10 May 2011

Africa: Urbanization in Africa - A Megatrend for Business to Watch

Urbanization is one of the big megatrends in the world of today and tomorrow. Millions of people are migrating from rural to urban areas for many reasons. While the percentage of people living in urban areas has already reached very high levels in the Western world and Latin America, some parts of Asia and most parts of Africa are lagging behind.

The urban population in Africa accounts for about 40% of the continent's total population. In Latin America, a similar proportion between urban and rural population was observed in 1950. Within the next decade, more than 80% of all Latin Americans will live in cities.[1] So, Africa lies 60 years behind Latin America if it follows the same trajectory.

The urban population growth in Africa is mainly determined by two major factors: the migration of mostly young people from rural to urban areas, and high general population growth because of high fertility rates and low median ages. And because Africa's youth bulge is now reaching adulthood and will move to cities for better opportunities, Africa will quickly catch up with Latin America.

Strongest Urban Population Growth in Africa

According to UN-HABITAT, Africa will experience the strongest growth among all regions of the world until 2050. From 2000 to 2030, Africa's urban population will grow from 294 million to 742 million people, an increase of 152%. In comparison, the urban population in Asia will grow by 94%, while Latin America will add another 55%.

The three largest cities in Africa are Cairo (Egypt), Lagos (Nigeria), and Kinshasa (DRC).[2] Cairo and Lagos populations exceed 10 million making them megacities. In about 10 years, Cairo will be overtaken by Lagos and Kinshasa. Many African cities will have grown more than 50% between 2006 and 2020.

Another factor influencing urbanization is how densely populated a country is. The small countries of Rwanda and Burundi have already passed levels of sustainability regarding the ability to feed their own people with agricultural goods from local sources. Too many people are living too close to each other, allowing only very small parcels of agricultural land per family. Fertile grounds in this country are almost utilized by 100%, so that there is no further expansion possible.

As a result of this unpleasant situation, many young people are forced to leave their parents' farms and will move into the cities looking for a job, or any informal business activity, that will allow them to earn a living.

Urbanization will definitely accelerate in those countries. Right now, more than 80% of the overall population of the East African countries of Rwanda, Burundi, Uganda, and Ethiopia is still living in rural areas. Consequently, rapid growth of the primary cities of those countries can be anticipated with very high probability.

Uganda is an excellent example for the extreme dynamics of future urban growth. The country has one of the youngest populations worldwide. Regarding fertility (6.73 children born per woman) and birthrate (47.55 births /1,000 population), Uganda is ranked second, according to the World Factbook. The population growth rate is approximately 3.6% per year, according to 2010 estimates. The median age is 15, which means that half the population is younger than 15 years. One can anticipate the transformation of this high youth population – from too young to being productive citizens; from a burden to a benefit when the majority of youth reach adulthood. What is called the "demographic dividend" will begin to pay off.

One can easily imagine the future exponential growth of urban areas. In 2008, only 13% of the Ugandans were living in cities. Over the next 20 years, the urban population will well exceed the 20% level, leading to rapid growth of the capital city of Kampala, which is also the economic and financial center of the country.

The rapid growth of African cities will both imply major problems and create outstanding opportunities. The challenges are obvious. They range from infrastructure gaps and missing capacities for power, water, and food supply to loss of agricultural land and chaotic traffic situations, not to mention the huge health problems originating from air pollution, lack of sanitation, and huge piles of garbage.

Clever entrepreneurs, who understand problems are also opportunities, will find a large variety of promising business concepts by proactively dealing with the aforementioned challenges in city development in Africa. Sophisticated city planning methods, innovative waste management procedures, cost efficient water treatment technologies, and independent power plants belong to this category of opportunities.

Increasing Land Prices

Studying past history reveals another set of opportunities. When we look back to urban expansion in Western countries, we find some business cases that should work in Africa as well. Land prices will increase when the plots move closer to the city.

From an investor's point of view, we will take a look at some glaring opportunities that are connected with the megatrend of urbanization in Africa. There is a significant unsatisfied need in residential housing in all major African cities. The gap between demand and supply is still increasing, offering numerous opportunities for real estate developers, prefab house suppliers, and construction companies. In Latin America, households need 5.4 times their annual income to buy a house. In Africa, they need an average of 12.5 times their annual income.[3]

The market environment is completely different from the situation that we are familiar with in the Western economies. An example is if you want to rent a flat in some cities like Lagos, Douala, or Luanda, you have to pay the rent for up to 24 months in advance. For real estate developers, such down payments from future renters will provide a solid base for financing ventures.

However, it is not so easy to tap into this kind of business opportunity. In practical terms, it can be very difficult, costly, and time-consuming to get the necessary licenses for starting operations. Corruption is known to exist. Securing and maintaining ownership rights might also be difficult, depending on the rule of law, the availability and reliability of title deeds, and the handling process in general.

The more well developed real estate markets are found in North Africa, including Egypt and Morocco, Cape Verde, and South Africa to name a few. Because they are more developed, rates of return may not be as high though. There are online resources to help decipher the investment and business climate related to land across countries.[4]

In some countries, where there is no private ownership of urban land possible, lease holds can be obtained for a period of 25, 49, or even 99 years. In many countries, leasing is the only possibility of getting agricultural land. However, lease rates can be very inexpensive and be negotiated for a long period. This might be very attractive for long-term investors.

Urbanization is a critical challenge for the African continent, but it is a premium opportunity for business.

[1] UN-HABITAT. (2010). The State of African Cities 2010: Governance, Inequalities and Urban Land Markets. Accessed online at http://www.unhabitat.org/
documents/SACR-ALL-10-FINAL.pdf (January 8, 2011).
[2] In other sources, Johannesburg, South Africa is in the top three largest cities in Africa because the East Rand is incorporated into the figures. The UN-HABITAT figures here separate the two.
[3] http://www.dramatispersonae.org/RealEstateAndDevelopmentFrontPageAffHousingAfrica.htm
[4] For example, visit the International Finance Corporation's websites – http://www.investingacrossborders.org and http://www.doingbusiness.org.

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