and neck with three buildings over 25 storeys high in the works.
Perhaps most tellingly of all, of the 30-something proposed mega buildings in Africa, six are approved and or concretely planned for. A whopping four of those are in Nairobi, including the soon-to-be-iconic, 70-story Hass Towers, the tallest building in Africa. Of the rest, one is in Luanda and the other, you guessed it, Dar es Salaam.
Turner & Townsend’s 2017 International Construction Market Survey lists Dar es Salaam as “hot”, Nairobi as “warm” and Kigali, Johannesburg and Kampala as “lukewarm” construction investment options in Africa.
In terms of its weighing in on historical favourite Johannesburg, the report states that “in the lukewarm Johannesburg construction market, there is still relatively high inflation and strong growth in trade wages. The weaker rand adds to import costs, helping to push up the cost of construction by 5.3%.”
So, perhaps, comparatively cheaper labour, cheaper importing of materials and a stronger currency add significantly more to an African city being the next hot ticket construction-wise than anything else?
Not so, it seems. In the Turner & Townsend survey, building the same five-star luxury hotel in Kigali would cost $1,700 per sq. metre, slightly less in Johannesburg at $1,588, but only around $1,200 in both Dar es Salaam and Nairobi.
The cost of labour in African metropolises was, in descending order: Nairobi, Johannesburg, Dar es Salaam, Kigali and Kampala, but only Dar es Salaam and Nairobi were accredited with not having labour skill shortages of the five. And while cost escalation in 2017–18 is expected to increase 7.5 % in Johannesburg, it will only increase 4% in Dar es Salaam and a mere 1% percent in Nairobi.
The magic ingredient
So, what does all of this mean if the correlation between new skylines under construction and an FDI-attracting growth rate are very closely linked – as they are at the moment? One explanation is that skyscrapers are not built by economists or number crunchers but by speculative private sector investors.
A skyscraper is a long-term investment made on the gamble that there will be sufficient take-up of all those thousands of sq. metres of office and residential space made available. It is a vote of confidence in the economy of a country – and confidence may be the magic ingredient that creates wealth and jobs.