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Nairobi: The top investment destination in Africa

Recent and past reports of foreign firms moving to establish operations in Nairobi have handed the city the pride of place as the top investment destination in Africa.

This is according to a new report, which says Nairobi is the most attractive destination for foreign direct investment (FDI) in Africa, relative to some of the largest cities in the continent.

The Into Africa: The Continent’s Cities of Opportunity report by financial advisory firm PricewaterhouseCoopers (PwC) says Nairobi has outperformed 20 major African cities in its attractiveness to FDIs.

It also indicates that Nairobi is a regional financial services hub, only rivalled by South Africa’s commercial capital, Johannesburg.

The report studies variables such as housing, transport, water and power, healthcare, education, public safety on the one hand, and GDP, inequality, middle-class growth, ease of doing business and FDI on the other.

 

Real estate has been booming in Nairobi. PHOTO | NAIROBI NEWS
Real estate has been booming in Nairobi. PHOTO | NAIROBI NEWS

The 20 African cities that are considered to be most dynamic and focused on the future are Abidjan, Accra, Addis Ababa, Algiers, Antananarivo, Cairo, Casablanca, Dakar, Dar-es-Salaam, Douala, Johannesburg, Kampala, Kigali, Kinshasa, Lagos, Luanda, Lusaka, Maputo, Nairobi and Tunis.

Tanzania’s port city, Dar es Salaam, leads in the degree of real GDP growth, while Rwanda’s capital, Kigali, takes the lead in the ease of doing business.

Uganda’s capital, Kampala, leads in population growth rates, while Abidjan in Ivory Coast leads with the fastest growing middle class. Cairo tops in infrastructure development, closely followed by Tunis. The Tunisian capital leads the pack in human resource endowment.

NORTH AFRICA DOMINANCE

Of the top five cities that rank highly in almost all the variables, four — Cairo, Tunis, Algiers and Casablanca — are North African, while the fifth is Johannesburg.

The dominance of North African cities is attributed to the fact that their development dates many centuries back. This has given them time to develop their infrastructure, regulatory and legal frameworks to support investments and growth.

Johannesburg is the only exception to this pattern since it was formed more recently in 1886 (compared to the other cities it’s ranked highly with). Therefore, its infrastructure and services are comparable to those of the more established African cities.

On the other hand, the discovery of oil, gas and other minerals like coal and titanium has also seen increased FDI inflows into Kenya over the past three years.

The country has witnessed substantial investment in energy, port and airport projects, partly driven by foreign investor capital, especially from China, Japan, Western Europe and the US.

The country has in recent years seen an influx of foreign firms moving to set up base in Nairobi as their hub for regional operations.

In the last financial year (2013/2014) alone, FDI to Kenya is estimated to have been over Sh150 billion owing to amplified confidence in the country’s investment climate and planned infrastructure projects in roads, energy and rail.

The projection followed a slowdown experienced in the last two years owing to the General Elections held in March 2013.

DISCOVERY OF OIL

The discovery of natural resources like oil, coal, natural gas and titanium has in recent years, however, firmly positioned the country as a hotspot for investment in what is expected to increasingly to draw more foreign investors.

The sectors that continue to attract the bulk of FDI include financial services, agriculture, real estate, manufacturing, retail, technology and construction.

Activity on the Nairobi Securities Exchange (NSE) is, for instance, dominated by foreign investors seeking higher returns on a bourse that has consistently been ranked among Africa’s best performers.

The Capital Markets Authority (CMA), in its 10-year masterplan, is planning to lift the foreign ownership limit on listed firms at the NSE, arguing that “blanket ownership ceiling” unnecessarily inhibits foreign investment in the country’s stock market.

The foreign ownership limit in listed firms at the NSE is currently capped at 75 per cent by law, but the suggestion is to allow 100 per cent ownership by foreign investors.

The country is also an undisputed leader in technology in the African continent, with its mobile banking platform, M-Pesa, hailed the world over for deepening financial inclusion in the country.

An impression of the Konza Technopolis Park in Malili, Machakos. Construction of Phase one of the futuristic park has begun. | File, NairobiNews
An impression of the Konza Technopolis Park in Malili, Machakos. Construction of Phase one of the futuristic park has begun. | File, NairobiNews

 

The planned construction of the Konza technology city, though long overdue, has ignited foreign investor interest in the country. Dubbed the African “Silicon Savannah”, the plan comes on the back of a number of global technology giants that have in recent years established offices in Nairobi.

Some of these are IBM (which also boasts the first African research lab in Nairobi), Google, Microsoft and Intel, which have their regional headquarters in the Kenyan capital.

Last year, French smartphone manufacturer Wiko Mobile entered the Kenyan market to cash in on the market that is dominated by other brands like Samsung, Tecno, Nokia, Huawei, Apple, Alcatel and LG.

GROWING CONSUMER CLASS

The growing consumer class in the country, buoyed by a fast- expanding middle class, has provided a perfect opportunity for the mobile firm manufacturers to introduce their products in the market.

Numerous foreign companies in different sectors have opened offices in Nairobi, with many others announcing plans to enter the market. In May this year, South African retail giant Massmart is expected to make its entry in Kenya at the Sh23 billion Garden City shopping mall located on Nairobi’s Thika Road.

The retailer will be trading under the Game brand name, its first in Kenya. Carrefour, a French retailer, has also booked space in the upcoming Two Rivers Mall in Runda. The mall is scheduled for completion before the end of this year, ushering in the French multinational retailer.

Much like other foreign firms establishing operations in the country, the retailers are eying the fast-growing middle class population.

Dubai-based firm, Al Futtaim, bought out troubled CMC Motors for Sh7.5 billion in 2014. The firm made its entry in Kenya with its headquarters in Nairobi as it explores growth opportunities across East Africa.

Kenya’s Internet service provider, Access Kenya, was bought out in 2013 by global technology firm Dimension Data, signifying the growing appetite of international technology companies in the local market.

Still in 2013, Nigerian lender, Guaranty Trust, acquired a 70 per cent stake in Fina Bank, a local mid-tier lender with operations in Kenya, Rwanda and Uganda. The bank was eying its expansion across East and Southern Africa by using Kenya as its regional hub.

ENTRY OF FOREIGN FIRMS

Likewise, the insurance sector has seen the entry of foreign firms, including UK-based Prudential, which bought out Shield Assurance last year. South Africa’s Old Mutual bought a stake in UAP, a local insurer, while another South African underwriter, Pan African, concluded the acquisition of a 51 per cent stake in Gateway Insurance this year.

Last year, Johannesburg Exchange-listed consumer firm, Tiger Brands, acquired 100 per cent stake in both Rafiki Mills and Magic Oven Bakery. Tiger Brands is one of the biggest manufacturers of fast-moving consumer goods in Sub-Sahara Africa. A number of multinational food and restaurant chains such as Java, KFC and Subway have also made Nairobi their home.

The entry of international hotels in the country has signalled the growing potential of business travel in the country and the position of Nairobi as a regional financial services hub.

Main entrance to the Villa Rosa Kempinski located on Waiyaki Way. PHOTO|FILE
Main entrance to the Villa Rosa Kempinski located on Waiyaki Way. PHOTO|FILE

Global hotel brands such as Radisson Blu, DusitD2, Kempinski and Hemingways have already established operations in the country, with more expected to follow suit in coming years. Marriot, a five-star international hotel, said last year it would open a hotel in Kenya this year.

The growth prospects of Kenya’s economy have especially got foreign investors coming in to partake of the pie of the growing investment opportunities in the country.

In March this year, a Bloomberg survey projected that Kenya would be the third fastest growing economy in the world this year. The economists that were surveyed by Bloomberg Business ranked Kenya and Nigeria as the only African countries that made it to the list of the fastest growing economies in the world this year.

China, the second largest economy in the world, was projected to be the fastest growing, at seven per cent, followed by Philippines. The survey projected the world economy to grow at 3.2 per cent this year and 3.7 per cent in 2016, less than the projected growth of the Kenyan economy.

“If you look at Kenya, there are ongoing efforts to enhance ease of doing business. We also have attractive financial markets, especially the stock and the bond markets, which are attractive for investors,” says Shiv Arora, investment associate at Nairobi-based Cytonn Investments.

POVERTY REMAINS HIGH

Despite the rosy picture of the country’s economic prospects, poverty and unemployment remain high, with 47 per cent of the 45 million Kenyans said to be living below the poverty line.

The country’s investment and growth prospects are also beset by increasing cases of corruption, terrorism-related insecurity and the dwindling share of the manufacturing sector in the export market.

According to the World Bank, the manufacturing sector’s contribution to Kenyan exports and growth in recent years has fallen behind and performance has been less than optimal.

This calls for the country to increase the competitiveness of its manufacturing sector for economic growth to be sustainable and for much needed jobs to be created.

While releasing the Kenya Economic Update (KEU) in Nairobi on March 5, the World Bank’s country director for Kenya, Diarietou Gaye, noted that “Kenya is emerging as one of Africa’s key growth centres with sound economic policies in place for future improvement”.

“To sustain momentum,” advised Gaye, “Kenya needs to continue investing in infrastructure and jobs, improve its business climate, and boost it exports.”

Sustained by falling oil prices, Kenya, like many other economies in Africa, is expected to experience growth rates of more than five per cent this year. The Kenyan economy is projected to grow at between six and seven per cent over the next three years, making it one of the fastest-growing economies in the continent.

With increasing levels of investments and growth being witnessed in Africa, the PwC report says there’s a need for the continent’s cities to invest massively in infrastructure and other basic amenities such as roads, rail, airports, energy, water and sanitation if they are to enjoy the benefits that comes with such growth.

Traffic jam on Muranga road near the Old Nation (Khoja) roundabout. PHOTO | NAIROBI NEWS
Traffic jam on Muranga road near the Old Nation (Khoja) roundabout. PHOTO | NAIROBI NEWS

Cities that score well in infrastructure also score well in human capital. This underscores the World Bank’s indication that sub-Saharan Africa needs infrastructure investment of about Sh9.1 trillion ($100 billion) annually if it is to achieve real growth capable of supporting increasing FDI flows and a growing middle class.

At the moment, less than Sh4.6 trillion ($50 billion) is committed to infrastructure investments in the region. With poor or less than required investments in infrastructure, cities cannot sustain their current levels of growth.

“State-of-the art infrastructure leads to rich human capital, if for no other reason than the fact that smart, creative, ambitious human beings will congregate where it is easy for them to do so,” says the report.

The report is part of PwC’s global Cities of Opportunity series. Its analysis is structured around the critical issues of the business community and those of the office holders and other public authorities responsible for improving the collective life of each city examined.

“(It) assesses how the cities are performing not only on a regional level but also on an international one, which is hugely important in terms of these cities being able to compete and prosper on both of these stages,” says Stanley Subramoney, PwC head of strategy for Southern Africa.

Urbanisation is of particular importance, given that by the year 2030 half of the continent’s population will reside in cities where economic activity and growth will be focused.

The growing middle class, strong demographic growth, technological innovation like mobile payments and rapid urbanisation are all shaping what the future of Africa will look like.

Most of the African cities with promise can, with a little effort and organisation, climb to join those cities toping the overall ranking.

Furthermore, many of them have already become key regional platforms — for instance, Dar es Salaam and Douala as centres for port operations, Accra and Lagos for culture, and Nairobi for financial services.

“With five per cent growth, dynamic demographics and a growing middle class, Africa is extremely appealing to investors. After undergoing a period of pessimism about the future of Africa with some exaggerated optimism, leaders today share a more realistic view of the economic climate of the continent,” PwC says of the trend it refers to as “Afro-realism”.