Political risks are the uncertainties surrounding the expected outcome of an investment due to the imminence of political changes in a country. Political risk factors include changes in regulatory environments, social instability, bureaucracy, possibilities of coups, etc. With the unstable history of political events in the continent, political risks in Africa is neither nor news.
Political risks can seriously impact consumer confidence, business confidence, ratings by international rating agencies, and inflation. Also, Political risks are usually accentuated or significantly reduced in periods before and after cyclical political activities such as regional elections.
However, many savvy real estate investors have mastered the terrain of political risks in African real estate investments, and have created many real estate investment portfolios that have weathered many political storms.
Ways in Which Political Risks Impact Real Estate Markets in Africa
Political instability can set off a chain reaction that can negatively impact the market dynamics and key performance matrices of African real estate markets. Political instability can be framed with numerous definitive terms. These include the cost of living, purchasing power of consumers, the foreign exchange rates, the regulatory and policy frameworks, as well as the stability of the legal system.
Most savvy real estate investors keep close tabs on these key indicators of political stability, as well as the impact of these indicators on key aspects of real estate market markets. These aspects include:
During periods before and after heightened political activities, banks and financial institutions usually adopt new temporary house loan policies, which may or may not be favorable to real estate investors in the country, depending on the outlook of the political climate.
First Time Buys
Political risks can severely impact first-time buys. There are many instances where people cash in on the decrease in housing prices due to political uncertainties. But in most case, political unrest usually inhibits first-time buys.
Time on market
The average time that houses spend on the market can be significantly affected by the political climate in the country. During periods of political turmoil, the average time on market for most houses usually increases significantly.
Staying Ahead of the Curve With Measures for Mitigating Political Risks in African Real Estate Investments
Some political risks in African real estate markets which investors need to be wary of include changes in regulatory and legal frameworks that may give rise to social unrest, expropriation of land, terrorism, or regional instability.
One of the safest ways to manage political risks in African real estate markets is to stick to short-term investments. It’s much easier to forecast the short-term outlook of the political climate in a region. The short-term forecast can also provide significant foresight into the long-term vision. For instance, the first 100 days of a new administration will project the strength, direction and policy inclinations of the administration for the rest of the tenure.
Another sure-fire way is to collaborate and going into joint ventures with local partners who have ears on the ground.
Nonetheless, one of the most prevalent strategies for mitigating the negative effects of political risks is the adoption of a wait-and-see approach, where investors delay commitment to real estate investments until the most of the political uncertainty blows over and the polity of the country becomes fairly stable.