McKinsey on Chinese Investment in Africa & Subsequent Lessons for Housing Solutions
In 2017 McKinsey released an exhaustive study on the extent of Chinese investment in Africa, with a number of recommendations and conclusions that are relevant for African states and private players working in the housing industry. The paper focuses on over 1000 firms operating across Ethiopia, South Africa, Kenya, Nigeria, Tanzania, Angola, Zambia and Cote d’Ivoire.
Extrapolating from the direct results of the study, there are an estimated 10 000 Chinese firms operating in Africa. Ninety percent of these firms are private and make up about half of all nominal Chinese investment on the continent, where the other half is made up by a handful of state-owned enterprises (SOEs). This runs contrary to popular belief that there is a single, monolithic push by the Chinese state to invest in Africa for debt diplomacy reasons. The study suggests that there is a real, profit driven incentive to invest in Africa and that Chinese investors have been capitalizing on this potential for years.
Housing is not yet a priority industry for Chinese investment in Africa. About one third of Chinese firms on the continent operate in the manufacturing sector, followed by services, trade, then finally construction and real estate. However, even within construction and real estate, only a small minority of investment falls into the affordable housing sector. Chinese firms tend to prefer commercial properties and infrastructure.
Despite this, there is enormous potential for Chinese investment to make an impact on housing in Africa. In McKinsey’s “accelerated growth scenario”, the consultancy suggests that forays into new, “high potential” sectors like housing could bring billions of dollars in growth. While manufacturing, services and trade all account for a larger share of Chinese fundsthan construction and real estate, Chinese firms own a much larger portion of the construction market in Africathan they do of the manufacturing market. Approximately 50% of construction and real estate revenues in Africa are Chinese, versus only 12% in manufacturing. This suggests that any lateral expansion into the African housing sector will involve heavy Chinese participation. Given that the types of capital investments required for construction/real estate firms are similar to those of housing developers, it is possible that a minor shift of productive capacity or a simple expansion could yield not only large profits for those Chinese firms but also combat dire housing deficits that exist in target countries.
It is important to note that the data above tells us little about housing specifically, which is a common problem in industry taxonomies, especially those tracking Chinese investment. Further investigation into how much Chinese construction is real estate and housing is necessary to determine how much further the sector has to go.
Another highlight of the report is that SOEs have incentives that align better with the needs of the affordable housing industry than private Chinese companies. In countries like Zambia and Kenya, where informal markets are plenty, mortgages are hard to come by and average incomes are low, the opportunity for healthy profit margins in affordable housing is not immediately apparent. SOEs are far more likely to take the risk of entering this new market, given that they serve diplomatic interests in addition to business interests.
So far, this has already been the case. SOEs tend to report lower to negative profit margins than private firms. While part of this is because they tend to be over-represented in energy and mining sectors, which are disproportionately affected by commodity price drops, interviewees to the McKinsey report point out that it is also true that SOEs often compromise on profits to serve geopolitical objectives to which their private counterparts are not bound. Therefore, in determining who out of the Chinese investors to engage with to find affordable housing solutions, SOEs are likely the first place to look.
Read the report here: