Firm foundations: As high-end residential growth slows, affordable housing and retail are giving the sector a lift

Property development in Ghana is growing, with increased demand in the residential, office and retail segments in major urban areas. Currency fluctuations and high levels of inflation have limited expansion, and high interest rates continue to dampen lending activity. However, developments in Grade-A property, spurred by an influx of foreign investors and steady progress in the mortgage market, led to strong growth in 2012, with further positive developments expected.

Spurred by double-digit GDP growth and an influx of commodity investment following the discovery of oil, developers rushed to offer high-end options to new multinationals establishing a presence in Ghana. With expansion continuing at a steady pace and the middle class slowly realising its purchasing power, real estate in Ghana is set to offer long-term rewards for patient investors. Although speedy development brings the risk of a real estate bubble, sustained demand in middle-income housing should offer opportunities for local and international investors, developers and buyers.

RESIDENTIAL: Residential development in Ghana began to take off in the early 1990s, after liberalisation of the financial sector. It has since shown steady growth, though foreign capital has been limited. However, housing is moving into a new stage of expansion, sustained by the discovery of oil, a young population, a rising middle class and an influx of foreign investors. Population growth has created the opportunity for expansion – it jumped from 22.9m in 2008 to 24.7m in 2010, and is expected to reach 26.1m in 2013. Ghana’s young population and shrinking household size (4.4 per household as of 2010, compared to five in 2000), combined with high urbanisation and growth in Accra, Takoradi and Kumasi, have created a need for affordable housing as the number of potential first-time buyers rises.

One reason why this demand remains unmet is the land acquisition issue. Land is usually acquired by negotiating with community leaders, and the titling process is dogged by inefficiency. A host of multinationals entering West Africa through Ghana has also created strong demand in the high-end residential and office sectors, sparking a property boom in Accra and urban areas in the Western and Ashanti regions.

While the creation of large-scale land banks can be a challenge, Ghana’s business environment is favourable for foreign investors. Capital, profits and dividends are transferable, there are guarantees against expropriation in the constitution and the government has signed double taxation agreements with many countries.

SCALING UP: Residential development has hitherto been largely fragmented, with most of the current housing stock provided by individual investors in collaboration with small-scale local contractors, though large domestic and international developers have been moving into the market, constructing projects for high-end apartment blocks and commercial space.

Notable among these is the Trasacco Group’s Villagio Vista, a three-building complex in Accra now in the final stages of construction. At a height ranging from 12 to 27 stories, it is the tallest residential development in West Africa. La Beach towers, which opened in 2012 under its eponymous developer, offers three 18-storey luxury residential units on the La Beach Road in Accra.

Vanguard Heights, developed by Vanguard Properties Development Company, completed construction in 2012 and offers two seven-storey buildings with 36 apartments in the Cantonments area of the capital.

Smaller high-end projects are also in demand. “Developers are having the most success in smaller projects.

We see investment-focused buyers attracted to property appreciation and high yields in this segment. The rents across luxury products are very strong at up to $10,000 per month,” Robert Davis, sales manager for property marketing firm KHI, told OBG. The company is responsible for, among other things, selling 18 luxury villas in Accra. Though luxury property prices usually max out at about $1.2m, Davis said demand for highend residential is such that he expects the villas to fetch $1.5m per unit, and that all 18 will sell out before construction begins. However, Naadua Nuno, head of residential property management at Broll Ghana, warns that the luxury market is at risk of becoming oversaturated. “The market has started slowing and diversification will be vital for developers. Why buy one $1.2m unit with 12% returns when you can buy 10, $120,000 units and get 8% returns on each?” she said.

AFFORDABLE SEGMENT: With international developers largely involved in high-end deals, Ellis Atekpe, executive director at local mortgage provider Ghana Home Loans (GHL), said that given the significant housing deficit of an estimated 1m units, huge opportunities exist for the private sector in the lower-income segments. “We need large-scale developers who can achieve economies of scale by delivering housing units in large numbers. What the government needs to do is make sure the process for land acquisition is smooth, ensure availability of utility services at sites, and ensure the environment is conducive for business. The private sector has to lead the charge,” Atekpe told OBG.

The government expects the housing shortfall – which is largely in affordable housing – to grow to 2m by 2020, and though the market will need at least 150,000 new units per year to meet the shortfall, current annual supply is between 30,000 and 40,000 units. Eric Gené, CEO of The Ridge Capital, a Ghanaian developer working on delivering 150 units in the affordable segment, told OBG, “Now we’re getting into low-income projects, and those are going to be mass-market. If you look at the pyramid of residential homes, it’s clear that what people need is not high-end homes, it’s the $15,000 and $20,000 homes that no one is producing.”

NEW CITIES: Larger developers have also taken note, and moved forward with plans to tackle the shortage. Three new cities will be constructed in the coming years, providing jobs and housing for thousands.

In November 2012 Renaissance Group announced the construction of two new cities: the Appolonia City of Light in Accra, and King City in Takoradi. Renaissance expects that Appolonia City, around 40 km from Accra, will provide 22,500 residential units and house 88,000 people when completed. King City, 10 km from Takoradi Harbour, will have 24,000 residential units housing 98,000 people. Renaissance Ghana’s country manager Dela Wosornu told local media that the company had procured several thousand acres of land for the two projects – 2000 acres for Appolonia and 2400 acres for King City – that it will lease to both real estate developers and individuals to build houses for residential and commercial purposes. The new cities will cost $100m and take 10-15 years to complete, meaning the housAverage rental rates in Accra, 2013 ing shortage will persist in the near future. However, the concept of city developments is catching on in Ghana. RIg Communications announced in March 2013 the construction the City of Hope, a $10bn ICT City that, when complete, will boast Africa’s tallest building, house 25,000 people, and create 50,000 jobs.

Speaking to the BBC at the City of Hope announcement, President John Dramani Mahama said the private sector will play a critical role in Ghana’s infrastructure development. “Government has led growth since independence with all the major investments... The time has come for the private sector to take over,” he said.

OBSTACLES: Major players like Renaissance, which boasts a 10,000-ha portfolio of urban, residential and commercial real estate developments across Africa, and access to large amounts of capital and financing, are well positioned to provide far-reaching solutions to housing shortages. But projects like Appolonia and King Cities highlight the challenges facing smaller local contractors and property developers in Ghana.

The Ghana Real Estate Developers Association ( GREDA), an umbrella organisation representing private developers, has complained about a lack of government contracts being awarded to local players. GREDA’s executive director Emmanuel Asamoah argues that these developers are at a disadvantage when it comes to supplying the housing market. “As it is, local developers are struggling to find their own financing, land and equipment. You cannot tell them they should provide affordable housing, while not helping them to produce it. The government could provide land and infrastructure, which would boost efforts to produce more affordable housing for the masses,” Asamoah told OBG.

The Ghana Investment Promotion Centre reports that residential real estate transactions averaged 85,000 over the past 10 years, with an estimated value of $1.7bn. Although this is substantially lower than the 320,000 transactions occurring annually in South Africa, the numbers begin to even out from a per capita perspective, with Ghana averaging 3400 transactions per million people, compared to South Africa’s 6238. However, the sector showed strong growth in 2012, with activities growing by 13% over the year. Estimates show foreign direct investment (FDI) in real estate, finance and business services accounted for one-tenth of overall FDI in recent years, at close to $500m in 2012, according to the African Development Bank.

RENTALS: In the rental segment, property firm Broll Ghana has seen huge demand for one- and two-bedroom apartments in Accra and Takoradi. In Accra, new developments offering one- and two-bedroom options are cropping up in the sought-after areas such as Airport City, Cantonments, Ridge and Osu, and typically spend two weeks or less listed on the market.

High-end residential developments offering a mix of one-, two- and three-bedroom units are experiencing significant demand, with rental rates for a one-bedroom flat in Accra’s prime neighbourhoods running $ 1000-1500 a month, and a three-bedroom property fetching $2700-4500. Prior to Ghana’s oil discovery in 2007, there was a limited supply of luxury apartments on the market, and a three-bedroom unit could be snapped up for $1000-2000. Nuno expects that an influx of new units will prevent further price increases over the long term. “We are witnessing sustained demand for new stock and we anticipate prices going up. Competition will lead to prices for some inventory being priced more realistically; people will realise they’re paying too much,” she said. Developers expect to see an estimated 8% Average sales prices in Accra, 2013 annual return on residential one- and two-bedroom investments in 2013 and 2014, according to Broll Ghana.

MIXED-USE: Mixed-use spaces are also on the rise in Accra. Long seen as solutions to traffic congestion and torturous commutes in Europe’s urban centres ( problems which are increasingly afflicting West Africa’s metropolises), mixed-use spaces are become increasingly popular with developers, with several slated to open in the next three years. Local firm Laurus Development is currently working in partnership with UK-based private equity firm Actis on The Exchange, a mixed-use development that will begin construction in the third quarter of 2014. When complete, the $255m, 75, 000-sq-metre project will offer two office buildings with 16,500 sq metres of gross leasable area (GLA), 12,500 sq metres of retail space and four residential towers.

Nuno told OBG that developers working towards mixed-use spaces are ahead of the game, as Ghana’s white-collar workers are keen to reap the rewards of living and working in the same area: “If a developer was to put up serviced apartments in the central business district (CBD), people could walk to work. In master planning any major city one should consider how people would live, work, play and move,” she said.

The current lack of mixed-use space in Accra allows developers to benefit from higher demand for office and retail space. Dream Realty is developing 32 groundfloor shops in its 80,000-sq-metre mixed-use development the Octagon. Managing director Karim Ibrahim told OBG his waiting list sits at 40 retailers long, adding that developers, even for small-scale retail projects, are at an advantage when it comes to choosing the best tenants at major property developments. “Accra centre has no shops, showrooms or storefronts. The only upscale retail options available are inside hotels,” he said.

MORTGAGES: For an emerging market, and despite high interest rates, mortgage lending is relatively well established in Ghana, and mortgages are increasingly seen as a way of avoiding tedious land-acquisition processes. The market still has significant room for growth however, with penetration at less than 1%, compared to an average of 13% across Africa between 2004 and 2009. At GHL, which accounts for 75% of the country’s new mortgages and holds 50% of the existing market with roughly 2000 loans in its portfolio, the biggest opportunities for growth exist in the middle of the market – houses priced between $50,000 and $200,000.

Deposit insurance in the form of a collateral replacement indemnity policy is also becoming increasingly common among mortgage lenders, meaning the loanto-value ratio for homebuyers can now go as high as 100% on properties under $100,000, compared to the previous 70-80%. As first-time buyers account for 93% of mortgages at GHL, consumer-friendly policies like deposit insurance will go a long way to improving accessibility. With a default rate of less than 3% on mortgage loans, an average loan size of $60,000 and Ghana’s growing middle class set to make an impact on real estate growth, the future is promising for the mortgage market. To accelerate growth, however, mortgage providers are looking to address the issue of interest rates of 20% and above. Buyers have the choice of a mortgage in cedis or dollars, but few choose a mortgage in cedis owing to the effects of depreciation on interest rates. “A mortgage in dollars is always better, because it works out to be a lot cheaper. If you look at the cedi, interest rates are closer to 30% because they are tied to Treasury bills; risk-free rates stand at 21% to 23% per annum plus the lender’s margin, compared to lending rates of 12% or 13% in dollars,” Atekpe told OBG.

The problem lies more with funding sources than local institutions, according to GREDA. If mortgage funding is sourced from international lenders, it inevitably causes market dollarisation, which puts pressure on local institutions as well as potential homeowners who earn in cedis. “Mortgage providers face financing problems because they have to source overseas funding, so when the funds come in, they’re in dollars, and they have to be paid back in dollars. Depreciation puts the providers at a risk, and the cost of that risk is passed on to homeowners,” Asamoah told OBG. In May 2013 Asar Akuffo, the managing director of HFC Bank, told local press that high interest rates are one of the biggest challenges facing mortgage growth in Ghana. “If interest rates remain above 20%, then it becomes a major challenge. We currently have a dollar mortgage portfolio that is growing because we can borrow the dollar at 7%, but we want cedi loans as well,” he told a local newspaper.

PURCHASING POWER: Cutting rates by 10-15% would open the market up to more Ghanaians, but average income levels still limit expansive mortgage growth. According to a 2012 Ernst & Young report, less than a quarter of households had an income of more than $5000 in Ghana in 2010. By 2020, this figure is expected to rise to more than a third of households. However, with low-range house prices starting at $30,000, the minimum annual income needed to make mortgage repayments over 20 years at a 12.5% interest rate is nearly $11,000, meaning the majority of Ghanaians are priced out of home ownership at current levels.

Buying power in limited segments of the economy may increase over the short term. A promising development for the estimated 478,566 public employees who migrated to the single-spine system was substantial salary increases rolled out across the board in 2012 and 2013. The government more than tripled its wage bill for civil servants (to $4.3bn) between 2009 and 2012, injecting substantial purchasing power into the middle class. However, inflation and heavy government borrowing to finance the project – it cost $977m to introduce the system in 2012 – means wage increases maybe represent a mixed blessing for the market.

COMMERCIAL: Issues of affordability are not restricted to residential real estate. The commercial sector, which has long been dominated by general-use rather than purpose-built buildings, is experiencing substantial shortages of AAA retail and office space.

While retail space is currently experiencing the highest demand (see Industry & Retail chapter), office space is also in short supply. In May 2013 Accra was among 20 cities selected by Jones Lang LaSalle as representing key opportunities for commercial real estate growth by 2020, and office rental rates as of the fourth quarter of 2012 ranged between $21 per sq metre in Accra CBD, to $35 per sq metre in Airport City, compared to $15 to $21 per sq metre in 2007/08. A 2011 report by Broll Ghana found that total available office space was at its lowest level in two years, and predicted healthy rental growth for developers in the office segment.

Since then, a number of developers have moved forward on office and mixed-use commercial properties in Accra’s prime areas – including the CBD, Airport City, Osu, Spintex Road and Cantonments – as well as in Takoradi, which is emerging as the country’s oil capital.

Notable developments set to open in 2014 include Icon House, a 17,335-sq-metre mixed-use development, and One Airport Square, a 20,000-sq-metre office and retail space, both in the Airport City. The Octagon, a 50,000-sq-metre office and retail development, and the Accra Financial Centre, with 14,080 sq metres of office and retail space, are also due to open in 2014 in the CBD in Central Accra. One Airport Square comprises nine floors of office space and 2000 sq metres of retail space, and Cyril Tay, business development manager at Laurus, the project’s developer, told OBG that it was able to develop the project on a speculative basis due to high demand for upscale office space. “The residential market was growing but offices were lagging. All you saw was the B-Grade type office, or companies leasing and refurbishing a residential property to be used for office space. Multinationals are used to quality space, and here there was nothing,” he said.

OUTLOOK: Although hampered by bureaucracy, currency fluctuations and a sluggish mortgage market, Ghana’s real estate sector holds significant potential. Stronger collaboration between the private and public sectors could see housing become accessible to a largely untapped middle- and lower-class market, while the outlook for the office segment remains positive as oil growth continues to drive new tenants into the market. Overall, high demand for prime real estate should continue to spur investments and growth into 2014.