African real estate market key themes and trends

Written by: Boniface Abudho - Research Analyst

The just concluded East African Property Investment (EAPI) summit revolved around a prominent and recurring theme that dominated the sessions: the emergence of new asset classes within the African real estate industry. It is evident that investment preferences have undergone a remarkable transformation over the past five years. Historically, the focus has been on traditional offices, retail establishments, and industrial properties.

Currently, a notable surge of capital is being directed towards diverse alternative asset classes in Africa, including student accommodation, logistics and warehousing, data centres, and education and healthcare facilities. Indeed, according to a report by the African Development Bank, the value of capital invested in alternative asset classes in Africa reached US$100 billion in 2022. This represents a significant increase from the US$50 billion invested in 2021.

At the same time, the summit provided a comprehensive overview of the post-COVID business landscape, focusing on how businesses have adjusted working practices and their occupational strategies in the aftermath of the pandemic. Below, we highlight some prominent trends that have come to define the present state of the African real estate market in the post-COVID-19 era.

1. Flight to Quality

In the present market landscape, cost alone no longer holds sole significance for occupiers. The emphasis has now turned towards quality. Stakeholders are increasingly prioritising high-quality offices that also deliver on ESG considerations.

This flight to quality is resulting in the emergence of a distinctive two-tiered market. Indeed, across the East African market, the average rental rate for prime offices exceeds that of traditional offices by as much as 20%. Additionally, the vacancy rate for prime offices stands at approximately 5%, compared to 15% for the rest of the market. The need to attract and retain top talent, the necessity for a productive and collaborative work environment, and presenting a positive image to clients and partners are other reasons behind the laser-like focus on best-in-class offices

2. Flexibility

Long-term leases, previously common in Kenya, for instance, are being avoided by occupiers. As a result, landlords are adopting a different approach, supplementing their offerings with additional amenities such as bicycle racks, shower rooms, gyms, cafeterias, and communal reception areas as part of the foundational infrastructure.

In Kenya, the dynamic technology and SME sectors have driven this shift, as co-working space remains a more cost-effective and flexible alternative to traditional offices. For instance, the average duration of leases has decreased from five to three years, while the demand for flexible office space in Kenya has surged by 20% in the past 12 months alone. Overall, there is an escalating need for flexible offices throughout Africa, influenced by various factors such as the rise of remote working. Another good example is Egypt, where the average cost of flexible office space is approximately 15% lower than that of conventional offices. Landlords who can provide flexible lease agreements and desirable amenities stand to benefit the most from the shift in occupier preferences.

Other benefits of flexible office spaces include:

• Cost-effectiveness: Flexible office space enables tenants to save expenses on rent, utilities, and other miscellaneous overhead costs.
• Adaptability: Tenants can easily adjust their space requirements in flexible office setups.
• Amenities: Unlike traditional offices, flexible space offers often offer additional amenities like gyms, cafes, and shared meeting rooms.
• Community: Flexible office space fosters a sense of community and encourages collaboration among tenants.

3. Net Zero Commitments

Environmental, Social, and Governance (ESG) considerations have gained significant prominence within the African real estate industry. A rising number of stakeholders are committing to achieving net-zero targets, emphasising sustainable practices, and actively seeking environmentally friendly properties.

In 2021, the African Development Bank initiated the Africa Green Building Finance Initiative (AGBFI), which involves a substantial US$ 500 million fund to finance green buildings across Africa. During 2022, Cape Town committed to achieving net-zero emissions status by 2040, setting an interim target of reducing emissions by 40% by 2030. This increasing emphasis on ESG aligns with the global movement towards a more sustainable future and has serious implications for real estate that do not have any ESG credentials attached to it.

According to UN Estimates, the real estate industry currently contributes approximately 40% of global greenhouse gas emissions, which could rise to 70% by 2050. Consequently, there is a growing recognition of the need for ESG integration within the African real estate industry.

Scan the code below to find out how Flight-To-Quality is defining the African Offices Market in our latest edition of the Africa Offices Market Dashboard.