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Understanding the impact of interest rates, policy shifts on Africa’s real estate in 2023




Across the continent, new policy adoptions are turning the tide on business as usual operations.

The removal of the decades-old fuel subsidy in Nigeria, the adoption into law of Kenya’s finance tax that is set to increase taxation on core components such as fuel and income tax, as well as Egypt’s new tax initiatives focused on components such as income tax and entertainment tax are just a few examples of such policies.

Interestingly, local financing has also faced its own share of downturns. Benchmark interest rates across Kenya, Nigeria, Ghana and Egypt have remained elevated at  10.5%,18.5%, 29.5% and 18.75% respectively resulting in an increased cost of capital.

As such, market performance across the real estate sector remains varied with the changing macroeconomic environment having a direct impact on development pipeline, market take up and real estate prices.

Therefore, we anticipate the second half of the year to continue reflecting limited transaction activity underpinned by cautious optimism by investors. In this article, we discuss the performance of the office, residential, hospitality and retail sectors across our core cities of Accra, Lagos and Nairobi and end with our expected outlook across each of the locations.

The office development pipeline across Lagos, Nairobi and Accra declined by 34%,53% and 52% respectively in 2023 compared to 2022. This can be attributed to a subdued macroeconomic environment that has impacted on the cost of financing as well as the cost of construction materials.

Source: Estate Intel

Interestingly, with the exception of Accra, both Lagos and Nairobi are still tenant markets due to an oversupply recorded pre-pandemic with occupancy levels currently averaging 75% for Grade A offices and 80% for Grade B offices.

As a result, average office rents have remained stable across the board over the past five years as illustrated below.

However, bright spots remain with a market such as Tema, in Accra emerging as a stand out neighbourhood with a five-year average growth rate above 5%.

Africas real estate 2 e1697858501828

Source: Estate Intel

In terms of an outlook, with heightened inflation and rising construction costs, we expect limited new project announcements across the markets in the near term resulting in a core balance between demand and supply.

In the residential sector, the ultra luxury and affordable segments of the markets remain undersupplied effectively presenting an opportunity to developers. In Lagos and Accra for example, the ultra luxury segment accounts for only 2% of the market , while in Nairobi it accounts for approximately 0.5% of the total stock. In addition, the affordable housing segment accounts for 1%(Accra), 7% (Nairobi) and 10% (Lagos) of total stock.

Africas real estate 3

Source: Estate Intel

On the other hand, the luxury and deluxe segments remain oversupplied accounting for 22% and 41% respectively of total stock on average across the three markets.

As such, this has resulted in rents remaining relatively stable in dollar terms without notable growth over the past five years across the majority of the neighbourhoods as illustrated below.

Notably, the case has been different for local currency rents, with prices remaining volatile and reactive to heightened inflation across the cities.

Still, markets such as Ajah in Nigeria and Ridge in Accra have emerged as stand-out markets recording five-year growth rates in US$ terms above 5% due to their higher composition of luxury and affordable housing residential units resulting in heightened demand

Africas real estate 4 e1697858551909

Source: Estate Intel

Notably, renewed government initiatives on affordable housing especially in Nairobi, Lagos and Accra will likely result in increased institutional participation, focused on this asset class.

Nairobi for example is already seeing heightened institutional investor participation. This has been evidenced by the recent announcement by the International Finance Corporation of plans to co-fund the development of 5,000 affordable housing units in collaboration with the International Housing Solutions (IHS) in Nairobi.