African cities boast some of the hottest property markets in the world. But this may mean far more to rich foreign elites than middle-class locals.
Think of where the super-rich live and one is likely to imagine the bright lights of London, Hong Kong or New York. Not sub-Saharan Africa. Yet foreign investors are increasingly flocking to the continent’s booming real estate markets, particularly at the top end.
The results are startling. A four-bedroom house in the heart of Angola’s capital Luanda will set you back up to $20,000 per month, according to a report published in April by estate agents Knight Frank. And at $150/month per square metre, the Angolan capital also has one of the world’s highest prime office rental rates in the world.
But the Knight Frank report is just the latest in a series to suggest sub-Saharan Africa has some of the hottest property markets in the world. For its part, for example, the Global Property Guide ranks the Kenyan capital Nairobi as the top city in sub-Saharan Africa to invest in, citing good rental yields and a landlord-friendly legal framework as the most attractive selling points.
According to the South Africa-based First National Bank, Namibia ranked fourth globally in 2012 in terms of the biggest housing price increase, after Hong Kong, Dubai and Brazil. Meanwhile, the strategic hubs – Nairobi, Cape Town, Johannesburg, Lagos and Dakar – continue to be popular locations.
Property price booms are usually an indication that people are gaining confidence in their economic prospects, and in Africa’s case, this is undeniably true – at least when it comes to economic elites. After all, 13 of the 20 world’s fastest-growing economies are forecast to be in Africa over the next five years.
Price increases are also being driven by rapid population growth in Africa’s major cities. The populations of Kampala, Dar es Salaam and Lusaka are expected to more than double between 2010 and 2025, according to the United Nations.
Yet surging real estate values also have a nasty habit of mutating into an asset bubble that can burst and lead to a recession. The questions then are whether Africa’s boom in bricks and mortar is part of a sustainable trend, whether it will be followed swiftly by a bust, and who exactly benefits.
According to Min Zhu, deputy managing director of the International Monetary Fund, it is the size of mortgages compared to salaries that determines the risk of a real estate bubble.
“The most common cause of a housing bubble is when a surge in house prices is accompanied by a comparable rise in the availability of credit,” he says.
The sub-prime mortgage crisis in Europe and the US, for instance, was fuelled by cheap credit, lax regulation and irresponsible risk-taking by financial institutions that lent to borrowers who could never pay back their loans.
Sub-Saharan Africa does not face this same dynamic. In fact, by contrast, it is very difficult to get credit and bank loans are anything but cheap.
The average interest rate offered by commercial banks on the continent is well over 10%. Rates below this mark are sometimes offered to investors wishing to pay from euro- or dollar-denominated accounts, but most banks offer rates between 15-20%. This is a long way off the under-5% average mortgage interest rate in Europe, where credit still remains tight, and the US.
For most, these interest rates are prohibitively high, affecting middle-class would-be homeowners. After all, there is little value in taking out a long-term mortgage over 20-25 years – the length normally chosen by European and US consumers – unless you want to pay for your home four or five times over.
With such high interest rates, the housing market encourages cash purchases or short-term mortgages, a privilege only available to people with deep wallets and sizeable savings accounts.
“Local-currency interest rates in the mortgage market remain high and price many people out of the market altogether,” says Gerhard Zeelie, head of real estate finance for Africa at Standard Bank.
For example, only a fifth of city dwelling Kenyans can afford a home loan priced at KSh1m ($10,000) or above, according to the Nairobi-based Mortgage Company.
Meanwhile, much of the investment in real estate comes from abroad.
“The inflow of investment from China into Africa has been well publicised, but there is also growing activity involving investors from elsewhere, including the rest of Asia and the Middle East,” says Tony Galetti, joint CEO and co-founder of Galetti Knight Frank.
As a result of these dynamics, property markets across swathes of sub-Saharan Africa resemble an inverted pyramid, where most of the new housing supply is aimed at the top of the market, leaving severe shortages of affordable housing for those on low and middle incomes.
Indeed, most African housing investment markets are “are opaque and small”, according to Knight Frank, while low levels of property ownership mean that, for the moment, the risk of asset bubbles of any magnitude forming is minimal.
Yet there comes a point when the number of luxury apartment blocks will saturate expat demand. And meanwhile, pricing local people out of their own markets risks laying the foundations for a different set of deep and potentially troubling issues.