According to Gerhard Zeelie, Head Real Estate Finance, Africa Regions for Standard Bank, funding commercial property developments with a combination of hard and local currency is an effective method to mitigate currency volatility and liquidity risk in Africa’s rapidly growing commercial real estate sector.
Operating across 20 markets in Africa means that we are acutely aware of how endemic, persistent and volatile local currencies are, as well as just how high the risk is of markets running out of hard currency (a currency that is unlikely to depreciate suddenly or fluctuate greatly in value). This is obviously apparent in Africa’s real estate sector, where shortages of hard currency remain a persistent operational challenge, necessitating a buffer to absorb or delay the impact of often unforeseen instability.
Traditionally, most property development projects in sub-Saharan Africa have been financed in hard currency, ensuring a predictable funding environment for the assets. More recently, the US dollar’s sustained appreciation against African currencies, for example, means that US dollar-denominated leases are placing tenants under pressure: local currency rentals are spiralling upwards as tenants struggle to fund the growing gap between local and hard currencies. This is alongside the added stress of Africa’s endemic liquidity shortages.
In response, Zeelie advises Africa’s real estate developers to consider denominating commercial property loans in a mix of hard and local currency. For example, denominating a portion of the debt in US dollars and the rest in local currency acts as a buffer against liquidity risk. When local markets run out of US dollars, landlords can continue to service the local currency portion of the debt. While the US dollar portion of the debt may grow, the local currency portion of the debt will continue to shrink, achieving a net reduction despite the absence of US dollars in the local market.
Zeelie reveals that as local currencies in Africa continue to depreciate against most hard “safe haven” currencies, tenants are insisting on signing local currency leases. This, of course, provides an opportunity for banks to denominate significant portions of debt funding in local currency, offering clients a mechanism to match rental cash flow in local currency with local currency debt.
While Zeelie strongly recommends that Africa’s real estate developers and operators consider the advantages of denominating their debt in dual currencies, he cautions that this is not an option that can be applied retrospectively to existing hard currency-denominated commercial real estate debt where illiquidity is already a problem. Commercial property developers in Nigeria, for example, long used to an oil-based economy delivering consistent US-dollar liquidity were not able to convert their US-dollar debt into local-currency debt when the oil price collapsed and US dollars dried up.
“Debt needs to be denominated in dual currencies upfront when the financing is structured,” advises Zeelie.