Dar es Salaam real estate investment opportunity

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Located in East Africa, Tanzania is one of the largest countries in Africa with an area of 947,303 SQKM and the second highest population in Eastern Africa, with a current population of 56.9m, after Ethiopia, which has a population of 102.4m.

In comparison, Kenya has a population of 48.5m. The population has been growing at a five-year CAGR of 3.1%, compared to the global average of 1.2% p.a. It also has a relatively high urban population of 32.3% compared to Kenya’s 26.5%, Rwanda’s 29.8% and Uganda’s 18.0%, with an urbanization rate of 5.3% p.a compared to the global average of 2.1% p.a. The United Republic of Tanzania is composed of mainland Tanzania and the semi-autonomous Zanzibar Island and while the capital city is Dodoma, the main economic city is Dar es Salaam.

Tanzania is bordered by Kenya, Burundi, DRC Congo, Zimbabwe, Rwanda, Mozambique, Malawi, Zambia, and Uganda as well as the Indian Ocean to the East.

Economically, Tanzania has had one of the strongest economic growths in Sub-Saharan Africa with a GDP growth rate averaging at 6.6% for the period 2012-2016, and a marginal decline to 6.5% expected for 2017. The trend is however, expected to continue in 2018 and 2019, with World Bank projecting 6.8% and 6.9%, respectively.

The stable economic growth is supported by the mining, construction, financial services, and information and communication sectors. As at 2017, the service sector, entailing real estate, accommodation, and finance industries, has been the largest contributor to GDP with a 42.0% share, while agriculture, forestry, and fishing accounted for 31.0% and the industrial and construction sectors accounted for 27.0% of the GDP.

In comparison, Kenya’s service sector accounted for 50.8% of the GDP, agriculture, forestry and fishing accounted for 23.1%, with the industrial and construction sector accounting for 13.8%.

Dar es Salaam Overview

Dar es Salaam is the largest city and main economic hub of Tanzania. It has an area of 1,590 SQKM, as per United Nations data, with a population of 5.1 mn as at 2017 according to the African Development Bank, resulting in a population density of 3,661 persons per SQKM. Dar es Salaam served as Tanzania’s capital city up to 1996, before the capital city function was moved to Dodoma. The city has the second largest port in Eastern Africa after Kenya’s Mombasa. The main drivers of the economy in Dar es Salaam are the financial services, transport, manufacturing and tourism sectors.

Services & Amenities

Dar es Salaam is served by major roads such as Ali Hassan Mwinyi, Nyerere, Bagamoyo, Morogoro and Kilwa roads, which are in a good state of repair. It is also served by a 6-phased Bus Rapid Transit System (BRTS), with Phase 1 of the project consisting of 29 stations having been completed in 2015. This has helped to ease congestion in the city and also opened up the area for development.

Ferry services are also common especially for transit to surrounding islands, while the newly constructed 680-meter-long Kigamboni Bridge, which was completed in 2016, links the district of Kigamboni and Dar es Salaam’s CBD at Kurasini.

Electricity is provided by Tanzania Electric Supply Company Limited (TANESCO), which accounts for approximately 60% of the total power generation, while other players include US-based Symbion, and Tanzanian Firms Independent Power Tanzania and Songas, which account for the remaining 40%. Water and sewerage disposal services are provided by Dar es Salaam Water & Sewerage Corporation (DAWASCO).

Overview of Real Estate in Tanzania

A bulk of real estate property, especially housing, in Tanzania is dominated by individual home-builders who account for over 70.0% of the total supply. The public sector through local governments, National Housing Corporation, Tanzania Building Agency, Watumishi Housing and pension funds such as National Social Security Fund (NSSF), account for approximately 12.6% of the supply while residential private developers cater for approximately 3.9%. The housing demand is estimated to grow by 200,000 units annually with the cumulative deficit currently at 3m units, according to National Housing Corporation (NHC).

The sector contributed to 3.8% of Tanzania’s GDP in H1’2017, a decline from 4.0% during the same period in 2016 while its growth softened to 2.3% in H1’2017, from a 2.4% growth in H1’2016. Similarly, the construction sector’s growth declined to 8.6% in H1’2017 compared to a 10.0% growth in the same period in 2016. The decline in growth of the two sectors is attributable to tight liquidity, inadequate infrastructural development and slowed real estate uptake following a tough macroeconomic environment.

Factors driving real estate in Dar es Salaam

Majority of Dar es Salaam’s investment grade real estate is developed by government entities through the National Housing Corporation, Tanzania Building Agency, and pension bodies. The sector has however seen an increase in private developers with players such as Avic, Nevada Properties, Quality Group, Shamo Group, Actis, and GSM Group, among others, carrying out developments.

The factors driving growth of real estate in Dar es Salaam include:

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Stable economic growth: Tanzania has had one of the fastest growing economies with GDP growth averaging at 6.6% annually since 2012 driven mainly by growth in mining, construction, financial services, and information and communication sectors. The World Bank projects a GDP growth rate of 6.5% for 2017, a decline of 0.5% points from 7.0% in 2016, attributable to the government’s ban on export of raw minerals and ores for metallic minerals. However, this is expected to pick up in 2018 and 2019, with projections of 6.8% and 6.9%, respectively, premised on the recovery of the global commodity prices, scaled-up investments in public infrastructure and a tightening trade deficit with a drop in imports.

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Influx of multinational players: The discovery of gas in 2015 and the presence of a seaport has attracted multinational companies in the transport, manufacturing and mining sectors, who demand institutional grade real estate including housing, offices, retail as well as hospitality facilities,

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Positive demographic dividend: Tanzania has a population of 56.9m people growing at 3.1% p.a., compared to the global average of 1.2% p.a. and East African average of 2.9% p.a. This translates to a density of 60.5 people per SQKM (Kenya has 87 people per SQKM). 32.3% of its population is urban and growing at 5.3% p.a. compared to the global average of 2.1% p.a. and East African average of 5.1% p.a, thus creating demand for real estate,

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Infrastructural Development: The government has invested in infrastructure through construction of roads to remote areas such as Kigamboni through the Kigamboni Bridge, implementation of the Bus Rapid Transit System and ongoing construction of a Standard Gauge Railway to ease accessibility, thus boosting real estate growth in out of town areas.

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Institutional Funds: Government corporations such as National Housing Corporation (NHC) and Watumishi Housing, pension schemes such as National Social Security Fund (NSSF), Government employees pension Fund (GEPF), Local Authorities Pension Fund (LAPF), among others, have been at the forefront of real estate investments. As per the Social Security Regulatory Authority investment guidelines, pension schemes are mandated to invest a maximum of 30% of their funds in real estate. As at 2017, NHC accounted for 70% of all housing in Dar es Salaam.

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Housing Deficit: As per the National Housing Corporation, housing deficit in Tanzania stands at an approximately cumulative 3m units and expanding by 200, 000 units per annum. The gap has attracted interest from both the public and private players especially for lower-mid end and low-end segments, evidenced by the various masterplan communities by NHC, Watumishi Housing, Avic, across the country.

The real estate sector has been facing fundamental challenges, among them:

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Access to Credit: Credit growth fell from 24.8% in 2015 to 7.2% in 2016 and to 0.3% in August 2017, attributable to a rise in the risk premium due to an increase in non-performing loans and thus banks preferred to lend to the Tanzanian Government. Despite the Bank of Tanzania lowering the monetary policy rate to 9.0% in H2’2017, banks still charge relatively high interest rates reaching highs of 17% – 21% p.a. and a 5-year average of 16.1% p.a., thus limiting the uptake of mortgages, which affects property purchases. The Mortgage to GDP ratio in Tanzania stood at 0.5% as at 2016 compared to Kenya at 2.7% and Uganda at 0.9% in the same period,

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Unfavourable Government Policies: The implementation of austerity measures such as surplus income cuts for government employees thus restricting their property purchasing capabilities, as well as a strict new tax regime by the new government since 2015 resulting in reduced spending, leading to low purchasing power of real estate consumers. It has also resulted in the closure of firms and scaling back of multinational firms. The imposed 18% VAT on all property purchases increases the cost of buying property, limiting affordability, compared to countries such as Kenya where VAT is only imposed on commercial real estate purchases,

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Insufficient Infrastructure: Various parts of Dar es Salaam such as Mwenge, parts of Mikocheni and Kigamboni lack requisite infrastructure such as adequate water connection, mains sewers, mains electricity and proper road access hindering the growth of real estate as developers have to incur extra costs to provide these services –See figure 1

A review of performance across the various sectors:

Residential Sector

The residential sector in Tanzania is dominated by individual homebuilders and the public sector either through the National Housing Corporation or the Tanzania Building Agency (TBA) who cater for Tanzanians or government employees.

We conducted research on housing by both private and public developers and sub-divided Dar es Salaam into the following segments:

  • High End – Areas such as Oyster Bay, Masaki, Morocco, and Msasani,
  • Mid End – Areas such as Mbezi, Kunduchi, Kinondoni, Mikocheni, Mwenge, Upanga, Kariakoo, and Kisutu,
  • Low End – Areas such as Mbagala and satellite locations such as Kigamboni and Bunju.
  • In summary, the residential sector has been recording subdued performance for the past two years, especially in the high and mid-end segments, which have continued to record negative price growth, attributable to tight liquidity, slow credit growth, which declined to 7.2% in 2016 and to 0.3% in August 2017 from 24.8% in 2015. However, the low-end segment had the best performance with an annual uptake of 53.7%, and average total returns to investors of 5.2%.

Due to a tough operating environment in the market, prices have either stagnated or declined indicating that the market is more suitable for investors targeting returns in terms of rental income as opposed to price appreciation – see figure 2

The performance breakdown of the various market segments and typologies is as shown below:

High End – see figure 3

Mid End – see figure 4

Low End – see figure 5

Commercial Sector

The commercial sector has been steadily growing, especially in terms of supply. According to Cytonn Research, office stock in Dar es Salaam stands at approximately 350,000 – 450,000 SQM, and another 100,000 – 150,000 SQM expected to be delivered in 2018/19. Commercial office supply growth is propelled by infrastructural development in key regions around the city, a stable economic growth and continued entry of multinational firms into the country and the budding small and medium enterprises industry, especially in the manufacturing, financial and telecommunication industries. However, as demand stabilizes and stock supply increases, the sector has been recording subdued returns and increasing vacancy rates in the last three-years. This has been attributed to high rental rates that do not sustain the small and medium enterprises, emerging cities that are slowly catching up such as Dodoma, Arusha and Mwanza and the high cost of borrowing affecting expansion of enterprises – See figure 6

Retail Sector

Tanzania’s formal retail activity is centered in Dar es Salaam, which is considered the main economic hub of the country. As per JLL Dar es Salaam Report 2017, Dar es Salaam had a retail stock of 153,000 SQM. The main premium malls are Mlimani City Mall in Mwenge, Aura Mall in Upanga and Mkuki Mall in Kisutu. According to the Cytonn Research, at least 84,000 SQM is expected to be complete in the next five-years with malls such as Peninsula Plaza in Masaki, AICC Shopping Mall and Ngorongoro Towers in Arusha as well as shopping plazas in the upcoming MNF Square and Morocco Square in Dar es Salaam. Other premium malls in the country include Aim Mall in Arusha and Rock City Mall in Mwanza, measuring 15,454 SQM and 5,000 SQM, respectively.

The retail sector has grown on the back of positive demographic dividends with increased consumerism from the expanding middle class, increased interest from foreign players, and the growth of e-commerce – see figure 7

Hospitality Sector

The hospitality sector is growing supported by one, holiday travelers who are the main drivers of Tanzania’s hospitality sector accounting for 78.0% of international arrivals over the last 5-years attracted mostly by key attractions such as wildlife, coastal beaches and mountain climbing, and two, political and social security in the last few years making it a preferred destination in East Africa compared to countries such as Kenya that suffered a setback between 2013 and 2015 due to terrorism and negative travel advisories. The sector’s performance, however, was low in 2016 due to the introduction of VAT to tourism services making Tanzania a relatively more expensive tourism destination. The sector, however, recorded improved performance in 2017 and is expected to sustain growth due to political stability and government efforts to improve infrastructure.

Land Sector

Land in Tanzania is divided into 3 categories; general land, village land and reserved land. The Land Act provides for rights of occupancy for between 33-years and 99-years for general land and reserved land. The Village Land Act recognizes the rights of villages to land held collectively by village residents under customary law. Under the TIC (Tanzania Investment Centre), a foreigner can be allocated land designated for investment purposes and which is already listed, or can look for desirable land owned by a Tanzanian national, and after agreeing on the acquisition of such land with the owner, the owner will submit the existing title deed to the Ministry of Lands whereby it will be re-issued as a land designated for investment purposes under the name of TIC and thereafter derivative rights issued to the investor (foreign entity).

Comparison to Other Sub-Saharan African Markets

In comparison with other cities in Sub-Saharan Africa, Dar es Salaam has low residential and office yields at 5.2% and 6.4%, respectively, attributable to the shrinking demand resulting in reduced rents mainly in the residential and office sector.

The retail sector, however, has relatively competitive yields at 9.4% compared to Kenya’s and Accra’s at 9.6% and 9.5%, respectively.

Real Estate Investment Outlook

Our outlook on the Dar es Salaam real estate sector is neutral with a bias to positive. We have a positive view on the retail and hospitality sectors, a negative on the commercial sector and a neutral view on the residential sector. Investors entering the real estate market should, therefore, focus on the retail and hospitality sectors, which have potential and therefore offer new opportunities for growth. In addition, the residential sector has pockets of value in the low-end segment where demand is highest for detached units and in the mid-end segment where rental apartments have the best yields.

Cytonn Investments