Posted by: Martin | May 19, 2010

Risks – part 2

7) Tenants damaging or neglecting essential upkeep of the property
This seems to be a big worry among Ivorian landlords. I don’t really have any experience or statistics to support claims that properties are not well taken care of, but one worry is that it is not uncommon to keep animals in the middle of city of Abidjan – and we are not talking chihuahuas here, more like chickens, sheep or goats.

Probability: ?   Impact: Medium

Goats in Abidjan

8)  Zoning issues
In Senegal I saw a restaurant losing a great location when a house was built next to it blocking the way for customers to access it along the beach.  What’s going to be built in terms of buildings and infrastructure is unpredictable, and one needs to watch out for stuff that can lower the value of one’s property. Buying something without a paved road in expectation that a road will be built is a gamble that sometimes must be made if one wants to be early in new areas.

A problem I’ve had is that the empty lot in Yopougon before construction started was turning into a place where people dumped their garbage. You don’t want that happening next to your property.

Garbage in the outskirts of Abidjan

9) Devaluation of the CFA franc
With the weakening euro the risk has probably decreased, but if it happens like in 1994 it would mean an instant drop of 50% of rents (until they can be raised) and a drop of up to 50% of property values in poorer areas. In more well off areas, residents are likely to have incomes in euro making values hold up better.

One way to prepare for a devaluation is to include a clause in lease contracts that allows for automatic increase of rents or at least renegotiations upon a devaluation. However, if the market rent in euro terms drops, no contract clauses  can keep the rent above market levels for very long.

Probability: Low, but is likely to happen sooner or later    Impact: High, but provides a good buying opportunity, and the impact decreases over time

10) Build quality
Build quality is a big topic, but one sneaky thing in the Ivory Coast and the region is that there are two rain periods with very intensive rain fall.  A house may appear fine for most of the year, but leak water during the rain period which if unchecked can cause serious damage.

11) An economic crisis in Europe
As mentioned in the previous post real estate would be a reasonably good inflation hedge in case of a crisis in Europe, but the immediate effect would still be reduced demand especially in better off areas where people often count on incomes from Europe. According to the Aller de l’avant blog, Ivory Coast exports more to Europe (48% of exports in 2008) than it imports in Euro (31% of imports) which isn’t great  in a Europe crash scenario. Also Ivory Coast’s debt is denominated in US Dollar.

Probability: High   Impact: Medium, but with a high margin of error in both directions

12) Disloyalty among partners
Could kill the business. If I thought this was a significant risk I would not have invested at all.

Probability: Very low     Impact: Very high

13) Black Swans
Black Swans are low probability, high impact events that by definition are not predictable, but can be positive just as well as negative. The concept of black swans was popularized by Nassim Nicholas Taleb in his bestselling book The Black Swan. Acknowledging black swans can be seen as a way to recognise the limits of one’s knowledge. Taleb says that while black swans can’t be predicted, one can position oneself to benefit from one (by for instance buying out of the money put or call options on stock indexes) or at least increase robustness in order not to be too badly affected by a negative black swan.

I see the whole venture of investing in West Africa as a form of positioning to benefit from positive black swans, (and white swans such as an economic boom and resumed tourism), and not only financially but also by experiences and connections that wouldn’t have happened without this venture. As to robustness to survive negative black swans, it would be good to spread out to multiple countries, and many areas of Abidjan, and not have too much debt.


Responses

  1. Build quality – can be a big issue. Quite a few buildings lost their roofs this week in strong winds.

    Disloyalty – in your case, you may be fine, but ‘palabre Africains’ as one friend of mine calls it, seems to have ended many a business project here. Probably different for outsiders, but there seems to be a lot of space for jealousies and whispering about who’s cheating on who,that can destroy viable business schemes.


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