No reason to waste good crisis in East African property markets
A mix of factors, such as lasting high interest rates, global instability and dollar shortages in markets like Kenya and Tanzania, has affected investor sentiment to a degree.
Investors with patient capital committed to markets including Tanzania, Uganda and Kenya could benefit from increasing institutional participation in the coming years.
Investor sentiment has been influenced by a combination of factors including higher-for-longer interest rates, geopolitical uncertainties and dollar liquidity constraints in key markets like Kenya and Tanzania.
A mix of factors, such as lasting high interest rates, global instability and dollar shortages in markets like Kenya and Tanzania, has affected investor sentiment to a degree.
While investors have a clear understanding of the dynamics around the impact of interest rates on any property market, the impact of dollar liquidity constraints is more nuanced.
As sustainable dollar liquidity worries grow, US Dollar loans may face pressure from tenants who want to switch leases to local currency or from lenders who want to cut down wrong-way risks.
This may affect capital flows as investors aim for dollar returns and local interest rates are high (and sometimes lower than risk-free sovereign returns on offer).
As financial markets are deepening, we are seeing banks, development finance institutions and other lenders adjusting to the environment and responding with innovative funding structures.
This includes the introduction of interest only, bullet structures and mezzanine funding that bridges the gap between equity and senior bebt—essentially ranking as “junior debt”.
Despite the challenging environment, there are several reasons for patient investors to keep markets like Kenya, Uganda and Tanzania on their radars.
The emergence of Special Economic Zones (SEZs) continues to attract capital flows driving the development of infrastructure, including warehousing, logistics hubs and data-centres.
The region has a positive outlook with rapid urbanisation, a rising middle class and projected gross domestic product growth that increases the need for high-quality commercial and residential properties.
The region continues to attract foreign professionals who require both accommodation and related services such as health care and online shopping capabilities supported by warehousing and logistics.
While some readers may argue about the use of the word “crisis” as a title, we can acknowledge that the environment is challenging in the near-term.
This doesn’t mean that an enabling foundation isn’t being laid for a prosperous future.
On top of this the subject of Environmental, Social and Governance (ESG) and sustainability-linked financing is becoming central to making Real-Estate investments work and investors are becoming far more intentional about integrating this into their property sector strategies.
We are seeing ESG as another risk mitigation tool given deliberate strategies deployed to future proof cashflows.
These assets tend to retain values and have lower operating costs over time.
Investors are preferring qualifying ESG assets, and this shows in how they allocate their capital to assets that meet ESG criteria.
We also see more tenants wanting ESG features, and this relates to securing future income.
Kenya is progressing on the development of their Real Estate Investment Trust (REIT) market, and we see the potential in East African property because it is an emerging asset class supported by continued economic growth behind it.
The IMF started the year predicting that the Kenyan economy would grow at 5% in 2024 and the finance minister raised this to 6.3% in March this year.
Uganda's growth forecast for the next 3 years ranges from 5 to 6.5%, depending on the oil sector, and Tanzania's Central Bank aims for 5.5% in 2024.
As these growth rates start to come through, this will drive bigger and more sophisticated deals which will bring in further institutional participation.
Joshua is the Head of Commercial Property Finance, Absa CIB and Khanbhai is Director—Commercial Property Finance, EA – Absa Bank Kenya.
