When thinking about successful emerging market investing, the following quote comes to mind: “In an unfamiliar culture, it is wise to offer no innovations, no suggestions, or lessons.” (Maya Angelou, American poet and civil rights activist).
The notion to watch and learn before arriving at conclusions is particularly important in rather complex socioeconomic environments like emerging markets. So, which lessons have been learned by successful real estate investors in Africa and other emerging market environments?
1) Boots on the ground!
Probably the worst mistake to make when dipping a toe into emerging markets is to rely exclusively on third-party reports and due diligence. As previously discussed, data availability and quality for African markets is rather limited. If available, reports tend to focus on macro themes, whereas a particular real estate project will largely depend on microeconomic data in a particular region, customer group or industry. Hence, targeted sub-market intelligence is necessary at the planning and pre-development stage in order to understand local politics, zoning and planning permissions and, most importantly, infrastructure availability and limitations.
Advice available from well-connected local advisory groups such as Songhai Advisory focused on sub-Saharan markets often provides crucial add-on value for individual projects in addition to the macro views provided by global consultancies.
While the market entry for distribution-focused fast-moving consumer goods (FMCG) players may to some extent be handled using a fly-in-fly-out approach, long-term oriented and capital-intensive real estate and infrastructure projects must have ‘boots on the ground’. Even then it typically takes two to three years to scout out the market and conduct pre-development research.
Building local relationships, conducting land bank due diligence (title, environment, encumbrances etc.), evaluating road and electricity availability and quality, understanding existing and developing legislation affecting planning, construction, employment and hard-currency capital flow limitations are only some of the trigger points to be considered.
For corporate owner-occupiers, it may be tempting to use turnkey contracts with the aim of outsourcing (and paying for) a contractor to take care of all the usual troubles. The idea is then to ‘manage’ the project progress remotely with a skeleton corporate real estate team who get on the red-eye from corporate headquarters once in a while and otherwise review the often rather rosy progress reports.
Well, this tends to be an expensive approach.
In the absence of a tried, tested and trusted developer on the ground providing build-to-suit services, hands-on oversight from an experienced in-house team or a trustworthy project management consultancy on the ground helps significantly to re-risk projects.
2) Understand your local partners and stakeholders
Partnerships matter – in Africa and other emerging markets more than elsewhere.