One of my favourite pieces of academic research is a study of house prices along the Herengracht canal in Amsterdam made by real estate finance professor Piet Eichholz of Maastricht University. Thanks to outstanding dutch record-keeping, Eichholz managed to construct the Herengracht house index covering house prices from the contruction of the Herengracht in the 1620s all the way to 1975 at first, and later extended to 2008.
So, ehm, what’s going on here? Guess it’s good news if this is a new trend. On the other hand, I can’t help to think a bit along the lines of the following quote:
“Whenever people agree with me I always feel I must be wrong.” Oscar Wilde
I recall investor Jim Roger’s reaction when he first heard the term “Frontier Markets”: “Oh, they have a name for it now!” Then he said something along the lines of that not being a good sign and that it might be time to invest somewhere else.
Anyhow, I think it will take some time before any of this trend following capital will find its way into real estate in Yopougon and raise prices. At the moment, my feeling is that most people investing in residential housing in Yopougon are individual Ivorians living in Europe or North America.
I got one more thing I like about the Yopougon investment in the previous post:
It allows me to get to see how things really work in practice on the ground, giving an insight into the economy on a micro-level which is hard to obtain in any other way – a bit like the Portfolios of the Poor study.
Finally, a plot of land that has passed all the due diligence. I haven’t bought it yet, but right now there is only a 500,000 CFA Franc difference between what the seller is asking and what I would like to pay for it. It’s in Yopougon again, but in a much nicer part than where the building with the six studio apartments is.
The idea is to eventually have two 4-storey buildings constructed with a possible configuration of:
19 Studio apartments
8 Three-room apartments
4 Two-room apartments
So this is a much larger project than anything I have done before, but well, it’s time to scale up things! Initially, it all kind of was a funny little side project of having a house in Africa that I could use to stay in if it didn’t work out as an investment. But over time I’ve had a few “Hey, this is actually working, the rents are being paid and nothing is going horribly wrong!”-moments, so I can’t just stop here.
Reasons to like this investment:
At the moment I only know the revenue it will generate and the building cost to within a certain range, but even with most pessimistic assumptions, the return looks to be ok.
Everything doesn’t need to be built straight away. One can pause after each storey, have tenants move in, and use the existing cashflow to finance the next storey.
It’s an area that has potential to increase in value as Abidjan grows, yet it’s not so far off as to not have roads and city-life.
On the ground floor, there is potential to have shops instead of apartments increasing the revenue.
The demand for housing in this price range is very strong, and I have a hard time to envision a scenario where it would go down. Even in 2002, during the civil war, people fled from the interior of the country to Abidjan increasing the demand for this type of housing.
The area is not in the risk-zone of floods.
I have a quite pessimistic outlook for the economy in the western world. With a high and increasing debt-load and an aging population there are risks of default, and of both deflation and inflation, making it difficult to find a safe place to put one’s cash. I have cash with a bank that is bankrupt and saved by a government which in turn is not far away from bakruptcy itself. All of this creates the unprecedented situation where it almost feels safer to own urban land in West Africa than to have cash in a bank account in Western Europe.
This is a too big project for the builders I used previously in Yopougon. I have to contact someone new and the project’s success will hinge on that new builder doing a good job at a fair price. If the building company isn’t doing a good job, it would be good to have it replaced as early as possible.
The contract with the building company need to be carefully worded to set the right incentives and avoid a lock in with too high costs or poor quality. Enforcement of the contract in case of dispute is something that can go very wrong.
I have had two architects independently have a look at the plot and give quotes for the construction of two four-storey buildings. The quotes were pretty far from each other, highlighting that I need to get a better idea of construction costs.
Initially estimated construction costs risk rising due to various reasons including building materials getting more expensive.
Problems with the paperwork around acquisition of the land. I have checked and double checked it, but one never knows.
To conclude, I would like to share a quote from a mostly, but not entirely unrelated TED talk video by Discovery Channel “Dirty Jobs” host Mike Rowe:
“Bob Colmes, the pig farmer in Las Vegas who collects the uneaten scraps from the Casinos and feeds them to his swines. Why, because there is so much protein in the stuff we don’t eat that pigs grow twice the normal speed. And he is one rich pig farmer, he is good for the environment and he spends his days doing this incredible service. It smells like hell, but god bless him, he is making a great living. […] You know, the guy is worth… was offered 60 million dollar for his pig farm, and turned it down outside Vegas. He didnt follow his passion, he stepped back and watched where everybody was going and then he went the other way!”
Just liked this picture, got no big story to tell this time.
When seen this way, unlike the more common Mercator projection which distorts surface areas, it’s striking that Africa is a really big place. The other striking thing is the relative absence of lights. I’d say lights are a proxy for population density and economic activity, both of which are projected to increase according to the McKinsey study Lions on the Move I blogged about earlier. I’d love to see this same picture 10, 50 or 100 years into the future.
One funny thing with the Ivory Coast is that when people hear it out of context, often they don’t straight away connect it to: Country, West Africa. Unlike say, the unambiguously named Central African Republic.
A typical example would be somebody asking: “So, where are you going on holidays?” And I go: “Oh, to the Ivory Coast.” And if I don’t immediately say “in West Africa” or “you know, where Drogba is from” they either have this blank stare not knowing what hit them, or the conversation just goes on, and later you have the “Oh, are you going to AFRICA!!!” moment, sometimes followed by “I thought it was somewhere in southern Spain”
Or today, when asking the human resource department for a letter needed to get a visa for the Ivory Coast (and that’s a story onto itself), I got the more unusual: “That’s one of those French islands, right?”
Touva or bust!
Now this was supposed to connect to the late Nobel laureate physicist Richard Feynman somehow. One lesser known fact about Feynman is that he had this hook-up on a place called Touva. When he talks about it in a (highly recommended) video called The Last Journey of a Genius , he puts words to an attitude about travelling I’ve think I’ve had since early teens involving visiting a lot of odd places.
It’s about travelling being a passion for adventure, for exploring new places and a general curiosity about the world. Instead of that package holiday to a beach in southern Spain, I’ve kind of always chosen places like eastern Belarus, Burma, the night train between Tblisi and Baku, northern Albania or Montevideo. And if given the chance to visit a country where the capital is called Yamoussoukro, it just has to be done!
Here’s Richard Feynman talking about Touva:
“He said you are making up a country that doesn’t exist! I said Oh yeah. I got the encyclopedia and we looked it up on a map. Sure enough there is a Tannu Touva, and that was a surprise, but where was it? Just outside outer Mongolia, in the middle of central Asia, in the depths of Russia, far away from anything. And it was no longer an independent country, it was part of Russia. And we saw that the capital – this is what did it – was KYZYL. My wife and I and he, at the same time looked and smiled grinned at each other. Because any place that’s got a capital called KYZYL just got to be interesting!
I know how I act. I’m an explorer, ok. I get curious about everything. I want to investigate all kinds of stuff.
Let’s go back to what we are doing. One day we look at a map and it’s capital’s K-Y-Z-Y-L We decided it would be fun to go there because it’s so obscure. It’s a game, it’s not serious, it doesn’t involve some deep philosophical point of view of authorities or anything, it’s just fun of having an adventure to try to go to a land we never heard of that we knew was an independent country once, it’s no longer an independent country. Find out what it’s like, and discover as we went along … that it’s isolated makes it more interesting. You know many explorers like to go to places that are unusual.
I know we were all excited to go, but you see, even if we didnt go to Touva that would have been interesting too. You got to understand every plot, even though there is a high chance of failure, as far as the ultimate aim was concerned, would always turn out [inaudible] supposed to be a big adventure after all. It ain’t everybody that goes across to visit a throat singing conference in the western part of Mongolia.”
With the Yopougon building fully rented, I have set up a little spreadsheet to keep track of the cashflow. Here’s how it looks starting in July when the first four Yopougon tenants had stayed a month and paid their first rents:
So, this month everybody paid on time without any problems, which is nice, although it makes the spreadsheet a bit dull if it keeps on. The best way to make it more exciting would be to add a unit that’s rented per month. I’m working on that, and on buying more plots of land in Abidjan, but it takes time.
The World Bank’s Investing Across Borders study summarises the issues pretty well in the Accessing land chapter:
Foreign companies seeking to access land in Côte d’Ivoire have the option to lease or buy both privately and publicly held land. There is no outright prohibition of foreign ownership of land. However, the process involved in leasing or buying public land is complicated and time-consuming.
Land-related information may be found in the registry or cadastre. Most of the laws relating to the land are old, and need to be updated. There is no land information system (LIS) or geographic information system (GIS) in place that centralizes relevant land information.
The main points of the article are very much in line with my own thoughts on the issue:
Investing or doing business in sub-saharan Africa is not easy, but easier than what general perceptions in the West would make one think. And in this misperception lies an opportunity.
Few have noticed, but the business environment has gotten a lot better over the last ten years, and there are no strong reasons to believe it would get worse over the next ten years.
The long term fundamentals look great, and should bode well for a patient long term oriented investor.
Quotes and a table:
Africa’s economy is growing at a tiger-like 5% to 8% pace, versus 4% for countries like Russia and Brazil. And the IMF has been nudging up its forecasts for Africa.
There are compelling long-term trends on the continent, says Razia Khan, the London-based head of research on Africa at Standard Chartered, a U.K. bank with businesses in many emerging and frontier markets. Political stability and economic policy has improved. Consumption is rising, with the working-age population expected to hit 65% of the total population in 2050, versus about 50% now. And new capital, some from investment funds, is coming in. Africa’s debt and foreign-exchange markets are opening up, too, Khan adds, another encouraging sign. Over all, “Africa is becoming more accessible” to Western investment.
Sub-Saharan Africa is far more attractive than its media stereotype would lead one to believe. Yes, poverty and violence are still huge problems in some parts of the continent. But, increasingly, the miseries of lands like Zimbabwe are more the exception than the rule. Africa isn’t an easy place to invest in. But the patient are likely to be rewarded for venturing into what for many is the last overlooked investment frontier.
On a more positive note compared to the previous two posts, I found a study by the World Bank on foreign direct investment regulation . It turns out that the Ivory Coast is – on paper at least – one of the most open countries in the world to foreign ownership of companies, scoring the maximum 100 points for all sectors.
It’s ahead of for instance the United States and the United Kingdom which have restrictions on air transport (both), light manufacturing (UK) and media (US). Maybe a more relevant comparison would be to a developing world country such as Thailand which is a very popular place for westerners to set up small businesses like my own. Thailand scores abysmally on foreign ownership due to a near blanket rule on sectors and business activities in which foreign capital is limited to a less-than-50% stake.
I have heard of foreigners in Thailand using shell owners and all kind of tricks to get around this rule. So that’s one thing less to worry about in the Ivory Coast. I’d speculate the reason for the openness is linked to the significant French business presence and the relatively smooth and non-antagonistic decolonisation under Felix-Houphouet Boigny.
The comment on foreign ownership across sectors from the study:
Côte d’Ivoire is one of the most open countries to foreign equity ownership, as measured by the Investing Across Sectors indicators. All of its business sectors covered by the indicators are fully open to foreign investment. With the exception of electricity transmission, there are no other sectors with monopolistic or oligopolistic market structures nor are there any perceived difficulties in obtaining any required operating licenses.
One of the Ivorian blogs I’m following called aller de l’avant just had a real-life story from Abidjan illustrating regime uncertainty.
In brief, a lady parks her car and goes into a shop. When she comes out, two policemen have clamped her car under the bogus claim that parking was forbidden and ask for 10,000 CFA Francs (15.24€) to let her car go. The lady offers to pay 3,000 Francs (4.60€) which one of the policemen wants to accept whereas the other insists on 5,000 Francs (7.62€). The lady then contacts a friend at the local municipality who refers to a policeman at the municipality who, to help her, manages to convince the policemen who clamped the car that the lady is a prosecutor of a city in the interior of the country. “Madame le Procureur’s” car is then quickly de-clamped without any fines.
Now, this is an example of the most visible petty corruption that can affect anybody. I’m pretty sure the same type of things happen to businesses, just that the amounts asked for are likely to be greater. And for businesses too, the law isn’t applied equally to everybody, and it matters greatly what contacts one has in politics or in the administration. Even a somewhat amusing – especially in retrospect – situation where public officials disagree with each other about the size of bogus fines/bribes to ask for, can clearly happen to businesses.
So far in my business activities in the Ivory Coast I have had no experience of corruption or arbitrarily applied laws and regulations, but it’s likely to happen sooner or later.