Dual currency funding structures can bring stability and robustness to real estate deals in sub-Saharan Africa, as developers and retailers seek solutions to the volatility currently, being faced in their domestic economies.
Traditionally, most property development projects are financed in dollars to assist in creating a sustainable and predictable funding environment for the assets.
The Head of Real Estate Finance for West Africa at Stanbic IBTC, Mr Adeniyi Adeleye, said while the property sector trends in West Africa were still positive, the main challenge had been currency volatility and related regulations.
The volatility had exposed tenants to rental increases because their rents were indexed to dollars. The depreciation of currencies in countries such as Nigeria and Ghana had been quite significant.
Over time, these cost increases will inevitably be passed on to consumers, which will in turn create additional affordability challenges.
Stanbic IBTC’s head of real estate finance for West Africa said the issue was now more about new solutions needed to improve the structuring of those deals, so developers could manage the challenges caused by policies aimed at shoring up dollars, the high local interest rates relative to dollar-based interest rates and weakening currencies.
This is why Stanbic IBTC is proposing the dual currency structure, a mechanism of utilising a combination of hard and local currencies, while hedging the interest rate risk.
“These facilities would provide a natural hedge and create a win-win between developers and retailers. For example, a local currency facility can be accessed to hedge leases that are unlikely to be sustainable or easily adjusted in shock currency devaluation scenario for defined periods”.
“This way the exchange rate risk can be more effectively shared between retailers and developers by keeping lease exchange conversion rates constant for periods of volatility,” Mr Adeleye explained ahead of the West Africa property investment conference in Accra.
“The robustness of the structure is that it adjusts in periods of shock to provide stability,” said Mr Adeleye, adding that it also provided sound financial structuring, inbuilt buffers and flexibility into project funding structures, to accommodate unexpected changes in the economic environments.
“This structuring solution seems to be the most pragmatic approach to dealing with the challenges of unpredictable economic environments,” Mr Adeleye stressed.
The key challenge is that though many markets have official channels for assessing hard currencies, they often require regulatory approval to convert. There remains the risk that a change of government or policy may hinder the unfettered access to the markets, thus creating a real risk of being unable to service foreign currency obligations.
“It is this serviceability challenge and robust flexibility that dual currency funding structures seek to mitigate,” explained Mr Adeleye.
Traditional intuition is to finance retail real estate projects in local currency but the differential in interest rate between US$ (dollar) and local currency loans can be as much as 18 per cent, which makes the foreign currency financing attractive, especially as there is a margin of compression from stabilising rental rates and limited scope for project cost reductions.
Mr Adeleye is, however, encouraged that in spite of the strained environment the level of interest from property developers had not waned, adding “in fact, most developers are positive about the long-term prospects of the economy and options available to them, largely because of the supply gaps in these markets.