To deploy global investment on a significant scale Africa needs to develop the domestic conditions to absorb the much higher levels of global real estate investment currently considering Africa.
Typically, African real estate accounts for around 0.5% of large global funds’ commitment. That said, most of the global real estate funds that have invested in Africa, have sustained reasonable returns at a portfolio level over the last two decades. This has meant that most have stayed and that most have also either maintained or increased their allocation over the years. “This has built familiarity with – and confidence in - the continent,” says Adeniyi Adeleye, Executive Real Estate, Africa Regions, for Standard Bank.
The next big step is to increase the level at which these global funds’ commit to the continent.
The biggest challenge to achieving this is not so much global appetite or confidence but rather, “the ability of African markets to deploy or sustainably absorb this capital,” explains Mr. Adeleye.
Most of the continent’s leading markets have fundamental real estate demand and supply imbalances meaning that they present a largely attractive long-term investment outlook. As such, demand for real estate investment opportunities has remained consistent in most of Africa’s larger markets despite commodity price induced volatility challenges.
“Despite macro-challenges, most investors who made a commitment to the continent over the last two decades have stayed, managing volatility by seeking to evolve from short-term to more permanent real estate investment structures,” says Mr. Adeleye.
Standard Bank has supported significant evolution in the funding of real estate development on the continent. Private equity seeking alpha during the heady pre-economic crisis days appears to be giving way to longer-term funding structures.
“Private real estate funds seeking to evolve into Real Estate Investment Trusts (REITs) aim to draw on pension funds or other sources of institutional capital, for example, and are proving to be more effective in Africa’s longer-term real estate investment cycle, which typically requires much more patient structures,” says Mr Adeleye.
Yet the scale for growth going forward is much larger.
Encouragingly, policy and market conditions on the ground in Africa are shifting in the right direction. One of the keys to increasing investment in African real estate is to unlock capital in local markets. Even though some of the larger markets on the continent have regulatory or structural constraints that limit investments to unlisted real estate securities, “real estate investment, with its long and stable return profiles, still represents a fantastic opportunity to deploy local savings for broader investment and economic growth,” explains Mr. Adeleye.
Financing real estate investment requires low and predictable interest rates. In many African jurisdictions, local interest rates have been both high and volatile. This has meant that, traditionally, African real estate investment has focused on top end, global quality, opportunities that will attract hard currency funding. Today, however, leading African markets are rapidly developing the road, rail and digital telecommunications infrastructures linking their economies to the global economy. The industrial, retail and service sectors that these infrastructure ecosystems enable is making middle and lower end real estate opportunities more attractive to investors.
In short, “as African markets develop rational globally-linked and market-relevant infrastructure, real estate investors have to fund fewer of the ancillary infrastructure (roads, power, services) that have historically made middle and lower end opportunities unattractive in Africa,” says Mr. Adeleye.
Africa’s heavy focus on backward processing in agriculture (the continent’s biggest sector and traditional mainstay) also represents a significant opportunity for real estate investment – on two fronts. Firstly, the physical infrastructure required to develop a beneficiated agricultural export sector presents a real estate investment opportunity in its own right. Secondly, and arguably more importantly, “exporting beneficiated goods will limit the imported inflation endemic to raw commodity exporters,” explains Mr. Adeleye.
“If interest rates in African markets can be sustainably brought within the 10% to 14% range, we’ll see an explosion of middle and lower end real estate opportunities as these suddenly become justifiable – to both global and local investors,” he adds.
China’s heavy investment in African infrastructure at the government to government level as well as private investment in businesses unlocking the continent’s industrial and beneficiated agricultural export opportunities is deepening Africa’s ability attract and deploy much higher levels of both global and local real estate investment.
Standard Bank combines in-country presence and insight, a multi-jurisdictional view and capability across 20 African markets with an established presence in all leading centres of global capital and real estate investment. “Observing, advising, managing and growing Africa’s real estate sector enables us to recognise the scale of the opportunity that awaits those markets able to create the conditions to deploy significantly higher proportions of the world’s real estate investment capital,” says Mr. Adeleye.
Ghana’s balance of trade is set to receive support from cocoa export and oil production revenues this year according to researchers at Standard Bank, parent company of Stanbic Bank Ghana. This was contained in the April edition of the African Local Markets Monthly report prepared by Standard Bank.
According to the report, “after strong economic growth in 2017, reaching 8.5 percent year-over-year, we expect growth to remain robust at around 7.0 percent year-over-year in 2018. The Stanbic Bank PMIs are certainly corroborating this view thus far. The overall PMI reached 55.2 in March from 54.9 in February and 53.5 in March 2017, as survey respondents suggested that output levels were rising as consumer confidence and consequently new orders rose. That being said, the oil sector will continue to underpin growth as authorities estimate that production is set to reach a peak of 290k bpd in 2018”.
The report further indicates that the Ghanaian economy is expected to remain strong due to increased cocoa export revenues. “Ghana’s trade balance should receive a boost from increased cocoa export revenues. Since beginning of the year, cocoa prices have risen by over 40 percent to around US$2,700/mt as demand-supply dynamics appear to have adjusted to the lower price environment that was prevalent in 2017. Given that imports declined last year – leading to the trade deficit swinging into a surplus – and our expectation of only a moderate rebound this year, the trade balance should remain in surplus and allow further contraction of the current account deficit.” the report said.
Commenting on the report, the Head of Global Markets at Stanbic Bank Ghana, Afua Bulley, said the rise in global cocoa prices will have an impact on the country’s Treasury. “The recent rise in cocoa prices will have a reasonably positive impact on the fiscus. Unlike in Cote d’Ivoire where the cocoa board reduced prices it paid to farmers, Ghana refrained from reducing prices – thus placing some pressure on the country’s fiscal accounts. The 40 percent surge in cocoa prices since beginning of the year should certainly reduce the implied subsidy and alleviate fears of impending fiscal strain,” Ms. Bulley indicated.
“We also expect financial reserves to remain buoyant, especially after planned Eurobond issuances which may amount to US$2.5billion later in the year. As a result, we now expect reserves to reach around US$6.8billion by year-end,” Ms. Bulley added.
The African Local Markets Monthly also predicts that prolonged disinflation and the proposed reduction in electricity tariffs by some 12% is likely to push the Bank of Ghana to cut its policy rate by another 300 bps in the course of the year. The report said: “After delivering a 200bps cut at the March MPC meeting, we expect the BoG to cut the policy rate by another 300 bps through the course of the year”.
According to the report, these developments provide a basis for further easing of the monetary policy stance by the central bank – although this is likely to be restrained by uncertainty within the banking sector as a result of the new minimum capital requirement.
“Given the trajectory for inflation and non-oil economic growth, there is an argument for further easing of the monetary policy stance taken by the BoG. Such an aggressive easing in monetary policy may well result in a substantial rise in private sector credit and may actually result in higher US$/GH¢. However, our suspicion is that said easing in monetary policy will probably be restrained by uncertainty within the banking sector, as capital requirement changes have ensured that most banks have taken a defensive posture to asset origination,” the report noted.
The African Local Markets Monthly is a monthly report issued by the Standard Bank Group and focuses on the economic and financial outlook of African countries. The report also reviews current economic situations and makes short- to medium-term predictions about the economies of African countries.
Seeking societal outcomes to investment is a growing theme to watch as more wealth is directed towards making a difference.
While philanthropy is still an immature market in Africa – the recent Knight Frank Wealth Report 2017 pegs it as a 4% priority in Africa versus a 9% global average – increasing wealth in Africa will change this paradigm significantly.
Global Head: Wealth Advisory at Standard Bank Group, Philip Faure says wealth management is a far broader concept today than it ever was, with philanthropy set to grow in popularity across Africa.
“More African wealthy people are thinking beyond their own lifetimes to make a difference to their communities and societies after they are gone. Seeing a social return on investments is becoming increasingly sought after and this trend correlates with increases in wealth,” says Faure.
The Knight Frank findings show that over the next decade Africa’s number of ultra-high-net-worth individuals will grow by 33%, after suffering a decline of 2% in 2015-16 due to tough market conditions. The growth in ultra-wealthy populations in Africa will outpace that of Europe and North America over the next decade.
“The funny thing about the free market system is while it creates innovation and pushes society to new areas, you tend to also get a lot of money in a few hands. There is no doubt there is a growing gap between haves and have nots, but this is in turn generating interest in the formalised giving process. People in Africa are definitely putting a lot more thought into giving,” says Faure.
The Knight Frank Wealth Report 2017 Attitudes survey points out that private aviation, education and philanthropy are all high on the agenda for ultra-high net worth individuals worldwide. “There are a lot of reasons for this, ranging from leaving a family legacy to seeing it as an obligation because the system is so imperfect. While giving often drops below the radar in a country like South Africa due to the private nature of foundations, there is a lot of activity and people are hard at work bridging the gaps in society,” says Faure.
So while there is enough money out there that can make a difference, wealthy people also want to ensure they achieve an impact and are not ripped off by doing so. “This is why education and advice is so important. Families need to understand the full range of these activities, from establishing foundations, managing foundations, managing capital and grant making, among others. They need to work with trusted partners and adviser to ensure their objectives are met within an over-arching wealth management strategy,” says Faure.
This comes as inequality is at centre stage on the global agenda. “In Africa philanthropy needs to play a big role where general resources fall short – government has limited resources after all – so this is a key way to top up the difference,” says Faure.
The super wealthy, in particular, have responsibility to give back but there is also a need to take a step back and see the impact of philanthropy as a social return on investment.
While most wealthy people very often still view philanthropy in isolation from their wealth creation, more wealthy families are actively considering the social and environmental impact of the businesses they own or the investments they make, according to Knight Frank.
Importantly, the art of giving must form part of an overall, long-term wealth management plan, which includes building wealth, preserving wealth, and maintaining lifestyle and legacy wealth.
Standard Bank – Africa’s largest bank by assets and with a footprint in 20 countries in sub-Saharan African, as well as in Jersey, the Isle of Man and London – continues to provide advice that matters to families seeking to broaden their philanthropic activities while maintaining their overall wealth objectives.
“Despite philanthropy being an immature market in Africa at the moment, we will see this trend growing in the future. Education on the benefits and how it works will become more important as there are enormous complexities involved. Trusted experts with a deep understanding of Africa need to assist by setting up the most appropriate structures to maximise outcomes and optimally formalise the giving process,” says Faure.
The growth in ultra-wealthy populations in Africa will outpace that of Europe and North America over the next decade, according to the 2017 edition of The Wealth Report launched in Africa by Knight Frank and Standard Bank Wealth and Investment.
The findings show that over the next decade Africa’s number of ultra-high-net-worth individuals will grow by 33%, after suffering a decline of 2% in 2015-16 due to tough market conditions.
Hotspots for growth include Ghana, Mauritius, Ethiopia, Tanzania, Uganda, Kenya, and Rwanda. The survey also shows that the majority of investors still feel under-invested in property and are looking to rebalance overall portfolios. Respondents’ preferred locations varied considerably depending on their domicile, with Australia, Africa and the US all cited as investment targets for 2017.
Deon de Klerk, Head of Wealth: Africa Regions for Standard Bank, says it is increasingly important that individuals’ goals, requirements, time horizons, lifestyles and tolerance for risk are well understood and managed early.
Preservation of capital and generational wealth transfer considerations remain critical to an effective overall wealth strategy.
“There is little doubt that uncertainty prevails and wealthy investors are becoming increasingly concerned about their short-term wealth prospects. However, it is important not to panic and to rely on a goals-driven approach to successfully navigate the environment,” says de Klerk.
The total number of global ultra-wealthy - those with $30m or more in net assets – rose by 6,340 in 2016, taking the total to 193,490, according to the report. What’s more countries offering fiscal and political stability, as well as excellent quality of life, are expected to see strong growth over the next decade.
“It is imperative for countries in Africa to position themselves for attracting new business and investment to boost economic growth and improve financial inclusion. Therefore, while the ultra-wealthy in Africa only grew by 13% between 2006 and 2016, growth could be more than double that rate over the next decade as policy and regulatory frameworks make countries more conducive for doing business and creating prosperity,” says de Klerk.
Standard Bank Wealth and Investment is an advice led business with more than $12 billion in assets under management worldwide. Due to its reach in to 20 African countries and on-the-ground expertise the bank is seen as a key partner for Knight Frank in delivering an unbiased view on the key trends underpinning the wealth market across Africa.
The level of complexity within markets has heightened risks, ushering in the need for specific expertise across a broad spectrum, from investment specialisation and system sophistication to the management of endowments, retirement funds and institutional mandates, among others. At the same time, absolute discretion and confidentiality are crucial.
The ultra-wealthy in Africa are also increasingly interested in leaving a legacy and providing more for society at large through philanthropic activities.
“A thorough understanding of each family’s quantum of available wealth to preserve for the sake of maintaining their lifestyle is required, so that legacy and philanthropic activities can be undertaken with higher levels of confidence. There is a definite move in Africa to give back to society due to the limited resources available to the poor. This is why a comprehensive and tailored solutions are so important,” says de Klerk.
Standard Bank Wealth and Investment’s extensive presence throughout Africa, including South Africa, Nigeria, Kenya and Ghana as well as in London, Jersey and Mauritius, combined with the Standard Bank Group’s heritage of over 154 years, empowers the Bank with the diversification needed to provide seamless on- and offshore offerings. These capabilities have led to the recognition of Standard Bank Wealth and Investment as the leading wealth manager in Africa, a position supported by a number of continent-wide industry accolades including, amongst others, Africa’s Best Bank for Wealth Management by Euromoney.
Standard Bank Wealth and Investment is also Nigeria’s largest Pension Fund administrator and Asset Manager, and in the UK the Jersey business was recognised as the Best International Structured Product Provider in the 2016 UK International Fund and Products awards.
“Standard Bank is well positioned to deliver bespoke wealth management and banking solutions seamlessly, whether onshore or offshore. Our approach ensures clients receive best of breed solutions. With increasing volatility being experienced in the markets there is an increasing demand for bespoke investment solutions that achieve superior risk-adjusted investment returns alongside those which give a higher degree of confidence to achieve each family’s unique goals and aspirations,” says de Klerk.
The expansion of global trade over the last 50 years has created industries, jobs and value on an unprecedented scale, driving innovation and technological advances and in the process, benefitting most of the countries, most of the time.
“While this growth has not been even, much can be done to ensure that future growth continues to support economic development,” says Vinod Madhavan head of transactional products and services for Africa at Standard Bank.
Global and cross-border trade is the fastest contributor to growth, supports domestic trade, small and medium enterprise formation and job creation. This has been especially evident in emerging markets over the last 30 years.
However, the growing trend towards de-globalisation in some developed markets, driven through concerns around job-losses due to automation and de-industrialisation, is resulting in an increasingly negative reputation for trade. In contrast though, the opportunity that trade presents for markets in Africa is potentially game-changing.
“Africa could increase its intra- Africa trade three fold and still not match Asia’s level of internal trade. In Asia, trade – and exports – have been central to the regions exponential growth, lifestyle improvements and stability of last 30 years,” explains Mr Madhavan.
Looking into the future, Africa is expected to grow as the second fastest growing region in the world over the next 4 years returning growth rates between 4 and 5 percent. As intra-African trade grows, this will drive even more growth and job creation on the continent. While the value of trade in Africa dipped in 2016 - tracking recent historically low commodity prices - the volume of trade trended upwards. This points to the depth, spread and longevity of trade and trade opportunity – beyond just commodities – in Africa.
“As commodities rebound, 2017 is expected to set new records in the volume and value of African trade,” says Mr Madhavan, “however, the point is not to get side-tracked by some of the current headwinds.”
Africa’s current headwinds are certainly real. There has been debt default in Mozambique, local currencies are losing value, US dollar and other hard currencies remains scarce within key economies, legislators do not always adopt the most efficient policies, political risks are real, and there have been over 10 bank defaults in a number of countries, in the near past.
“Despite the defaults seen over the last year, we are seeing greater accountability and transparency in the banking system across markets which provide a level of comfort for investors,” says Mr Madhavan.
Perception however, remains key in Africa.
While Africa exhibits many of the risks endemic to emerging markets generally, “the concerns around operating in Africa are often much higher,” says Mr Madhavan. This is where banks like Standard Bank have a critical role to play, to reduce the perception gap that can materially affect people’s lives by diminishing the continent’s ability to trade.
Negative perceptions of trade can reduce the funding available for trade finance, widening the gap between the need for trade finance and the funding available. This is a characteristic of many emerging markets and acts to retard the positive effects of trade-fuelled growth, reducing the number of jobs created along with the development revenue generated.
“As an African bank, we need to be clear on how we help our client manage risk, by helping clients understand the headwinds in the right context and then delivering the solutions that mitigate such headwinds,” says Mr Madhavan. “Beyond managing risk, we work across all our markets in Africa to create an environment that allows people in Africa to do business within and between countries - as well as for people across the world to do business with Africa.”
Something as simple as a letter of credit enables a trade where one was not possible before. Every trade generates at least two jobs – one on either side of the letter of credit. Most trades generate many more. Mr Madhavan expects 2017 to be the year that Africa recognises the huge opportunity available to the continent in driving regional and global trade.
While Standard Bank provides its clients with the tools and systems to conduct efficient trade on the continent, the bank also supports the evolution of new fintech applications aimed at improving the cost-effectiveness, speed and ease of trade in Africa.
Africa’s financial services industry is rich and varied. It is rich in the sense that in South Africa, for example, you have a financial services sector that leads even countries such as the United Kingdom, Germany and France in the Financial Market Development pillar of the Global Competitiveness Index (as mentioned in the World Economic Forum Global Competitiveness Report 2016-2017). It is varied since at the same time, in some African markets, legislators grant certain licences to corporates, that can only be used in a specific branch of a bank.
“This combination of world-leading expertise and capability, with untold opportunity for growth, defines the continent as a hot bed for innovation,” says Mr Madhavan.
By 2019, Mr Madhavan expects to see an indigenous technology that will support intra-regional trade in Africa, “probably designed by a tech start up in Cape Town or Nairobi, transforming the way cross-border and global trade happens in Africa.”
This kind of original technology that helps reduce friction in cross-border trade, could ensure that Africa benefits practically from the World Trade Organisation’s recent global trade treaty that is expected to boost global exports by US$ 1 trillion, “as we develop the mind-set, clear policy commitment to multilateral trade, and the platforms, to drive African development through trade-led growth,” says Mr Madhavan.
Africa’s largest bank by assets, Standard Bank has joined the powerful R3 network of over 75 global financial services players to enhance their exploration into blockchain solutions that have the potential to alter the digital payment landscape of the future.
“It is essential to deliver on changing customer expectations and be innovative so that we can provide solutions that make a difference in the lives of customers. We are optimistic about the potential use of blockchain technology and are very interested to see what opportunities it presents,” says Peter Schlebusch, Standard Bank’s Chief Executive for Personal & Business Banking from Standard Bank.
“Collaboration will be critical to unlocking value and we want to be actively involved in exploring and testing how technology like blockchain can be adopted by financial institutions. Being a partner member of the R3 network will provide us with an excellent opportunity to accelerate and enhance our adoption of this new technology,” he says.
R3 is a financial innovation firm that leads a consortium partnership with financial institutions to design and deliver advanced distributed ledger technologies to the global financial markets. Distributed ledger technology has the potential to change financial services profoundly and banks are looking to, among others, develop a permissioned blockchain system that requires a level of clearance to join and can be linked to legal tender.
“South Africa is a key market for us as we continue to expand our footprint in the region. We look forward to working closely with Standard Bank to test and develop distributed ledger based technology to address some of the major challenges facing participants operating in Africa’s financial markets and beyond,” says David Rutter, CEO of R3.
The R3 team of financial industry veterans, technologists and blockchain and cryptocurrency experts collaborate with consortium members on research, experimentation, design and engineering to help advance this technology to meet banking requirements for identity, privacy, security, scalability, interoperability and integration with legacy systems.
Consortium members work closely with R3 to develop Corda™, its shared ledger platform specifically designed to record, manage and synchronise financial agreements between regulated financial institutions.
“The potential for blockchain technology to transform the financial services industry is vast. Change should become more mainstream as regulatory acceptance grows. We are also working closely with regulators to understand implications for the SA and other African markets,” says Mr Schlebusch from Standard Bank.
Standard Bank is already engaged in a number of initiatives in blockchain for business trade and is exploring enhancements that blockchain technology can add to their cross border payment solutions.
The ability for numerous participants in the financial services sector to exchange insights and knowledge is vital for the future of a global network. “Our partnership with R3 will be essential in this regard” concludes Mr Schlebusch.