This was the running poll at our June research meeting. Among a slew of yes and no responses, the crew unanimously decided that the solution was not so simple.

While inflation is on the rise, the situation varies per country;
Inflation has been a prominent 'buzzword' in global markets in recent months as it continues to increase, fueled by factors ranging from pandemic impact to the Russia-Ukraine war, which has resulted in a spike in gasoline prices and the cost of daily goods such as wheat.

The situation in Africa has been no different. In most countries, inflation has been at a decade high. Nigeria experienced 17 per cent inflation in May 2022, while Egypt's inflation rate increased to 12.1 per cent in March, up from 4.8 per cent in 2021. Kenya's inflation rate, on the other hand, surged to 7.1 per cent in May 2022, the highest number since February 2020.

On the plus side, Sub-Saharan Africa's average inflation rate remains low when compared to levels reported around the turn of the century. This is proof of unparalleled economic expansion, which has been fueled by increased foreign direct investment and typically low debt levels.

Ideally, Real Estate is a good inflation hedge;
Since real estate assets have a low link to stocks and bonds and are therefore less susceptible to market pressures, they are typically regarded as " haven" investments.

With common lease stipulations allowing for rent to be marked up to the market, the investor is protected in terms of net income in times of rising inflation and rents are expected to climb along with the prices of commodities and raw materials. This is what happens in cities like Accra, where landlords raise rental rates yearly by at least 10% to 15% to battle inflation, among other reasons.

The situation is not so clear-cut, though. Outside of inflation, there are usually many other factors that have an impact on rental revenue in Africa, including the availability of rental properties, the affordability of the market, and currency fluctuations.

With rising 'cost side' inflation, office and residential affordability remain an issue;
In our earlier analysis, we pointed out that the existing supply glut is already affecting the office market in locations like Accra and Lagos. Due to this, in Grade A and B offices in Lagos 12–36% and Accra 20–25% respectively, the markets would have high vacancy rates in the year leading up to January 2022. As a result, even though leasing activity has begun to pick up, with a few more new entries anticipated later in the year, the high "cost-side" inflation is anticipated to harm occupiers' affordability, which will directly hinder new inquiries in the sector.

The residential sector is anticipated to experience a similar situation. Demand has increased across the board, particularly for mid- to low-end market sectors. In Lagos, for instance, the demand is being driven by the young professional housing segment, creating hotspots in places like Yaba where Estate Intel has seen the price of a 2-bedroom apartment increase by 25% in the five years between 2017 and 2021. Due to the domestic nature of demand, Accra's low to mid-end properties is likewise experiencing high occupancy rates. As a result, in places like East Legon, the cost of a two-bedroom apartment increased by 52% between 2017 and 2021.

However, increasing inflation is anticipated to affect overall affordability by affecting household disposable income in most cities, which will affect new makeup.

Commodity price shocks are driving up building material prices, keeping developers in the dark;
Furthermore, most countries have seen an increase in the cost of building materials as a result of supply chain and inflation issues. This presents a problem for developers and investors because they are unable to pass on the higher expenses to buyers.

So far, rising building material costs in Kenya have increased construction expenses by an average of Sh3,000 per square meter, prompting builders to halt ongoing projects. According to the Nigeria Tribune, most developers have raised their house prices by 40 to 50 per cent in the year to April 2022, citing exorbitant building material prices, high costs of funds and labour, and high costs of obtaining planning permits and documents.

According to a report provided by the Central Administration of Building Materials of the Ministry of Housing, Utilities, and Urban Communities, Egypt has been the most affected, with building material costs increasing by up to 92 per cent in March. This has been supported by the war as well as cement output limits implemented in July last year to alleviate the existing supply excess. This is predicted to cause project delays as developers try to reduce the impact of rising input prices on existing projects.

With currency fluctuations and interest rates on the rise, real estate is on a precipice;
Along with inflation, the impact of weakening currencies is expected to extend to consumer demand and market advancement in terms of institutional finance.

There has already been an increase in the number of new office buildings and shopping malls with dollar-denominated leases as a result of multinational developers and investors entering the market in major African cities. Retailers, corporate occupiers, developers, and investors are all feeling the effects of currency depreciation, the parallel dollar market in places like Lagos and Accra, the severe lack of dollar liquidity in markets like Nairobi, and the application of capital controls.

With central banks throughout the continent boosting interest rates to stop inflation, loan costs are also still high. Due to the informal character of the market, these increases are anticipated to have little effect on lowering consumer spending. However, it is anticipated that the cost of capital would rise, which will unintentionally affect how continuing real estate projects are financed. For the first time in seven years, Kenya, for instance, increased its benchmark rate by 50 basis points to 7.5 per cent. The Central Bank of Nigeria then raised interest rates for the first time in six years, from 11.5 per cent to 13 per cent. The loan rate of Egypt's central bank was also raised from 10.25 per cent to 12.25 per cent.

The Alternative Opportunity;
The market's long-term performance will be intriguing to watch, even though these scenarios are anticipated to occur in the short term. Rising demographics are currently supporting Africa's real estate industry. The need for housing and social services like healthcare and student housing is anticipated to increase as populations rise and cities urbanize more quickly. Therefore, it stands to reason that this continued demand for various asset types will protect real estate investors from inflation.