Chinese SOE investment in Africa could impact housing solutions

2019-09-05T14:55:48+00:00September 4th, 2019|News|

Housing is not yet a priority industry for Chinese investment in Africa. About one third of Chinese firms on the continent operate in the manufacturing sector, followed by services, trade, then finally construction and real estate. In addition, even within construction and real estate, only a small minority of investment falls into the affordable housing sector. Chinese firms tend to prefer commercial properties and infrastructure.

Housing is not yet a priority industry for Chinese investment in Africa. About one third of Chinese firms on the continent operate in the manufacturing sector, followed by services, trade, then finally construction and real estate. In addition, even within construction and real estate, only a small minority of investment falls into the affordable housing sector. Chinese firms tend to prefer commercial properties and infrastructure.

Image credit: WEF

Image credit: WEF

In 2017 McKinsey released an exhaustive study on the extent of Chinese investment in Africa, with a number of recommendations and conclusions that are relevant for African states and private players working in the housing industry. The paper focuses on over 1 000 firms operating across Ethiopia, South Africa, Kenya, Nigeria, Tanzania, Angola, Zambia and Cote d’Ivoire.

There is enormous potential for Chinese investment to make an impact on housing in Africa. In McKinsey’s ‘accelerated growth scenario’, the consultancy suggests that forays into new, ‘high potential’ sectors like housing could bring billions of dollars in growth. While manufacturing, services and trade all account for a larger share of Chinese funds than construction and real estate, Chinese firms own a much larger portion of the construction market in Africa than they do of the manufacturing market. Approximately 50% of construction and real estate revenues in Africa are Chinese, versus only 12% in manufacturing. This suggests that any lateral expansion into the African housing sector will involve heavy Chinese participation. Given that the types of capital investments required for construction/real estate firms are similar to those of housing developers, it is possible that a minor shift of productive capacity or a simple expansion could yield not only large profits for those Chinese firms but also combat dire housing deficits that exist in target countries.

Another highlight of the report is that SOEs have incentives that align better with the needs of the affordable housing industry than private Chinese companies. In countries like Zambia and Kenya, where informal markets are plenty, mortgages are hard to come by and average incomes are low, the opportunity for healthy profit margins in affordable housing is not immediately apparent. SOEs are far more likely to take the risk of entering this new market, given that they serve diplomatic interests in addition to business interests.

The McKinsey report points out that Chinese SOEs often compromise on profits to serve geopolitical objectives to which their private counterparts are not bound. Therefore, in determining who out of the Chinese investors to engage with to find affordable housing solutions, SOEs are likely the first place to look.

Source: Centre for Affordable Housing in Africa