It is an exciting time for the real estate sector as private capital is in huge demand for development and investment, yet competition for prime assets is intense.
Impact of Ongoing Developments
Emerging market reports place a strong emphasis on the forces behind potentially prosperous real estate industries. Investors lured by sound economic fundamentals require cohesion between public and private capital expenditure to drive growth in private industries, such as construction and development. The PricewaterhouseCoopers (PwC) Real Estate 2020 Building the Future report sheds new light on the impact of ongoing infrastructure in developing countries. The construction industry’s role to facilitate the constantly changing needs of owners and tenants is emphasised. Far-reaching effects of well executed state budgets for infrastructure improvements that correlate with population growth, and not necessarily new building projects only, become more visible.
Real Estate Growth Statistics
- PwC forecasts shifts in population growth, as well as changing demographic trends to result in a greater need for new and different real estate by 2020 and beyond.
- Massive growth by 2025 will see over 60% of all construction activity around the globe taking place in emerging markets — up from just 35% in 2005.
- Between now and 2025, the construction sector is expected to benefit from sub-Saharan Africa becoming the second fastest-growing region, behind emerging Asia.
- Potential growth in Nigeria alone is forecast to have catered for almost 20 million new homes by then, compared to 2012.
The positive impact of infrastructure — of roads, public transport and electrification – on employment, housing, education and medical facilities, such as the acceleration of all round economic productivity and long-term growth for investors, cannot be underestimated. The role of construction companies, who compete at global standards in their bids to participate in cross-border electrification, road, telecommunications and water projects, is also emphasised in the paraphrased and acknowledged McKinsey Global Institute (MGI) Infrastructure Practice 2013 report. Win-win benefits of the improved socio-economic circumstances of potential property owners and tenants to real estate markets in emerging economies are clearly defined in this report. Studies have shown, for example, how a 9% increase in female employment followed the electrification of a specific South African rural region. This simple yet necessary solution allowed local women to explore microenterprise by leaving their houses to earn an income. However, both local and foreign direct investment that would facilitate construction and development of this magnitude relies on sound government policies that prioritise sustainable planning and implementation.
Benefits of Expansion
Investor confidence was reflected in South Africa’s post- recession real estate market in 2013. Expansion and new development brought cross-sector profits, backed by risk-averse investors. Current and future investors, however, are increasingly facing up to challenging trading conditions. The financing of large construction projects take place amid a cutting edge environment and uncertainty. In the words of Frank Berkeley, managing executive at Nedbank Corporate Property Finance (NCPF), who continues to finance massive projects: “In spite of our fragile economy facing further setbacks, the 2014 fortunes of the South African property market inextricably lies on the country’s economic performance and other markets.”
Infrastructure and Development
Fears of an uninspiring investment environment due to delayed infrastructure projects are substantiated by the construction and development industries. Future growth is inhibited by slow transformation, limited state funding and regulatory hurdles. Local operators now have access to alternative options in resource-rich sub-Saharan African regions, where investment opportunities beckon within the fast-growing power generation and oil and gas industries. Local civil engineering companies, such as Murray & Roberts, which is increasingly focusing on non-core assets, are exploring contracts beyond borders. Company chairman Henry Laas says infrastructure build is fundamental to economic growth, and that the private sector is leading the way in infrastructure spending, with little public sector expenditure on big construction projects. On the upside, however, is the growing trend of the aerotropolis mixed-use concept, now becoming a mainstream concept in aviation planning. Global developments of this expanse and capital investment have brought substantial economic and social benefits to airport owners as well as local businesses and communities. The first development of its kind in South Africa is taking place through the consortium-led development of global consulting engineering firm Aurecon at the Ekurhuleni OR Tambo Aerotropolis in Gauteng. This multi-disciplinary consortium offers industry advantages of previous planning and infrastructure projects in the Ekurhuleni area.
Trends to Alter Real Estate Economics
Long-term planning objectives relate to the economic benefits derived from the integration of manufacturing and residential areas within close proximity of the airport. Development criteria include questions regarding the adequate addressing of the city’s socio-economic upliftment. Land use issues and transport facilities have to facilitate maximum efficiency of both the people and freight in the region. Future growth is predicted to ensure the economic wellbeing of Gauteng and Ekurhuleni’s businesses and community, from the smallest informal trader to large multinational companies. The impact of predicted CO2 emissions on the environment formed part of the planning criteria of this project. The emphasis on large-scale mixed-use development is highlighting impacts on other sectors of the commercial real estate market, such as the global phenomenon of cutting edge technology on the office sector. A fast diminishing need for office space over the next few years is expected to see less office development, according to the PwC report. As telecommuting increases and office culture becomes more accepting of video conferencing rather than meetings, and as digital files replace paper, more time will be spent working from satellite and home offices. “These trends are likely to alter real estate economics more than is currently anticipated,” says Nedbank’s Berkeley. He has expressed particular concern about the potential for office vacancies to increase notably in the coming years. “This is on the back of the ongoing consolidation trend that is seeing increasing numbers of large organisations constructing their own centralised buildings into which they are relocating many of their staff that were previously housed in leased offices.” The construction industry also benefits from institutional backing of product specific requirements of prime tenants within the vehicle manufacturing industry. Job creation and economic productivity are long-term benefits facilitated by NCPF’s financing of the refurbishment of the R230-million motor vehicle manufacturing facility and joint venture of Iveco South Africa and Larimar Group in Rosslyn, Pretoria. Industry opinion is that South Africa’s real estate business is set to benefit from the construction industry’s focus on local knowledge, specialist expertise and good government relations. A fast diminishing need for office space over the next few years is expected to see less office development, according to the PWC report.
Words: Anna-Marie Smith
