Sub-Sahara Capital African Real Estate Update July Our view:

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1 Sub-Sahara Capital African Real Estate Update July 2015 Our view: Real estate is one of the best ways to benefit from two powerful African trends, population growth and urbanization. Between 2010 and 2025 the populations of many large African cities will grow %! Africa also has some of the fastest GDP growth rates in the world. Most Sub-Saharan countries expected to grow GDP 4-8% annually from Despite these long-term growth trends and the need for commercial real estate development, Africa has not been a focus for major real estate investors. There is a deficit of modern, affordable commercial and residential real estate. Any weakness in real estate prices over the next months could present a long-term buying opportunity. Long term growth drivers: 1. Population growth: African cities will be the fastest growing cities in the world during the rest of this century. Smart investors need to start visiting Lagos, Dar es Salam, Nairobi, Maputo, Kinshasa, Accra, Lusaka, Addis Ababa, Mombasa and Cairo. The population of many cities in Africa will grow % by By the year % of the world s population will be African and the majority of will live in cities. Source: Knight Frank

2 Source Knight Frank Source Knight Frank

3 2. Africa has some of the fastest GDP growth rates in the world: Over the next five years African countries are expected to grow GDP between 4 and 8% annually. Improved governance, telecommunications, financial services and infrastructure are helping Africa to catch up to the rest of the world. Source: Knight Frank Source: Knight Frank

4 3. Major infrastructure projects will improve Africa s connectivity: Across Africa large infrastructure projects are under construction which will improve the continent s connectivity and ability to trade. These major infrastructure projects will be transformational to the national and regional economies and drive big changes in real estate values. We are especially focused on the new railroad from Mombasa to Nairobi. Source: Knight Frank

5 4. Commercial real estate in Sub-Saharan Africa is under developed relative to the population: Despite 830 million people in Sub-Saharan Africa there are only 0.5mn square meters of shopping malls and 2mn square meters of office space. In comparison, South Africa has 21 million square meters of shopping malls for just 52 million people. Source: Jones Lang LaSalle

6 5. Global companies expanding into Sub-Saharan Africa need modern commercial real estate: The growth of Africa is cathching the world s attention and multinational companies are expanding into Africa. When companies from South Africa or the rest of the world look to open an office in Nairobi or Lagos they want attractive, well lit, open plan office space similar to what they are used to in the U.S., Europe or Asia. These types of offices are in short supply outside of South Africa. Similarly, retailer chains desire spacious, air conditioned, western style malls similar to what they are used to in the rest of the world. Modern shopping malls are a major bottleneck in Africa and for the few malls that exist rents are expensive. These retail chains also need to be backed up with modern logistics and warehouses to deliver inventories just in time. This requires modern industrial real estate, which is also in short supply.

7 6. International real estate investors are not focused on Africa: The large global real estate funds such as Blackstone, Carlyle, TPG, KKR, Goldman Sachs, Morgan Stanley, are starting to look at Africa, but so far there have been few investments. There is an active real estate industy in South Africa, but the major South African REITS are focused on their home market and have not invested much into the rest of Africa. The two largest REIT s, Growthpoint and Redefine, have expanded into Australia and Europe, but have no exposure to the rest of Africa. Hyprop, a leading shopping mall REIT, with $2.2bn in assets has just 7.5% of it s portfolio in Sub-Saharan Africa. Attacq, another South African property company with $1.8bn in assets has just 8% of its portfolion outside of South Africa. Another South African REIT, Rockcastle, has two investments in Zambia, but they are only $11mn out of its $2.2bn global portfolio. It is the same with the South African hotel companies. Tsogo Sun, the largest hotel operator in South Africa has 83 hotels in South Africa and just 9 in the rest of Africa. The opportunity is to invest in Sub-Saharan markets before these large international and South African players start to move. Source: Rockcastle 2014 results presentation

8 Source: Rockcastle 2014 results presentation

9 7. Yields in Africa are attractive relative to developed markets: Yields in Africa are high relative to developed markets. This is due to higher local interest rates and currency exposure risks. While there is a practice of charging rents in US$ in some markets (Lagos, Nairobi, Lusaka, Harare), most rental income is in local currency. Outside of Luanda and Lagos, rents are not high on an absolute basis and have the potential to rise over time. Yields on South African real estate market are low relative to the rest of Africa, but the market is perceived to be more stable. Many South African leases also have automatic 7% annual upward rent revisions, which is an attractive feature and helps to offset the persistant weakness of the rand.

10 Some markets to watch Cape Town: This is the San Francisco of Africa. It is a beautiful coastal city with a moderate climate, cool culture and lots of open space for an active outdoor lifestyle (surfing, sea kayaking, mountain biking, horse back riding, etc). Also, just 45 min from Cape Town is Stellenbosch, Africa s version of Napa. This is another attractive city worth considering for investment. Both cities have a sophisticated art and restaurant culture and are great places to live and work. Corporations will continue to relocate to Cape Town and start ups will want to be based there. Similar to what has happened in San Francisco and Seattle, Cape Town will be a leading city for higher paid jobs, which will have a network effect, and drive higher rents. Cape Town is also attractive because real estate prices are affordable. A buyer from Europe or the US will be excited to see the beautiful properties their money can buy. There is also a chance that Cape Town will benefit at some point from the wave of Chinese buying that has driven real estate prices in other attractive coastal cities such as Vancouver, Sydney, Los Angeles and San Francisco. On our last trip to Cape Town and Stellenbosch there were a large number of Chinese tourists, so this trend may just be starting. Cape Town is our top real estate pick in Africa. Johannesburg: Johannesburg is the New York of Africa. The large South African corporations are all headquartered there and increasingly the foreign companies who want to establish their first office in Africa. Even the large Chinese banks are opening offices in Johannesburg. OR Tambo airport is first class with direct flights to anywhere in Africa, Europe, New York, the Middle East and Asia. There is a high speed train connecting the airport to the Sandton business district. Sandton is full of attractive new office buildings, shopping malls and restaurants. A friend of mine, who is a NY film editor once told me, if you want to know which new neighborhood is going to go up in value, watch where the artists are going. Downtown Johannesburg, which used to be a violent, no-go zone, has turned into a hip area for new artists, musicians and fashion designers. When people say they don t like going to South Africa ask them if they have been in the last five years. Probably, they will not realize how much it has changed. We also have to keep in mind, the lifestyle of Cape Town may appeal to U.S. and European investors, the shopping and excitement available in Johannesburg is more appealing to wealthy Africans looking to invest their growing wealth.

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12 Sub-Sahara investor trip to Eko Atlantic in Lagos Lagos: Lagos is the largest city in Africa with 12 million people. You might not like the city s lack of open spaces, humid climate and the constant gridlock, but you aren t one of the 12 million Nigerians who live there. To Nigerians it s an exciting city and the business hub for 340mn West Africans. The city is spread around a lagoon, with real estate on Lagos Island and Victoria Island the most desirable. Real estate on the mainland is less expensive. A residential plot on Victoria Island is easily over $1mn even though the existing structure is tear down. Lagos and Victoria Island are similar to downtown San Francisco or Manhattan in that land is scarce and it is a difficult commute over the bridges to the mainland. One of the primary difficulties to developing real estate in Lagos is securing clean land title to large plots of land. Many plots are small, and owned by families where all family members have to agree to the change of ownership. This makes it difficult to put together large plots of land with clean title to build a shopping center, office building or hotel. This is part of the reason that despite this large city there are few modern real estate developments. There are only two shopping malls, and two international hotels in downtown Lagos (Intercontinental and Sheraton). Nigeria is currently suffering from depressed oil markets. Economic activity is depressed and the currency will depreciate further. The potential over the next 18 months is to buy existing high end residential real estate in Lagos. Another development to watch is the Eko Atlantic man made island. This will be a new city within Lagos. So far the development of this island has been slow, and we d prefer to wait for this project to get close to completion. Nairobi: Nairobi is the capital of Kenya and has the potential to be the Dubai of Africa. It is expensive, but likely to stay that way. The government of Kenya is currently spending billions of new roads, airports, rail roads and ports to improve the infrastructure in Kenya. Kenya will be the logistical hub for 140 million East Africans in Kenya, Uganda, Rwanda, Ethiopia, Southern Sudan and Tanzania. Nairobi is also rated by Jones Lang LaSalle as the most high tech city in Africa. IBM has located its first African research facility in Nairobi and both Safaricom and Access Kenya are building out high speed fiber rings in Nairobi. The negative to Nairobi is that there is currently a real estate boom that is going to deflate. The currency is depreciating and the government is borrowing too much. Any weakness

13 over the next 1-2 years could be a buying opportunity to benefit from Kenya s positive long-term investments, much the same way it was an opportunity to invest in Dubai in Source: Jones Lang LaSalle Sub-Sahara investor trip to the Two Rivers shopping mall under construction in Nairobi.

14 Sub-Sahara Capital investor trip to Britam Tower under construction in Nairobi Mombasa: Rotterdam of East Africa. This coastal city of 1.3mn people is not on any investor s radar, but it could be one of the best places to invest for the next 10 years. Mombasa is mostly known as a cheap place for retired Europeans to go for a beach vacation, but it is also home to Mombasa port, the largest port in Eastern Africa. This port serves a vast region of 140mn people. The port is expanding its capacity by adding new container terminals and fuel depots. The port will also be connected in 2018 to the new standard gauge railway being built to connect Mombasa to Nairobi. This will be the first railroad build in Kenya since 1926 and it will be transformational. There seems to be an opportunity to invest in hotels, office space, retail and logistics. Even though this is a city of 1.3mn there are no business hotels, just beach resorts. If there is any Grade A office space or shopping malls in Mombasa, we haven t seen it. Given the growth of the port and the railroad there is also potential to invest in highend logistics real estate. Sub-Sahara Capital investor trip to Mombasa Port.

15 Harare: The Detroit of Africa. This city of 1.4 million is one of the most depressed real estate markets in Sub- Saharan Africa. The government of Zimbabwe has severely mismanaged the economy and killed all the major industries (finance, agriculture, mining, tourism, and manufacturing). Unemployment is estimated at 80%, and the major banks would be declared bankrupt in any other country. Still, despite the downturn, it could be attractive at some point to invest in real estate Harare. Harare is one of the most livable cities outside of South Africa. The streets of Harare are wide and well laid out, there are lots of parks and open spaces, the weather is great, and there are many large beautiful estates at prices under $400,000. Harare was traditionally the business hub for the surrounding region of Mozambique, and Zambia, and could one day assume that role again. The current economic situation is awful, but the passing of Robert Mugabe, could have a big positive effect on the country. Zimbabwe has been disappointing investors for decades, so there is currently no interest in Harare real estate, but it could be a big turnaround story. If things do turnaround there will be a need for modern office space, hotels and modern retail. The current stock of office space is so bad many companies, including Sub-Sahara Capital are working out of large houses in the suburbs. There are two hotels in Harare and both are old. We usually stay at a bed and breakfast. For industrial space 10% yields are achievable, but it is hard to find tenants.