GRI interviewed Carlo Matta, CEO, Laurus Development Partners to discuss what the West African real estate market will look like five years from now.
What were the drivers for real estate investments in the past five years?
When we started in 2009 we got very excited at the perfect supply/demand imbalance in most asset classes and we saw the opportunity to come in and put Class A assets on the ground. Actis, our JV Partner, had already delivered the first investment grade shopping centers in Accra and Lagos and those were resounding successes. We then set out to do more. Back then the story was all about limited supply and unmet demand for institutional real estate. In 2009 there was no Class A office space in both Lagos and Accra and the pipeline was very limited. Back then the office market was going through what I have seen in other frontier markets: companies had to make the transition from sub-optimal space, often in villas in multiple locations to centralized, Class A space complying with corporate health and safety standards.
What about the residential market?
On the residential front the story was similar, strong demand could not find enough product: both rental and selling prices skyrocketed. The difference is that the cycle for the residential started earlier. In Lagos the residential boom was over by 2011 with a sharp price correction due to supply catching up with demand. Accra’s cycle happened a couple of years later.
What do you think the market will look line five years from now?
We will see more money entering the market. The incumbent investors will raise more money with larger, follow on funds. I am referring to the likes of Actis, RMB Westport, etc. However, there will be new players entering the market and this has started already. In 2008 there we two large institutional investors, now we can count say 10. This will mean more money chasing deals and as a result investors will have to adjust their expectations.
So will that mean lower returns?
Yes, but this is one side of the coin, the other is that the market is and will continue to mature and become more transparent and less risky. Country risk has already changed for better compared to five years ago. We have seen a few peaceful power transitions through clean and fair elections. Markets are becoming little less opaque: with more investors entering the market. We are seeing traditional service providers like JLL, Cushman, CBRE/Broll moving in as well they produce market intelligence to support investor decisions. Title risk is also changing: while it is still one of the major issues developers face when entering these markets, a lot of land has and is changing hands and building a “title history” in cleaning the title in the process and making it more difficult to fiddle with the papers. So all in all, the risk adjusted value proposition will still be there for investors albeit in a different paradigm.
What other changes will we see?
Well one of the most important changes will be the exit story. In 2009 the exit cap rate was anybody’s guess and investors had to get comfortable on an assumed, rather than a proven exit story. Five years on we will have comps which will benchmark the exit values and this too will contribute to lowering risk.
What about the financing side?
Good point. On the institutional side we will see more lenders move in. Until now very few lenders have had an appetite for real estate. Many factors have contributed to this, but there were two main reasons; Lenders could make more money elsewhere and in order to underwrite real estate loans, they need a dedicated and specialized team. However, things are changing and we will have more choice going forward.
On the consumer side, I believe a mortgage industry will eventually emerge as this is what happens in all emerging markets. This in turn will provide a huge boost to demand, especially in the mid and low income segments.
What else can we expect to change?
We will see more markets opening up. Alongside Nigeria, Ghana we will see Ivory Coast, Cameroon and maybe Senegal becoming the target of developers and investors. This will also help offset the various cycles in various countries.
The construction industry will also change. We will see larger, international companies entering markets which weren’t of interest before. This will help create more competition and keep construction costs under control, but it will also help to raise the technical level of the industry as a whole.