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Opportunities and risks for investors wanting to join the African construction boom

Construction in Africa

Physical infrastructure backlog in most of Africa is widely known and acknowledged. For example, road access rate is only 34%, compared with 50% in other parts of the developing world, and subsequently, transport costs are higher by up to 100% (PIDA, 2011).

For many years there have been rumblings about Africa lacking adequate paved roads, reliable power grids, retail shopping malls, formal housing for all its peoples, modern office space, decent airports and efficient ports.

It was only a matter of time before investors began to realise that the massive infrastructure deficit on the African continent represents a significant and potentially lucrative investment opportunity.

The global financial crisis can in part be credited with changing perceptions of Africa as an investment destination. With the United States, Europe, the United Kingdom, Japan and other first world economies falling into recession, and many global markets consequently suffering losses, Africa’s positioning changed from risky to a lucrative and relatively safe investment destination.

Seven of the World’s ten fastest growing economies are currently located in Africa. In a short space of time, the continent suddenly resembles a massive construction site with real estate markets faring well.

By way of illustration, in the first quarter of 2012, the value of prime property in the world’s key cities fell by 0.4% while that in Nairobi rose by 24% making it, globally, the strongest performer (Knight Frank, 2012). This is, however, not just due to perceptions of Africa as a better investment destination compared to the West in light of the global crisis.

This performance is underpinned by good governance, institutional reforms and tightened monetary policy which has, amongst other things, kept inflation at bay. By the end of September 2012, Kenya had recorded 10 consecutive months of dropping inflation rates and, in parallel, a drop in lending rates too.

So, for those wanting to join the African construction boom, what are the opportunities, the risks and the overall trends?

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If you require a more detailed discussion around the survey results, contact Andre Pottas at apottas@deloitte.co.za, Anushuya Gounden at angounden@deloitte.co.za or Taki Nkhumeleni at tnkhumeleni@deloitte.co.za

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David Graham

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