Dual currency funding structures can bring stability and robustness to real estate deals in sub-Saharan Africa, according to Adeniyi Adeleye, Head of Real Estate Finance for West Africa at Stanbic IBTC.

While property sector trends in West Africa are still positive, the main challenge has been currency volatility and related regulations.

“The devaluation of currencies in countries like Nigeria and Ghana has been quite significant,” Adeleye said.

Essentially, a dual currency structure refers to utilizing a combination of hard and local currencies, while hedging the interest rate risk.

“These facilities would provide a natural hedge and create a win-win between developers and retailers. For example, a local currency facility can be accessed to hedge leases that are unlikely to be sustainable or easily adjusted in shock currency devaluation scenario, for defined periods,” said Adeleye.

If the market stabilizes it would also be simple to refinance local currency exposure back into foreign currency and then original lease assumptions and plans can then be achieved, unless macroeconomic indicators show that local currency funding has now become appropriate for these deals.

“The robustness of the structure is that it adjusts in periods of shock to provide stability,” he added.

According to Adeleye, most of the real estate markets are dominated by foreign real estate developers and investors and they seldom seek to undertake projects in sub-Saharan Africa with the view to earning hard currency returns, as they are mindful of their return targets and asset valuation considerations.

The key challenge is that though many markets have official channels for assessing hard currencies, they often require regulatory approval to convert.

There remains the risk that a change of government or policy may hinder the unfettered access to the markets, thus creating a real risk of being unable to service foreign currency obligations.

“It is this serviceability challenge and robust flexibility that dual currency funding structures seek to mitigate,” explained Adeleye.

Traditional intuition is to finance retail real estate projects in local currency but the differential in interest rate between US dollar and local currency loans can be as much as 18%, which makes the foreign currency financing attractive, especially as there is a margin of compression from stabilizing rental rates and limited scope for project cost reductions.

Policies in some countries in the region are aimed at preventing developers and retailers from using scarce dollars to service obligations and thereby place further pressure on the demand for hard currency.

“However, it is important that in such times, the financing of projects that have commenced can continue, to ensure they can ride these waves of uncertainty,” said Adeleye.