March 2006

Sanjeev GuptaManaging Director-EMERGING MARKETS

Property Investment in AfricaA Multi Pillar Approach

The case for Domestic Savings to work with Global Finance

JULIUS NYERERE – ex PRESIDENT OF TANZANIA said

Africa’s problems are:

Poverty

Ignorance

Disease

AFRICA HAS BEEN PLAGUED BY

Disease

Illiteracy

Conflict

Segregation

Bias

Exploitation

Hunger

Poor GovernanceYou name it ….

The IMF & WORLD BANK wants African states to

EMBRACE A PROGRAMMEDIRECTED AT:

Privatisation

Liberalisation

Financial Market Development

Supported by Democracy & Good Government

MY PERSONAL VIEW IS

African needs a blend of:

Economic Reforms – YES

Labour Reforms – YES

Property Rights - YES

BUT IT ALSO NEEDS DESPERATELY

A savings culture

A deployment of those savings

If there is to be sustainable growth

Change has to come from within….

PROPERTY DEVELOPMENT

A perspective on the issues in the African Continent

Typical Realities- Property sector in Africa

Residential

Rural to urban migration

Demographic pressure

Gradual erosion of extended family support

Volatile demand

Weak property rights

Industrial & Commercial

Absence of quality covenants

Short period leases

Abnormally high yields

Periods of over/under supply

Typical Realities- Property Sector in Africa

Financing Constraints

Limited or non existent domestic savings

Fledgling or absent mortgage markets

Self- or informal funding

Absence of long-term finance

Exacerbated by short term `opportunistic` thinking

WHAT THEN DO WE NEED?

3 THINGS

SAVINGS – Domestic

DEPLOYMENT of those savings INTO DOMESTIC INVESTMENT

BRING foreign funding to work in tandem and ``kick start`` the process

BREAK THE CAMEL`s BACK!!!!!!

The need is to break the Vicious Cycle of:

LOW SAVINGS

LOW INVESTMENTS

POOR GOVERNANCE

UNEMPLOYMENT

DROUGHT

CRISIS

GUILT

DESPAIR

AID

ENTITLEMENTDÉJÀ VU

BREAK THE CAMEL`s BACK!!!!!!

And create (through sensible intervention) the Virtuous Cycle

SAVINGS

CAPITAL

INVESTMENT

ECONOMIC DEVELOPMENT

DIVERSIFICATION

EMPLOYMENT

CONSUMPTION

WHERE IS AFRICA…

In terms of Savings and Domestic Investment?

WHERE IS AFRICAN SAVINGS?

Facts about Savings

Individual Discretionary Savings Low or Non Existent

Contractual Savings often state owned & misallocated

Government Savings Zero or misused

Corporate Savings not reinvested but “exported”

Investment prudential guidelines restrictive & anti market forces

Issues to consider

History of Low employment or “disguised” Employment

Real wages have not kept with Inflation

Faith in financial products ZERO

Access to Banking & Insurance Limited

CASE STUDY 1 - BOTSWANA

Facts

Highly Developed Contractual savings but low discretionary savings

High total savings - 40% of GDP

Government is a major Financier

Financial (Equity) Markets small - 25% of GDP

Institutions have generous offshore allowance (70%)

Opportunities

Public Private Partnerships

Diversification possible into Mining, Tourism, Infrastructure

Regional Finance-Investments

CASE STUDY 1 – BOTSWANA (cont)

Problems

No Government urge to involve private Sector

Prudential guidelines not encouraging

High yielding T Bills

Effect

Limited availability of long term capital

Local entrepreneurship limited

Expensive Bank Debt main source

Economy dependent on Government spending

Preponderance of Government Subsidised projects

CASE STUDY 2 - ZAMBIA

Facts

Poor legacies – long term savings

Discretionary savings low

Investment opportunities abound – Tourism, Agriculture, Services

Opportunities

Attract FDI

Attract DFIs

Invest in local opportunities

Privatise pension schemes

Fiscal stimulus to save

CASE STUDY – ZAMBIA (cont)

Problems

State Schemes still state held

Private Schemes small

No incentive to save

Poor Banking & Life Insurance Access

Limited DFI play

Effect

Much vaunted “Privatisation” ended up in Giant Trust

No Domestic Capacity

No economic Multiplier

Opportunities going away

Case Study- Nigeria

Facts

Poised for exponential growth

Underdeveloped Contractual savings-15% of GDP but expected to be a multiple of GDP by 2010

Discretionary saving low

Financial Markets small- < 25% of GDP

Opportunities

Infrastructure opportunities abound

Pension funds can provide long term finance

Case Study-Nigeria

Problems

Underdeveloped Mortgage markets

Directed largely to `affluent` section

Short period-high rates

Confusion- Land rights & Bureaucracy

Rigid Investment Guidelines

Effect

Short tenancies

No quality developments

Lack of Developers and Construction Companies

Case Study-Kenya

Facts

Poor legacies – long term savings

Discretionary savings low

Investment opportunities in Tourism, Agriculture, Services

Opportunities

Attract DFIs

Invest in local opportunities

Privatise state pension schemes

Fiscal stimulus to save

Case Study-Kenya

Problems

State Schemes still state held

Private Schemes small

Limited incentive to save

Effect

Limited Domestic Capital & Capacity

No economic multiplier

Opportunities going away

WHAT DO THEY HIGHLIGHT?

Savings limited domestically

Where available -not utilised well

Sequenced approach to Forex, Tax, Asset allocation, etc missing

Investment Opportunities available but not harvested

Regional cooperation non existent at this stage

Reliance & Presumption on AID- Bail Outs – continues

CAN THIS BE RESOLVED??

YES - THROUGH

Global DFI’s

Global Funds

AID

Foreign Governments

In order to :` Act as a `CATALYST` Facilitate the PARADIGM shift Make it a VIRTUOUS cycle

But needs to be underpinned by

Generate Domestic Savings

Encourage Active asset allocations

Deploy Domestic Savings into Domestic Capital

GENERATE DOMESTIC SAVINGS HOW?

Access to Banking and Insurance products

Tax & other Fiscal Incentives

Privatise State Schemes

Corporate – Profit retention and reinvestment incentives

Redirect Government spending

ACTIVE ASSET ALLOCATION – WHAT?

Encourage Pension & Life schemes to go beyond immediately-available low risk assets (quoted equities, T-Bills)

To invest in Private Equity, Property and Infrastructure funds

Shareholder Activism as necessary

DEPLOYMENT OF SAVINGS INTO CAPITAL INVESTMENT

Adopt Long term horizons

Local focus – including into SMMEs

Co-invest with Global agencies

Mobilise Bank (debt) markets

Provide Technical & Mentoring Support

The SOLUTION

Focus on Community Issues

Develop communities Tourism, Infrastructure development -all inclusive

Lobby for Policy Changes

Active Investing by Life & pension funds Modernise Land Tenure & Ownership Rights Banking Industry- Mortgage Products & Retail Reach-MUST Stimulus to save & invest

Create a Partnership Culture

Involve Global agencies and provide `UMBRELLA` Finance Tie in with domestic institutions & funds Assist with technical & Implementation Capacity Mentoring- not ``dabbling`` Develop Real Estate Bodies, Laws, Regulations

THE MULTI PILLAR APPROACH- A COMPELLING STORY

Involve Global DFIs, NGOs

Work with Domestic Private Sector & Domestic Funds

Empowerment of local people through ownership , skills transfer, employment &local content criteria

Take Policy makers `along`- use the Clout

CONCLUSION

Remember – Nothing is as Powerful as an Idea whosetime has come

Let us as a continent stop “meddling” and trying out the same things – and wait for different results – That is INSANITY

t h a n k y u