By Gerhard Zeelie; Head of Property Finance Africa: Nedbank CIB
A combination of recent political volatility, regulatory uncertainty and slow economic growth in South Africa has meant that many property investors have felt the need to look for opportunities elsewhere in the world to bolster their portfolios while waiting for the country’s recovery to gain momentum. Fortunately, these investors don’t have to look too far beyond the borders of South Africa, as many parts of Africa now offer attractive investment propositions across a variety of sectors, including real estate.
Of course, lumping all of Africa together as a single investment destination is not only grossly incorrect, it is also very naive, and potentially disastrous for the misguided investor who makes this mistake.
Every African country is unique, and presents its own investment opportunities, challenges and quirks. So, assuming that investors have fully assessed an investment opportunity in an African country, and established that it makes sense from a growth, viability and supply and demand perspective, they would be well advised to acquaint themselves with the tax and foreign exchange regimes of the country before forging ahead with their plans.
Many African countries offer relatively appealing tax incentives as a way of attracting international investors. While these can be a significant deciding factor when choosing an African investment destination, it is essential to bear in mind that not all tax incentives are created equal. So, while complete exemption from tax for a given investment period may be attractive initially, the financial benefits could be relatively short-lived if the investor is faced with inordinately high capital gains tax on exist.
In fact, for many of the uninitiated, or ill-prepared African property investors, what looks like an appealing tax deduction is often just a tax deferral. The impact of Withholding Tax (WHT) on flows between jurisdictions is also complex, and double tax agreements can be tricky. It is therefore imperative that prospective participants in African property opportunities have a full understanding of tax incentives, or partner with someone who does. Nedbank Property Finance Africa has well versed in considering these implications.
Then there is the issue of how complex the tax incentive really is, how difficult it is to access fully, and how easy it is to deal with the tax authorities in the various countries or jurisdictions under consideration. Failure to fully assess and understand all of these components can very quickly dull the sheen of what may have initially looked like a very bright reason to pursue an investment opportunity.
Another aspect of investing in Africa that can be surprisingly challenging is getting to grips with the ins and outs of foreign exchange. Given that the majority of global investors will fund their African real estate investments in hard currency, an understanding of currency risk over time is essential. In a number of African jurisdictions, often volatile inflation and interest rates have a direct impact on local currency values against international currencies like the US Dollar.
Given that the factors that influence inflation and interest rates are often uncertain and unpredictable, the resulting currency volatility can be hard to predict as well. Add to this, the fact that foreign exchange regulations in many African countries can often be quite fluid, the challenges are clear.
That said, on the back of gradually increasing investor inflows, many African countries’ foreign currency regimes are becoming more predictable and certain, with many linking more directly to global market forces, thereby allowing for more certain determination of flows and rates. In time, this should also help with the development of a more mature and viable derivatives market in Africa, which will undoubtedly add to the potentially lucrative investment opportunities offered by the continent.
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