The Prospect of Tanzania Real Estate Investment Market

Tanzanian real estate market is currently experiencing a huge surge of increased construction and real estate activities.  It appears that every investor is constructing a villa, an apartment complex, office tower, hotel or shopping mall and with the extremely exciting and promising oil and natural gas market, there are great expectations in the real estate sector.

But, will these expectations be met? Torrid growth in real-estate investment in the country is inseparably connected to the country’s political and economic stability, which has made Tanzania the most preferred investment destination in East Africa for global investors, developers, agents and lenders.

Undoubtedly, Tanzania is set to become one of Africa’s leading economic powerhouses driven by many factors including strong macroeconomic policies.

With enormous demand for residential housing, industrial and commercial premises for Tanzania’s 48.2 million inhabitants (2012 Population and Housing Census) and for its thriving economy, large-scale real estate developments have been launched in the country.

This is transforming the real estate business into one of the most profitable sectors in the country. The sector has attracted a flood of venture capital dollars and diversified sources of funding, including private equity funds.

To stimulate economic activity and boost the real estate market, the Tanzanian government fostered a very stable and predictable fiscal investment regime, signed several double taxation treaties and multilateral and bilateral agreements, introduced regulations for mortgage financing, established a framework for Real Estate Investment Trusts (REITs), and enacted the Unit Titles Act – also referred to as the Condominium law.

Subsequent to this, the funds inflows catalysed and transformed real estate investment in Tanzania. The real estate market is very vibrant, and a wall of money coming into the sector is driving a huge amount of legal work. Part of that work includes wading through the complex maze of legal rules and regulations associated with property transactions.

It is evident that the real estate sector plays a pivotal role in the Tanzanian economy, as it contributes to employment generation and GDP growth of the country. Almost 10.2 per cent of GDP is contributed by the real estate and business services sector (Financial Stability Report 2013), and in the coming few years, it is anticipated by industry experts to rise by up to 13 per cent.

For banks, too, real estate plays a key role, from a real estate financing perspective: It is estimated that mortgage loans outstanding amount to 156 billion/- with the average mortgage debt size being 62million/- or USD 38,000 (Mortgage Market Update 2013).

This amount is growing rapidly as new entrants come into the market. Moreover, the real estate sector has also been responsible for the development of allied sectors such as steel, paints, cement, bricks, and timber. A recent report by the Bank of Tanzania shows that industry and construction ranks third among the major sectors of the Tanzanian economy in terms of direct and indirect effects.

Being an increasingly capital-intensive industry, the real estate sector is not immune to liquidity crunches resulting mainly from banks’ extremely cautious approach to real estate lending – despite the big improvement in market sentiment in recent years. Isidore Leka Shirima, FK Econo- Consult’s principal consultant, opines: “Banks remain primarily concerned with the level of risk they’ll be taking when they lend to the real estate sector and they are taking an extremely cautious approach.” This approach, he continues, “is reflected in construction- linked payment plans.”

The good news is that alternative investors including private equity funds have stepped in to take big bets on the Tanzanian real estate sector by backing developers with risky shortterm finance, thereby helping the sector to expand.

According to data from the Tanzania Ministry of Lands, Housing & Human Settlements Development, the current housing deficit stands at over 3,000,000 units with an annual growth in demand of 200,000 units. This, coupled with the annual growth in demand for affordable houses and the urban population growth, offers big hyper-growth market opportunities for real estate developers who will design affordable housing options suited to average Tanzanian families whose disposable income is steadily on the rise.

Some of the public pension funds and the National Housing Corporation (NHC) have invested directly in housing. The Parastatal Pension Fund (PPF), for instance, ventured into low cost housing and developed a project in Kiseke, Mwanza, comprising of 580 houses.

The NHC expects to develop a minimum of 15,000 houses for sale and lease, of which 5,000 will be affordable houses for low-income groups by June 2015 (NHC Strategic Plan 2010/11 – 2014/15).

The current scenario has also opened up new locations for residential development such as Kinyerezi, Mtoni Kijichi, Ukonga, Gongo la Mboto, which were otherwise not very attractive to house buyers. Remote suburban areas, where land is relatively inexpensive, are witnessing the launch of real estate projects.

As far as the commercial segment is concerned, with a substantial deficit of office space in the port city of Dar es Salaam, demand for rentals has increased.

Due to the increased scarcity of office space in the city’s central business district (CBD), some residential flats in prime areas of the city have been converted into commercial properties. Although this trend is contrary to regulations, it is a sign of growth in the real estate sector.

The ongoing development of a real estate regulatory and control bill is expected to establish a regulatory agency and streamline the real estate sector by introducing various reforms. This is a crucial step in the right direction. If implemented, the bill should ensure housing for the urban poor by making it compulsory for developers to provide some portion of project townships for the lower income group. The bill should also help streamline the approvals process for all developments so as to reduce or eliminate project delays.

The Capital Markets and Securities Authority (CMSA), the stock market regulator in Tanzania, should step up its nation-wide campaign for sensitising the business community about REITs. This will go a long way to building up awareness and overall confidence and creating an environment conducive for increased private and public REITs, which help to drive the real estate market because developers can sell properties to these funds and use the sale proceeds to fund the building of new projects.

While the government has taken various steps to develop the whole sector, there is a further need to streamline government policies and introduce reforms to boost the real estate sector. Industry experts are advocating a substantial cut in interest rates and greater simplicity in credit financing.

The government should consider removing VAT on building materials to further catalyse and allow for affordability of new real estate developments. These government initiatives will reduce prices further for properties, increase liquidity in the market, and bring down the interest rates to a more realistic level.

In support of the initiatives, developers would lower property prices and more Tanzanians would be interested in buying properties. With a continued strong and stable central government led by President Jakaya Kikwete, the real estate market is expected to get a further boost soon, as improved investment climate sentiment is bringing a lot of confidence into the country. It is against this backdrop that continued growth in the real estate sector is predicted with rising real-estate values and improved credit quality.

Eventually, whether Tanzania’s real estate market can meet the expectations of foreign and domestic investors and developers will depend on the rationality of the regulatory regime and how well the laws are interpreted by courts and tribunals and implemented by the local authorities.

Overall, the real estate market will continue to present more windows of opportunity for those ready to open them.

Report by: Noah Amri , Freelance Property Investment Analyst. 

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