The African CenturyTwelve Pillars of Africa’s Future Success

Africa Cities Research | Global Foresight Series 2013

2 The African Century - Twelve Pillars of Africa’s Future Success

The past two years have seen a sharp rise in interest in commercial real estate opportunities in African cities. As home to some of the world’s fastest growing city economies, with rapid rates of urbanisation and burgeoning middle classes, it is of little surprise that Africa is appearing on the radar of an increasing number of major corporations. International capital is beginning to focus on Africa’s real estate potential, and developers are now responding to the strong demand for modern shopping malls, offices and hotels.

With the international spotlight firmly on the continent, our latest Cities Research focuses on the opportunities in 40 African cities. Africa offers a huge diversity of operating conditions, city dynamics and real estate environments; yet it is the rapidly expanding cities in Sub-Saharan Africa that are attracting greatest interest - and with less than 3 million square metres of ‘Grade A’

commercial space (office and retail) across the region (excluding South Africa), the real estate opportunities are clearly evident. Challenges abound, but the operating environment is selectively improving and there are potentially significant pay-offs in those African cities that are creating economic stability.

Our Africa Cities Research programme explores the continent’s evolving urban network and assesses how the changing environment is impacting on current and future commercial real estate requirements. We shall be releasing a series of reports that provide new insights into this rapidly urbanising continent – we will identify which African cities offer the greatest real estate opportunities, and we will explore real estate sector prospects and transparency. In this Introductory Paper and by way of context, we highlight 12 pillars that, we believe, will underpin Africa’s future success.

Urbanisation and Real EstateIntroducing our Africa Cities Research Programme

Africa’s Evolving Urban Network40 Cities – Our Watch List

Source: Jones Lang LaSalle, 2013

Africa is on the move - economic growth is robust, foreign investment is growing and its expanding urban middle classes with their strong propensity to spend are creating an internal market of global scale. The continent is actively harnessing its natural resources, but Africa is not just a ‘commodity play’; growth in manufacturing, technology and telecoms, finance and business services, outsourcing, retailing and hospitality is generating an urgent requirement for a modern commercial real estate infrastructure.

A commercial real estate market poised for ‘lift-off’Sub-Saharan Africa’s commercial real estate sector has many of the ingredients for ‘lift-off’ as the industry

responds to the strong demand for high-quality property. Unencumbered by a legacy of existing stock, the continent has a real opportunity to leapfrog the normal evolutionary process and to build assets equipped for the modern technologically-enabled business and consumer - Africa’s lead in mobile banking illustrates that it has the potential to be a groundbreaker. The reality, however, is that the future shape of Africa’s real estate market will be determined by its ability to tackle poor transparency, which will continue to be a major barrier to real estate construction, occupation and transactional activity.

Here, Sub-Saharan Africa can learn from many other emerging markets across the globe, who are successfully improving both their regulatory controls and the fairness of their real estate transaction processes.

Africa is on the Move The African Opportunity

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Twelve Pillars of Africa’s Future Success

Source: Jones Lang LaSalle, 2013

4 The African Century - Twelve Pillars of Africa’s Future Success

• The past decade has been a major turning point for the African economy. Economic growth in Sub-Saharan Africa has matched or exceeded 5% for nine out of the last 10 years, underpinned not only by a commodities boom but by expanding private consumption. This is producing significant pent-up demand from multinational corporations, local businesses and consumers for high-quality commercial real estate.

• Economic growth is expected to continue to

exceed 5% per year over the next five years as

Twelve Pillars of Africa’s Future Success1. Sustained Economic Growth

the internal market expands. The balance of economic activity within the continent is shifting southwards into Sub-Saharan Africa, home to some of the world’s fastest growing economies, such as Ethiopia, Ghana, Nigeria and Angola.

• In terms of economic performance, Sub-Saharan Africa now holds up well compared to other emerging markets - eight out of the world’s top dozen fastest growing countries over the next five years are expected to be in Africa.

Sizing the OpportunityEconomic Size - GDP (PPP)

The requirement for a modern commercial real estate infrastructure intensifies

Note: US$. Source: IHS Global Insight, September 2013

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• Africa is becoming a market of global scale - its population, currently in excess of one billion, is expected to double over the next 25 years, the fastest growth rate of any continent.

• Its working-age population is growing especially vigorously, with 70% of the total population aged under 30, delivering a potentially huge demographic boost. By 2040, Africa’s working-age population will be larger than either China or India.

2. Favourable Demographics

• Africa is a mosaic of 54 countries, yet several heavily populated countries are likely to dominate future market opportunities. Nigeria (the continent’s largest market with a population of 174 million), Ethiopia (94 million), Egypt (82 million), South Africa (52 million), Kenya (44 million) and Morocco (33 million) are providing true scalability for corporations, retailers, hotel operators and real estate developers.

Working-Age PopulationFastest growth in Africa

Africa’s demographic boost

Working-Age Population defined as 15-64 age cohortSource: UN World Population Prospects, 2012

6 The African Century - Twelve Pillars of Africa’s Future Success

• The real estate sector will play a major role in shaping Africa’s urban future as city infrastructures strain under the pressures of ‘flash urbanisation’. Africa is urbanising more rapidly than any other continent, with its city-based population expanding by 3.5% per year. Some cities are growing considerably faster (such as Abuja at 9% and Luanda at 6% a year).

• 60 cities across Africa currently have a population of more than one million; a total of 170 million city dwellers whose incomes are typically nearly double their respective country’s national

average. The continent is also home to four of the world’s megacities - Cairo, Lagos, Kinshasa and Johannesburg – each providing huge population catchments.

• Many African cities are showing remarkable economic dynamism. Accra and Addis Ababa are booming, and are among the world’s fastest growing city economies. Luanda, Maputo, Lusaka, Lagos and Abuja are also expanding rapidly, while Kigali (in Rwanda) has ambitious plans to transform itself into “the centre of urban excellence in Africa”.

Africa’s Economic Growth HotspotsEconomic Size - GDP (PPP)

Africa is urbanising more rapidly than any other continent

Source: IHS Global Insight, September 2013 (National Data); Jones Lang LaSalle, 2013

3. Rapid Urbanisation

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• Sustained economic growth is creating an expanding urban middle class with growing discretionary incomes. Africa’s middle classes have been estimated at around 350 million, although a more conservative estimate suggests that the total is closer to 150 million1.

• The continent’s middle classes will provide a key source of private sector growth, underpinning expansion in modern retailing, as well as business and healthcare services. They are proving to be one of the most compelling attractions for foreign investment into Africa.

• The highest concentrations of middle-class populations are in South African cities (Johannesburg, Cape Town and Durban) and in North Africa’s main urban areas - Cairo, Alexandria, Casablanca, Rabat, Algiers and Tunis. But the most rapid growth in the middle-class population is occurring in Sub-Saharan Africa in cities such as Lagos, Abuja, Luanda, Accra and Nairobi, where there is considerable pent-up demand from brand-conscious urban consumers who are looking for quality products and a modern shopping experience.

• Sub-Saharan Africa has, to date, been ‘off the radar’ of most international groups (with the notable exception of South African retailers), but this is beginning to change as international retailers, developers and investors seek to tap into the fast-growing consumer markets.

African City DynamicsEconomic Size, Economic Growth and Wealth

A sizeable urban middle class with a strong propensity to spend

*National dataSource: IHS Global Insight, Jones Lang LaSalle, 2013 1 African Development Bank, 2011

4. Expanding Middle Classes

8 The African Century - Twelve Pillars of Africa’s Future Success

• Africa has an abundance of natural resources, and the continent will continue to benefit over the long term from the growth in global demand for its oil and commodity resources. But, more significantly, recent evidence indicates that several African countries are now capturing greater downstream value from their resources, which will have a more direct impact on the demand for industrial and commercial real estate.

• Africa’s proven oil and natural gas reserves have grown strongly. Nigeria, Angola and Algeria top the ranks of oil and gas exporters, but recent finds of offshore natural gas in Tanzania and Mozambique and the development of oilfields in Uganda and Kenya will result in East Africa also becoming a major exporting region.

Africa seeks value-added opportunities from its natural resources

Nairobi, Kenya

5. Commodities and Energy Resources

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• Many African cities have strong entrepreneurial energy, and several innovation sectors are performing well. Innovative uses of technology are allowing some cities to leapfrog normal evolution and position themselves as centres of technology and research on the continent. The rise of mobile telephony and mobile banking is creating pockets of excellence, with Nairobi – Africa’s ‘Silicon

Savannah’ - emerging as a regional powerhouse in mobile technology. Elsewhere, Accra is witnessing strong growth in its ICT sector, while Addis Ababa is emerging as a hub for IT start-ups.

Africa’s Top Technology HubsPresence of International ICT Companies

But Africa is not just a resources play …

Based on presence of Hewlett Packard, IBM, Intel, Microsoft, Siemens, Vodafone, Huawei and Cisco Source: Jones Lang LaSalle, 2013

6. Innovation and Technology

10 The African Century - Twelve Pillars of Africa’s Future Success

• International investor perceptions about potential opportunities in Africa are slowly improving. The global search for commodities, a growing internal consumer market and better macroeconomic fundamentals have helped to boost foreign investment.

• FDI volumes into Sub-Saharan Africa have risen by 41% since 2007 (bettered only by Latin America), although volumes have fallen equally sharply in North Africa. High flows from China have contributed to FDI growth as it seeks to tap into Africa’s natural resources and contribute to infrastructure development. Malaysian, Indian and South African investors are also active.

• FDI from developing countries is growing, as well as from private equity funds, and there is a shift towards FDI directed at the African consumer as investors become aware of its favourable demographics.

• Nigeria, as the continent’s largest consumer market, has become Africa’s favoured location for investment, echoing the increasing retailer and real estate developer interest in the country’s main cities, notably Lagos, Abuja and Port Harcourt.

International Business Targets Sub-Saharan AfricaFDI Flows 2007-2012

Investors target Sub-Saharan Africa

Source: World Investment Report, UNCTAD, 2012

7. Increasing Foreign Direct Investment (FDI)

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• As Africa’s internal market expands, a huge requirement is building for personal banking services, business finance and micro finance. Currently, only a quarter of the continent’s population have a bank account, presenting a significant growth opportunity. Retail banking in Sub-Saharan Africa is expected to achieve 15% per year growth for the remainder of the decade2.

• New forms of banking, such as mobile banking, are emerging. This is being driven by platforms such as M-Pesa in Kenya, which is now used by a reported 70% of Kenya’s adult population. Similar systems have been set up throughout Africa, working with major banks such as South Africa’s First National Bank.

• Johannesburg will remain the continent’s leading financial centre, given its strong domestic banking sector and status as the regional headquarters of many international banks. Casablanca, Lagos and Nairobi are consolidating their positions as regional banking hubs, while Port Louis (in Mauritius) is evolving as an offshore banking centre.

Africa’s Financial Centres HierarchyEmergence of Regional Banking Hubs

Strong growth in business services to boost office demand

Based on presence of a basket of key African and international banks, accountants and insurance companiesSource: Jones Lang LaSalle, September 2013

2 KPMG

8. Service Sector Growth

12 The African Century - Twelve Pillars of Africa’s Future Success

• In comparison with the more established offshoring markets in India, Central Europe and South East Asia, Africa is a relatively recent entrant to the offshoring sector. The continent has, however, seen a strong uptick in activity in recent years, driven primarily by its low-cost proposition, talent availability, English and French language skills, and favourable time zones for Europe.

• Johannesburg, Cape Town, Cairo and Casablanca have evolved as the leading cities in terms of a

critical mass of offshore services, while Nairobi and Accra are also developing their offshoring capability.

• Several African governments, such as Ghana and Kenya, are making concerted efforts to improve the attractiveness of the operating environment by creating technology parks and developing their skills base.

Africa emerges as an offshoring destination

9. Offshoring Activities

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• Business operating environments in Africa are selectively improving and economic governance is, in general, becoming more rigorous. Nonetheless, investors’ concerns about a wide range of risks persist, and Africa will remain a challenging balance of risk versus opportunity. Within Sub-Saharan Africa3, Accra (Ghana), Lusaka (Zambia), Dar es Salaam (Tanzania) and Maputo (Mozambique) are judged to have the region’s

most favourable risk profiles and, combined with their high rates of economic growth, provide among the continent’s most attractive environments for investors.

African Cities – Risk v Opportunity

Operating environments are selectively improving

Risk: Country Risk, IHS Global Insight, September 2013. Growth: GDP Change 2011-13, IHS Global Insight, September 2013Source: Jones Lang LaSalle, September 2013

3 Excluding South Africa, Botswana and Namibia

10. Improving Governance, Economic Management and Transparency

14 The African Century - Twelve Pillars of Africa’s Future Success

• Poor infrastructure (in terms of transport, utilities and telecommunications) remains one of the biggest challenges for the African continent, but investment funding is steadily increasing. China, in particular, has become a major source of funding that includes hydropower projects in Nigeria, roads and railways in DR Congo, Mozambique, Tanzania, Kenya and Angola, and communications in Ethiopia.

• With many city infrastructures straining under the weight of rapid urbanisation, there are several ambitious plans for new satellite ‘cities’ on the edge of Africa’s major cities, including Konza Techno City outside of Nairobi and Eko Atlantic on Victoria Island in Lagos.

New infrastructure … new cities

11. Infrastructure Development

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and strong demand from businesses and consumers for a modern real estate infrastructure. Nonetheless, the continent remains severely undersupplied with high-quality commercial space, and a lack of experienced local developers will create opportunities for international players.

Africa’s Commercial Real Estate Stock

Implications for Developers

*Excluding South Africa. Relates to modern offices and shopping malls Source: Jones Lang LaSalle, Emerging Markets Consultants, SACSC, IHS Global Insight

12. … and a Rapidly Evolving Commercial Real Estate Market

• Sub-Saharan Africa’s commercial real estate sector is in an early, high-energy phase of development as the industry starts to respond to rapid urbanisation

16 The African Century - Twelve Pillars of Africa’s Future Success

• The growing number of brand-conscious urban consumers is not going unnoticed by developers and retailers. South African retailers such as Shoprite, Pick n Pay, Massmart and Woolworths have taken the lead, but a number of other international retailers are now assessing the opportunities.

• Retailer expansion, however, will continue to be hindered by a lack of high-quality retail accommodation. Jones Lang LaSalle estimates that the stock of ‘Grade A’ shopping malls across Africa (excluding South Africa) is less than 1.5 million square metres – that’s barely equivalent to the stock of Hungary, a country of 10 million people against one billion in Africa.

Implications for Retailers

International retailers are responding to the growth opportunities

• Nonetheless, shopping mall construction is poised for ‘lift-off’ as developers and retailers respond to the severe supply-demand imbalance. The stock is rapidly expanding at a rate of over 20% a year, spearheaded by Cairo, Casablanca, Lagos and Nairobi. Nigeria’s main cities have become a key target due to the scalability opportunities of a country of over 170 million consumers.

Mall construction is poised for ‘lift-off’

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• Corporates are leading the charge into Africa and, out of necessity, are acting as a catalyst for new real estate development. Many multinationals have already established significant footprints across the continent, and are facing the typical challenges of operating in ‘frontier’ markets, such as poor transparency, bureaucracy, high costs, skill shortages and an absence of suitable real estate.

Corporates lead the charge

• There is an urgent requirement for quality office assets to meet the strong demand from a broad range of growing corporate sectors – such as finance, outsourcing, oil and commodities, manufacturers and telecoms. We estimate that there is less than 2 million square metres of ‘Grade A’ stock across Sub-Saharan Africa (excluding South Africa), of which around half is located in just four cities - Nairobi, Lagos, Luanda and Port Louis.

Dearth of quality office space

Implications for Corporates

• Africa currently accounts for less than 0.5% of global direct commercial real estate investment volumes, the bulk of which is transacted domestically within South Africa. But, international capital is beginning to move into Africa as investors seek to access the continent’s growth prospects. A number of real estate funds have been created to focus on the commercial property market, with South African capital taking the lead.

Poor transparency will hinderinvestor activity

• While Sub-Saharan Africa is a compelling long-term growth story, poor infrastructure, corruption, scale of markets and low liquidity will continue to deter most investors. The key to success for international investors will be to secure the right local partners to guide them through the complications of land title, bureaucracy and political risk. Doing business in Africa is not easy and poor real estate transparency will continue to be a binding constraint in all but a few markets across Africa. Nonetheless, for many international real estate players the possibilities offered by Africa’s fast-growing markets will be too great to ignore.

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• In line with the corporate and urban development taking place in Sub-Saharan Africa, the hotel landscape is witnessing strong growth, led by upscale business hotels. Africa is estimated to have around 90,000 branded hotel rooms4, which compares to around 128,000 in London alone. With more than half of the hotel rooms concentrated in just three North African countries (Egypt, Morocco and Tunisia), the potential opportunities for the hotel sector in the Sub-Saharan region are substantial, and international and regional hotel operators are actively seeking to expand their presence. The hotel development pipeline is increasing significantly, and Nigerian, Ghanaian and Tanzanian cities are emerging as a primary focus of activity.

Increasing demand for budget and mid-market hotels

• So far, hotel development in the Sub-Saharan region has largely targeted the full service upscale international business market. However, there is a growing focus on the local customer base (both for leisure and business), as spending power increases. Groups such as Accor are already responding to the increasing demand for budget and mid-market accommodation.

Implications for Hotel Operators

Sharp increase in the hotel development pipeline

International capital perceivesopportunities

Implications for Real Estate Investors

4 W Hospitality Group, 2013

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Real Estate TransparencyOpportunities with Obstacles

Source: Jones Lang LaSalle Global Real Estate Transparency Index, 2012

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COPYRIGHT © JONES LANG LASALLE IP, INC. 2013. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.

November 2013

A special thanks to Emerging Markets Consultants who helped in the compilation of this report www.emergemarkets.com

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To find out how Jones Lang LaSalle can assist you in making real estate decisions in Africa contact:

Vincent LottefierGlobal Director & CEOEMEA Corporate SolutionsTel: +33 140 554 992vincent.lottefier@eu.jll.com

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Jeremy KellyDirectorGlobal ResearchTel: +44 20 3147 1199jeremy.kelly@eu.jll.com

Chiheb Ben MahmoudHead of Hotels & Hospitality GroupMiddle East & Africa Tel: +971 4 4362408chiheb.ben-mahmoud@jll.com