Booming Johannesburg
Is Still Facing Doubts

Johannesburg's commercial real-estate market is perking up, but many foreign investors remain leery in part because of the South African city's small base of consumers and stubborn social problems such as crime and unemployment.

Dubbed Joburg by locals, the city of some 3.2 million people anchors South Africa's financial center and the continent's most modern business hub. "Johannesburg is the commercial heart of the country," says Athene Van Mazijk, chief operations officer for Chicago-based insurer Aon Corp.'s business in South Africa and sub-Saharan Africa. Aon is relocating its South African headquarters to new offices this year to accommodate its growing staff.

Total returns on the country's commercial real estate, based on a formula that measures property incomes and values, rose 26.7% last year, according to London-based IPD, a real-estate research firm. This was just below Ireland, where a strong economy and real-estate boom pushed total returns up 27.2%, and well above the United Kingdom, with a total return of 18.1%. Though the rate of return was down slightly from 2005, South Africa's real-estate performance ranked second in a 2006 IPD survey of 18 mostly European and Asian countries.

Property values and office, retail and warehouse rents are up, thanks to a growing economy driven in part by rising commodity prices and an expanding services sector. South Africa's gross domestic product rose about 5% last year, according to the International Monetary Fund. That's above the 3% range of the previous decade, according to the World Bank. The country is benefiting from a rise in infrastructure investments as it prepares to host soccer's 2010 World Cup. Johannesburg's Soccer City stadium is being updated and the country is moving ahead with plans for a rail link between Johannesburg and Pretoria, about 35 miles north.

Nelson Mandela Square

More than 10 years after the end of apartheid, South Africa is headed by Thabo Mbeki, the country's second democratically elected president after Nelson Mandela. But it is still a place of economic extremes. Of the country's estimated 44 million people, only 13% live in first-world conditions while roughly half of the country's residents are in developing-world conditions, many without access to electricity or running water. Unemployment is estimated to be between 26% and 37%, according to the World Bank.

Concerns about crime and the costs of keeping businesses safe with often fortress-like offices put South Africa at a competitive disadvantage with China or Poland, though the situation isn't as dire as in Kenya or Central America, according to a recent World Bank report. "If I were an investor I'd worry about crime a lot, especially with real estate that I cannot move," says Simeon Djankov, an economist at the World Bank.

There are signs the growing economy may be easing the disparity. Efforts are under way to revitalize downtown Johannesburg, which lost many businesses in recent years to mostly white and affluent suburbs. Soweto, a former blacks-only township on the outskirts of Johannesburg where Mr. Mandela once lived, is sprouting shopping malls and banks.

A growing black middle class has driven the development of new retail, while some multinational companies are leasing warehouses to store goods with an eye toward using the region as a base to serve other African countries, says Linda Matthews, director of international consultancy for Pace Property Group in Johannesburg.

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