Townships: the new investment frontier

Private Property South Africa
Tahir Desai

Township dwellers constitute a large portion of South Africa’s social fabric. Until quite recently, this segment was overlooked to an extent by large retailers and developers who concentrated their efforts in more developed, ‘safer’ nodes. Quite apart from the upliftment aspect of investing in such areas, investors have recognised that there are enormous untapped potential business possibilities inherent in these communities, making them the proverbial ‘markets of tomorrow’.

Various entrepreneurial investors have taken the plunge and are investing successfully in these areas. For instance, asset management company Future Growth has invested in 24 shopping centres in various semi-rural areas and townships. Many of the centres are anchored by retail heavyweights such as Shoprite Checkers and provide essential products and services to millions.

Large real estate companies are also starting to get in on the act. For example, RE/MAX recently announced it will embark on a major drive in the affordable and township property sectors. Interestingly, FNB’s John Loos has also remarked that the shortage of suitable residential property in this segment will drive higher levels of building activity throughout 2015.

Investing in townships is no walk in the park though. Challenges aplenty lie in wait for those entering these markets and prudence is needed when dealing with the complexities and nuances of such consumer catchment areas.

For instance, it has become evident through studies conducted that many townships are at very different stages of development and that each has different requirements. Akin to many larger enterprises, small township enterprises also struggle with crime, infrastructure costs and red tape. Other key obstacles to small businesses and residents in general in these areas are the quality of infrastructure and education which generally tends to be poor.

The upshot is that it’s important to do your homework and consider the following before investing in any township venture:

Take your time: Do not feel compelled to rush into any undertaking without fully understanding what it is you are actually investing in

  • Familiarise yourself with all the necessary regulations. For example, if you are looking to invest in an establishment which prepares food, you need to make sure all the necessary regulations and hygiene protocols are in place

  • Know who you are dealing with: Does the business have a track record? Get the records of the company or development you’re considering investing in and the background of the people promoting it. Additionally, running a background check on those you intend to do business with (with their knowledge and compliance of course) is a good idea

  • Where is my money going? Legitimate companies account for investor’s money at all times. Ask for written proof of how much of your money is going to the actual purchase or development of the opportunity and how much is going to commissions and so forth. If most of your financial investment is slated to cover expenses and costs, much less will be available to earn a return

  • Do I have an independent, knowledgeable, trustworthy person who can advise me? Get an independent appraisal of the specific asset, business or venture you’re considering. An appraisal offered by the party selling the investment opportunity can be fake. Talk to the previous owners of an asset or a business you’re acquiring for its value history. Discuss all investment ideas or plans with an accountant or an advisor you know and trust

  • Ask for the business plan. Is it sound?

  • Do I know when something is too good to be true? Anyone who tells you an investment is likely to turn a profit quickly should have a basis for the claim. Demand written proof of profit projections from independent sources. Be especially wary when someone tells you profits will be big enough to offset the risk of investing. Generally speaking, every potentially high profit investment carries high risk

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