The impact of the global financial crisis may have led to a slowdown in Rwanda’s thriving construction boom, but investments in the property sector are still very much part of the government’s plan to transform Rwanda into a regional business hub. Rachel Keeler looks at prospects and challenges in the sector.
Rapid economic growth has inspired a lively construction boom in Rwanda, as the government continues to court foreign investors to transform Kigali into a regional business hub. From 2003 to 2008, the sector grew from an annual output of USD100m to USD351m. A number of regional and foreign investors have entered the housing market that was just a few years ago almost entirely untapped. Tourism is drawing substantial foreign money, while the government has invested heavily in commercial development and city planning. Over USD600m in potential projects were presented at a construction and real estate forum held in Kigali in May 2009 that attracted investors from Asia, America and across Africa. The Rwanda Development Board reported USD60m in new registered projects as a result.
But despite the flurry, Kigali remains a nascent urban center with a lot of work yet to complete. Transport costs, mortgage financing, infrastructure and human resources all present challenges for property developers. Rwanda’s policy environment is also in flux as the government attempts to enact necessary legislation and implement a new master plan for Kigali to keep up with development.
Setbacks
Growth enthusiasm took a hit this year when the global crisis finally began affecting Rwanda’s economy. After registering an impressive 11.2% growth in 2008, Rwanda is projected by the IMF to grow only 5.5% in 2009. Almost half of Rwanda’s budget depends on foreign donors, and aid flows are expected to decline in the medium term. Low commodity prices, declining mineral exports and tourism profits, as well as less FDI and a return to trend in the agricultural sector after a bumper harvest in 2008 will all contribute to the slowdown.
The IMF says this has already had a negative effect on Rwanda’s credit markets with consequences for the construction industry. In 2007 and 2008, the country experienced a rapid increase in bank deposits that fueled lots of cheap credit but then slowed from mid-2008 as the fallout from the crisis hit. Banks thus experienced a maturity mismatch between loans and deposits, causing a liquidity crunch. It was the initial credit boom that drove a large part of the country’s recent construction craze, which will now certainly ebb as the government works with banks to revive the stagnant credit market.
Perhaps more upsetting was the recent pullout by Dubai World from six of the eight tourism projects – worth a total of USD230m – that it had planned for Rwanda. The move was not a specific reflection on Rwanda, as the large Gulf investor has now delayed USD1.5bn in projects across Africa. But it will leave a big dent in the country’s ambitious tourism development plans.
As Always, Onward
Still, investor optimism for Rwanda is high. Consumer demand continues to grow and investors see far-reaching potential in the unsaturated market steered forward by one of the most pragmatic and least corrupt governments in Africa. While most early housing and commercial development projects were driven by government spending and state agencies such as the Rwanda Social Security Fund (RSSF), private business has begun taking over.
Local real estate development companies like Real Contractors and DN International have sprung up and expanded. Hong Kong-based investors New Century announced plans last year to build a USD40m five star hotel and commercial complex in Kigali. And an enthusiastic gaggle of American businessmen has taken special interest in Rwanda’s development story, including millionaire Joe Ritchie, a former commodities trader from Chicago who is now the CEO of the Rwanda Development Board. Here are the key issues they face:
Mortgage Market
Mortgage financing is perhaps the greatest impediment to housing development in Rwanda right now, says Rob Fogler – one of the enthusiastic Americans, who runs the 1000 Hills Venture Fund with investments in Rwandan real estate and technology. Government figures put annual demand for new urban housing at 25,000 units. But housing is not cheap, largely because land and building materials are both expensive. Fogler is charging between USD75,000 and USD100,000 for the private single family homes he just finished building in Kigali – the largest estate of its kind, with just 29 lots. The country needs mortgage credit for more projects to develop. And Fogler notes in a liquidity crisis mortgages are often the first to go.
As it happens, Commercial Bank of Rwanda (BCR) – the first commercial bank to offer mortgage loans when it started last year – announced in June that it would temporarily suspend mortgage lending because it had exceeded its portfolio ceiling. The bank reportedly resumed lending selectively in September 2009. One problem is that Rwandan banks lack the access to long-term local currency financing at a reasonable rate that would make it easier to provide long-term mortgage credit. BCR was able to access some by floating a 10-year corporate bond last year on the brand new Rwandan stock exchange. But the market remains highly underdeveloped.
One hope for improvement could come from the World Bank’s International Finance Corporation (IFC). The IFC began working with the Rwanda Housing Bank (BHR) last year, which has been offering limited mortgage loans through the state since 1975. The IFC wants to run a facility through the BHR that can offer long-term mortgage financing to local financial institutions. Rumor has it that the IFC is now interested in investing in BHR, as the government plans to sell its controlling stake in the bank by the end of the year.
Master Plan
Kigali unveiled its new conceptual master plan this year. The 425-page plan plus existing conditions survey is an incredibly detailed look at the government’s vision for the city with information on zoning, available land, building materials, environmental concerns and infrastructure, and recommendations for all kinds of sustainable development. For investors, the conceptual 50-year outlook – the lead author of which was American firm Oz Architecture – is already a gold mine of data and long-term policy that would be difficult if not impossible to find in other African countries.
Still, investors say a lot of the policy is in transition. The plan acknowledges this: “The primary obstacles in residential home construction in the city of Kigali are the absence of consistent development regulations and building standard requirements (procedures, rights and obligations) to facilitate future legal urban growth.” The government is of course working to change that. It also hopes to rid Kigali of its many informal settlements and slums by compensating and relocating their residents.
Infrastructure
Provision of safe water is cited in the conditions survey as the greatest need throughout Kigali today – for homes as well as tourism and commercial space. In August, government officials said 60% of plots in the new Central Business District had been booked, but only 10% paid, possibly because investors are waiting for the completion of basic infrastructure there. The government has promised to do that, as well as cut the price of electricity in half after 2010, and finalise construction of water pipes throughout the country. It also just took out a USD33m loan from China’s ExIm bank with which to upgrade Kigali’s road network. And as of November of this year, Kigali should be linked to the new undersea fibre optic cable.
Supply Chain
As a tiny landlocked country sitting 1500 kilometers from the nearest seaport, Rwanda faces major transport costs for building materials. Rwandan cement manufacturer CIMERWA is building a new plant that will triple its production to 300,000 tonnes per year by 2010, which will bring down costs. But Rwanda’s neighbors already produce a lot of cement and one idea behind joining the EAC was to make access to that and other products easier. Rwandan customs officials are also getting better at processing times. Commercial developments are coming along alright, as they have commanded the most market attention so far (even though demand for residential real estate is higher). The killer for home construction, according to Fogler, is finishing materials that must come from abroad.
President Kagame is pushing hard for a new high-speed railway project that would connect Kigali to the port at Dar es Salaam. But the project is still in the planning stages. Fogler thinks things can get cheaper in the meantime as the country develops a better domestic supply chain for construction materials. As demand grows, the number of businesses investing in material imports and provision should too, and that will make things more efficient. One major supplier of plumbing and building materials, American-based Ferguson Enterprises, recently registered for operation in Rwanda at the May forum. The country also needs to train more professionals in the field so it can stop importing much of its skilled labor at high costs.
Investment Perspectives
As the Rwandan economy forges on through its formative years, it may be some time before it can attract the kind of large-scale, long-term investment in real estate that other African hubs have. Fogler says he is putting off thoughts of a full-fledged real estate fund for now because Rwanda lacks the predictability over the next 10 years that long-term private investors require. But Fogler is still captivated by the housing market. He talks about building into new price brackets and regions: “Every 10,000 dollars you go down in price the market becomes bigger and bigger – that’s where we see no limit… If Kigali gets full, then we have the rest of the countryside… The market for middle income homes in Rwanda and Burundi and parts of Uganda and Kenya and Congo is not going to plateau any time soon. It’s barely begun.”
Rwanda’s market is small relative to neighboring Uganda and Kenya, but far less developed, and far less corrupt. That makes it very attractive, especially to smaller-scale foreign investors. "Rwanda is attractive because of the zero tolerance on corruption,” says a principal of Diar Capital, a Dubai-headquartered investment company that has spent the past 12 months investigating real estate and hospitality opportunities in all five EAC states. “It's an environment where you can operate in the way you're accustomed to."
Even if all of the policy kinks are not worked out, investors say government officials are accessible and helpful when problems arise – something that in many other African countries comes only at a backhanded fee. And unlike the large saturated economies in Kenya and Uganda, with their chaotic layers of political intrigue and back alley deals, Kigali is a much easier place for an outsider to navigate. And regional investors are also thinking twice about where to sink their own money: Many Kenyans and Ugandans are deciding that Rwanda is the better bet. Major investments are also coming in from the DRC, which could help move the market through its liquidity crisis. Congo is already a major demand driver for the wider Rwandan economy. And just as Somali money has flooded the Kenyan real estate market, so Congolese cash will continue to flow into Rwanda.
But to really thrive, “it’s got to create itself as more of a hub," says the investor from Diar Capital. Right now Kigali remains somewhat out of the way, expensive to get to and inconvenient to operate from. "If Rwanda can become that safe, secure, transparent hub with a strong legal framework between Congo and East Africa, then they have a great chance of making it."
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