By Giles Wrench, International Director, iDesk, Jones Lang LaSalle
South Africa’s recent coronation into the BRICS group — adding “S” to the other recognized emerging nations Brazil, Russia, India and China — officially acknowledges what many insiders have forecast: Africa’s southernmost nation is set to expand beyond regional influence to become an international destination for corporations and investors.
Although South Africa’s area is the smallest by far of the BRICS countries, this nation of roughly 51 million people is the world’s 27th largest economy. It is the only African member of the G20 and has become the gateway for business and investment into the rest of the African continent.
South Africa represents a very promising consumer market and offers attractive rewards for real estate investors and corporations. But with those opportunities come risks that must be considered.
South Africa has already become a location of choice for international corporations and investors seeking entry into the African region. For example, in 2011, Walmart acquired a 51 percent share of Massmart, the continent’s largest retailer. Other Fortune 500 companies with major offices or manufacturing facilities in South Africa include JP Morgan Chase, Merrill Lynch, Citibank, HSBC, Goldman Sachs, General Motors, BMW, Toshiba, IBM, Microsoft, Dell andCoca-Cola.
Corporationshave discovered that South Africa’s office space – much of it built to high-quality, international standards — is bargain-priced compared to most other desirable global cities. At the end of 2011, prime space in Johannesburg cost an average of about $25 per square foot, lower than all the BRICS nations plus 35 major European cities.
There is approximately 168 million square feet of space in its four main markets — Johannesburg, Cape Town, Durban and Pretoria – and roughly 57 percent of the stock is ClassA (or prime quality space). With the creation of the Green Building Council of South Africa in 2007, South Africa has become the continent’s leader in sustainable offices.
Less attractive, however, is a corporate tax rate of 28 percent,which ranks South Africa among the top third globally. But that hasn’t dissuaded corporations from moving there.
Why? Africa is growing at an astounding rate. Within the next 15 years, an estimated 800 million people will either move to or be born in its cities. In 2000, there were some 16 million mobile phone subscribers on the continent. Today, a mere 12 years later, the number of subscribers has expanded to a staggering 644 million. There are similar success stories across the retail, communications and financial service sectors. With Africa emerging as the world’s third-fastest growing region, South Africa is an attractive place to establish a foothold in the continent.
Obviously, there are risks associated with conducting business in Africa. Many of these risks can be mitigated, while others need to be included in the “risk column” for any business setting up there. In the South African context, these include:
· Currency volatility – When the world’s economy sneezes, investors tend to withdraw hard currency from emerging markets like South Africa.
· Crime Statistics– Unfortunately, South Africa’s crime rate is well-known and unacceptably high. Corporations and private citizens, however, can and do take extra measures to increase security.
· Income inequality and poverty – A tragic reality, though not unique to South Africa or Africa, are income inequality and poverty. Doing business in South Africa requires a corporatesocial conscience and a commitment to help fight this problem.
· Service Delivery Challenges – These challenges are experienced in any emerging or growing environment when infrastructure fails to keep up with the country’s growth. Corporations, however, have developed solid contingency plans to deal with these kinds ofproblems, which, fortunately, are occurring less often.
· Skills Shortage – There is a troubling shortage of skilled workers in South Africa. Some corporations bring in skilled workers from other countries, while others train South African citizens to fill these jobs.
Clearly, investors and corporations should be mindful of the operational challenges and risks that South Africa presents. However, South Africa’s unique blend of value-priced, world-class real estate infrastructure, combined with the nation’s growth potential as an emerging BRICS market, make it an incredibly attractive location. Perhaps most significantly, a foothold in South Africaprovides an entry into what many believe will be the globalization of what was once labeled the “Dark Continent” – and is now one of the 21st century’s brightest growth prospects.
