Perspective on Construction Market in Sub-Saharan Africa

Perspective on Construction Market in Sub-Saharan Africa

Taking a perspective view on the current market in sub-Saharan Africa, the status of construction sector, the demand for New Housing and the recent fall in demand, we look at factors in three groups of countries.  The biggest impact and decline have been in (A) Mineral Rich Countries and to understand the dynamics we need to look back at factors that first affected growth and subsequently decline.  The impact in (B) non-Mineral Rich Counties affected by growing debt and finally (c) effect of poor governance and the political climate impacting negatively on growth.

A. Mineral Rich Countries

History

Looking back at recent history in Africa three are 4 major factors which have had impact first on growth and later, on decline.

  1. Debt Relief

In 2004, as part of the millennium development goals, over $40 billion in international debt to Africa was written off by World Bank, IMF, EU and other debtors.  This debt relief came as a windfall to African governments who no longer had to allocate a large percentage of income for debt re-payment and therefore had more money to spend in the economy, money which had a multiplier effect, stimulating growth.

  1. Commodity demand

At a similar time, driven by Chinese demand for materials for export and growth in Chinas domestic demand; raw materials and commodities entered a ‘super-cycle’ phase.  This created a sustained 10 year high demand for commodities ranging from oil, coal, iron ore, bauxite, as well as precious metals; keeping their prices unrealistically high.  Until 2014.  Prices crashed across the range of materials which have now fallen back to 2002 levels.

  1. Spending Spree

On the back of debt relief, and un-naturally high levels of income from export earnings, African governments started spending like never before.  Demand, especially for new construction in residential housing, having experienced under supply for 30-40 years, began to boom.

Those at the top of the food chain built big houses and new estates sprung up across Africa – for homes with price tags over $300,000.  When the top end of the market started to saturate, developers moved onto the next level down and more and middle-class homes and estates sprung up with price tags from $80-$150,000.  With plenty of liquidity in the market and with a growth in finance from the domestic banks, markets across the continent experienced a construction boom.

  1. New Debt

The spending spree by Governments elected on promises of infrastructure spending found China positioning itself as Africa’s new best friend.  Thousands of new contracts were signed for huge infrastructure developments.  The ‘build now – pay later’ deals often had no independent evaluation, so many projects were not designed well, not build well, often inappropriate for the domestic needs and with price tags hugely inflated by corruption!  The ‘no-questions-asked’ approach by the Chinese crowded out other international development investment, described as having too many ‘strings attached’.

Time to Pay the Piper

Just 14 years after developed economies wrote off billions across Africa, another credit crisis is unfolding. At least sixteen countries are at high risk of, or already in debt distress, according to the IMF.  This co-insides with a massive drop in income as commodity prices have fallen to 18-year lows.  The expectation that there would be plenty of money to pay for these projects, based on inflated incomes, has transpired to be an illusion.

Despite repeated warnings about the need for better debt management, and domestic revenue mobilization, African governments are complacent – playing down or simply denying that there is a problem. The attitude, it seems, is that there’s always debt relief – Unlikely.

A lack of sympathy should be expected from other sovereign creditors (especially China) or multilaterals, who will rightly question why the continent should be bailed out again.

Even if they wanted to, the impact would be limited. In contrast to previous years, much of Africa’s debt today is commercial, driven by a spike in sovereign bond issuances in the last decade. 

Future

The failure by African governments to invest their windfall in sustainable development programs, job creation, industrial growth, agriculture* and other money generating activities, is a price now being paid.

*Despite a 2003 pledge by governments to allocate 10% of budget spending to agriculture, the share actually fell from 3.66% in 2001 to 2.30% (2017). Private sector investment remains insufficient due to various issues including poor regulation/policy, access to finance, and infrastructure.

Africa is not he same as it was in 2002 when it was seen as the lost continent, but in respect to current economics and public sector debt, Africa is once again caught up in spending a high proportion of government income on debt re-payment, for projects that create insufficient growth to warrant their cost.

Markets impacted by commodity prices are Angola, Nigeria, Ghana, Mozambique, Sierra Lone, Liberia, Zambia, Gabon, Sudan, Guinea.

A. Not mineral rich, but still in decline

Across other countries, not mineral rich; the build-up of debt has had a big impact on government revenue and spending.  This has affected Uganda, Tanzania, Ivory Coast, Mozambique, Kenya and in particular Ethiopia, where government had masked the debt problem by currency controls and import restrictions, but like a Ponzi scheme, the reality is now exposed and for the best part of 12 months, import restrictions in Ethiopia on everything excluding medicines and materials for manufacture (but sometimes even including these) have been close to zero.

In the same manner as Mineral Rich counties, these economies have jumped on the bandwagon of ‘eat now, pay later’ and public debt has soared to unmanageable levels.  Where they differ from mineral rich countries is that their income levels have stayed moderately the same – no sudden growth followed by sudden decline.  As a result, their debt growth is based on more realistic income expectations and the impact has been less dramatic.

Another factor which benefited growth in construction, was an increase in bank funding – on the back of growth in banking as a domestic market sector.   Although interest rates were and are high by international standards, loans became more accessible for both projects and individual home builders.  More recently, governments have increasingly turned to domestic banks to raise capital for domestic expenditure and budget funding.  Banks view public sector debt as more secure than commercial debt, (where defaults are common), and have been happy to oblige.  Feeding on government debt, banks are more risk averse to the private sector, providing less funds and hiking interest rates, thereby making loans less accessible.  This has hampered construction.

B. Poor Governance

Corruption remains prevalent, and it’s estimated that money lost to corruption is at least equal, if not greater, than all the international development funding in Africa.  This aside, other cases of poor governance have had impact in certain countries.  

We refer to the impact on an economy following a change in government or government direction and the Presidential,  ‘Monarchical’ approach to policy decision making, which can direct a country’s fortune.

Among others, policy decisions have had major impacts (beyond those mentioned in previous sections) in Tanzania, Nigeria, South Africa, Liberia, Congo Uganda and Gambia. 

Examples:

Gambia saw a small but resilient tourism-based economy de-railed by President Jammeh.  Too much time in power morphed into ‘Messianic’ self-belief.  Predominantly European tourists were increasingly put off by his stance on appropriateness of certain relationships and arbitrary related changes to the law. Further abrogation of public funds exacerbated economic decline until he was deposed by coup and replaced by Adama Barrow, himself facing criticism for economic ineptitude.

Tanzania hailed the appointment of President John Magafuli – known as the Bulldozer.  He was seen as a breath of fresh air, ready to clean up politics of its endemic corruption.  Things started well with a number of high-profile dismissals.  But there was another story unfolding, causing a downturn in inward investment and domestic commercial activity.  Many see Magafuli taking Tanzania backwards towards an era of communist control of the economy and the press.  There is significant dissent towards opponents, and criticism of the president or government often results in jail or worse.  There has been growing friction with business’s, treated aggressively and facing growing tax demands and penalties as the government fails to reach its revenue targets.  In the past 6 months it’s rumoured over 11,000 businesses have closed and FDI has seen massive decline.  

Nigeria on the back of oil income decline now faces another 4 years under the economic stewardship of President Buhari.  His economic management and currency controls are seen by many as ‘old school’ and outdated by 20 years or more.   It was recently announced that Nigeria’s central bank will keep its foreign exchange system, supporting a controversial managed float of the naira that investors and the International Monetary Fund have asked the country to dismantle.  Despite years of inflationary pressure as global prices for oil, Nigeria’s main export, dropped, the government and central bank have spent billions of dollars propping up the naira’s value in the face of calls for a free float.  In addition, petrol subsidies (seen by many Nigerians as the only benefit they enjoy from government and whose proves against their withdrawal caused National unrest) continue, costing the government billions.  These two government ‘costs’ soak up a huge proportion of spending, denying the greater economy the benefits that the same spending on other areas would achieve.

Housing Demand and New Construction

As in other markets, new construction is a sector hit quickly during economic downturn.  In some countries, the market has returned to 2002 levels (eg Angola – see below), but in most, there has been a fall on average of 50% from peaks in 2013/4.

Angola

As Africa’s second largest oil producer after Nigeria, but with a population much smaller, the oil price at $120 per barrel saw Angola flush with liquidity.  They launched into massive Chinese funded infrastructure programs, heavily weighted towards the oil extractives and built a debt profile, which at $120 per barrel was not only manageable, but left them with plenty remaining to spend.  Then 2014 came and the price of oil crashed.  The cost of debt re-payments to China was equal to total government income.  Ie all government spending went to pay debt.  A sudden and sharp fall in government spending caused an instant currency, liquidity and GDP crisis.  Lack of investment during the boom saw no growth in any sectors which created diversified growth in the economy.  It is only now, 5 years later under new government, that there are small signs of – if not recovery – a reverse in the decline.

Across Africa, one or more of the factors cited remain prevalent, so to forecast a quick return to growth would be unwise.  More likely we expect markets to remain broadly at current levels for the foreseeable future. 

The boom in high end homes, which later transferred to middle income homes and housing developments no longer exists.  The balance between owner builders and housing developments has swung back toward owner builders.  New housing developments have shrunk dramatically in number, even in relatively stable economies.

There is still some growth at the lower middle income and low income ‘affordable housing’ level, which is where the greatest supply shortage remains.  Finding financial models which allow finance to be secured for such construction, through guaranteed off-take agreements, remains the biggest challenge.  Financial bodies are unwilling to stand behind guarantees and governments are unwilling or unable (e.g. where IMF non concessional borrowing restrictions are in place) to stand in.   International lenders don’t recognise multiple housing stock with multiple owners as an attractive guarantee in the case where debt re-payments become an issue.

Market Outlook

Despite the ‘Africa Rising’ narrative of 2010-2014 no longer holding favour, there are good reasons to ‘keep faith’.   So far as residential construction is concerned, there remains a staggering under-supply with reported housing shortages in countries such as Kenya (2 million), Tanzania (3 million), Ghana (4 million) and Nigeria (18 million).  A further 1.3 billion additional people will be added to Africa’s population by 2050, so there will be no shortage in demand.

In the short term, not much is expected to change.  But governments must rise to the new environmental conditions and as economies begin to improve, as they must, one by one, residential construction will grow. 

Real Estate investments in Africa potentially remain highly profitable.   In fact, there is no shortage of international investors and funds who still welcome viable secure investment opportunities.   Cities that experienced rapid growth in real estate prices (e.g. Nairobi, Lagos, Luanda) have seen prices fall, but not collapse.  Future demand in growing economies will sustain prices and make real estate investment attractive.

Increased participation by governments to provide affordable housing is required to provide security to encourage developers and financial investors, of which there is no shortage.    This has happened in other regions around the world so no reason why, with improved governance, the same cannot be true in Africa.

For participants in the market, maintaining a presence and holding a position – being prepared for an upturn is critical. 


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