Investment opportunities in Africa

Land is Africa's greatest asset, and the farmland market has developed to the point where significant investment opportunities exist.

7 May 2013, Words by Ian Bailey

 

There has and continues to be commentary almost daily about the supposed ‘grabbing’ of African agricultural land by foreign investors, government vehicles and transnational corporations (TNCs).

Indeed, since 2001 over 200 million hectares is believed to be leased to overseas investors according to GRAIN. This may be the case but out of this total area only a small proportion will have been properly titled and an even smaller proportion developed into a viable farmland asset.

It is perfectly true there has been much interest in this frontier land market, however, the situation on the ground is somewhat different from the picture created by some media, non-governmental organisations (NGOs) and investment companies.

Savills has been monitoring the market in Sub-Saharan Africa (SSA), see Map 1, and it featured in our International Farmland Focus 2012 as a region to watch. The market has now developed to the point where there are real investment opportunities. Through a practical case study and first-hand experience from our team operating on the ground, we aim to provide clear, robust and transparent information about SSA to explain why it has become an area, which should be given serious consideration by investors. We are concentrating on SSA rather than South Africa (SA). In SA land title risk is higher and land is expensive.

There are many challenges and obstacles to overcome to unlock the ‘land capital’ in Africa but with the right knowledge, contacts and strategy; business can be done on a palatable basis and significant agricultural land assets developed.

Why Africa?

Africa continues to grow in economic significance (see Graph 1). It is becoming widely recognised as playing an increasingly important role in the global economy. Agriculture and, more specifically, land are Africa’s greatest assets, offering significant capital growth potential. It now provides alternatives to the mature markets of the western world.

Graph 1 shows that, in some of the key countries of SSA, output relative to the UK and the USA over the past five years has been significant (annualised 10 to 15%) and similar to India. Although the International Monetary Fund’s annualised growth forecasts over the next five years are more muted they still outstrip the UK and the USA. Graph 2 illustrates how large Africa is. It is generally recognised there are substantial areas of under-utilised fertile land with significant potential to increase production.

The African Guinea Savanna is one of the world’s largest underused agricultural land reserves, covering approximately 600 million hectares, of which about 400 million hectares can be used for cropping, but only 40 million hectares are currently farmed (source FAO).

Table 1, which shows the current yield relative to the estimated potential yield, clearly illustrates the significant yield potential of SSA compared with Asia and South America.

The World Bank report ‘Growing Africa: Unlocking the Potential of Agribusiness’ published in January 2013 reports;

• Africa has more than half of the world’s fertile yet unused land.

• Africa uses only 2% of its renewable water resources compared with the global average of 5%.

• Poor storage and other farm infrastructure leads to average post-harvest losses of 15% to 20% for cereals and higher for perishable goods.

• Fertiliser use lags significantly behind Latin America and Asian countries and has remained relatively static since the mid 1970s.

• In addition the climatic characteristics of the SSA zone are a warm tropical climate with typically between 800-1200mm rainfall per year and;

• Soils are typically low activity clays and high base loams, of good quality and nutrient retentive.

These headlines look very attractive and have inspired many investors to take a look at the market and in some cases acquire some land. However, it is often understated that to transform this land into a commercially productive asset requires a large amount of readily available capital, good external infrastructure, technical expertise, especially at farm level and time. As with all investments with potentially high returns, investing in SSA is not without risk.

Without the suitable resources and knowledge to overcome the natural constraints of investing in African farmland investors are unlikely to be successful. Whilst there are large areas not formerly under any title, most areas of productive land have some subsistence farming in place.

Thus, in addition to the requirements noted above, there are social, environmental and political factors that need to be included into any project to ensure success. It should never be underestimated how emotive the subject of land can be and being aware of these issues is fundamental to success.

 
 

Key Contacts

Ian Bailey

Ian Bailey

Director
Rural Research

Savills Margaret Street

+44 (0) 207 299 3099

 

Hugh Coghill

Hugh Coghill

Director
International Farmland

Savills Margaret Street

+44 (0) 20 7016 3818

 

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