Investing in Tanzania’s Residential Real Estate: Affordable Housing vs. Luxury

Investing in Tanzania’s Residential Real Estate: Affordable Housing vs. Luxury Developments Introduction The Tanzanian residential real estate market is experiencing significant growth, driven by rapid urbanisation, economic expansion, and an increasing population. According to the World Bank, Tanzania’s urban population is growing at an annual rate of approximately 5%, with cities like Dar es Salaam, Dodoma, and Mwanza seeing substantial increases in housing demand.1 This has, in turn, created a housing deficit estimated at over 3 million units.2 On the other hand, the luxury real estate market is also gaining traction, particularly in key areas like Dar es Salaam, Arusha and Zanzibar. The demand for luxury properties is driven by high-networth individuals, both local and foreign, expatriates who seek premium living spaces and tourists.

Affordable Housing: An Emerging Opportunity Urbanisation and Demand: According to the United Nations, Tanzania’s urban population is projected to reach 68 million by 2050, driven by rural-to-urban migration and natural population growth. Currently, Dar es Salaam alone is adding an estimated 200,000 people annually, creating an urgent need for affordable housing solutions. The national housing deficit is over 3 million units, with an annual demand for around 200,000 new units. However, only 15,000 to 20,000 units are being constructed annually, primarily by the private sector, leaving a significant gap between supply and demand. Government Support and Incentives : Recognizing the critical shortage of affordable housing, the Tanzanian government has prioritised this sector in its National Five-Year Development Plan (2021/22 – 2025/26).

The plan strongly focuses on urban housing, aiming to improve access to affordable housing and enhance urban planning. The government has introduced several incentives to encourage private sector participation in affordable housing projects. These incentives include tax exemptions for Real estate developers focusing on affordable housing, the government is making low-cost land available to developers in urban and peri-urban areas to reduce the cost of housing projects and Public-Private Partnerships. Challenges in Affordable Housing Financing Issues for Buyers: One of the primary challenges in affordable housing is the limited access to financing for potential homebuyers.

As of 2023, mortgage interest rates in Tanzania range between 16% and 19%, which is unaffordable for a large portion of the population.3 Additionally, with over 70% of the population working in the informal sector, many potential buyers lack the financial documentation required for formal mortgage applications. Low Profit Margins for Developers: Affordable housing projects typically offer lower profit margins compared to luxury or commercial developments. Developers often face challenges in controlling construction costs, particularly in urban areas where land prices have surged due to high demand. For instance, land prices in Dar es Salaam have increased by over 15% annually in some districts. This makes it difficult for developers to keep housing prices within the "affordable" range while ensuring profitability.

1 Transforming Tanzania’s Cities: Harnessing Urbanization for Competitiveness, Resilience, and Livability. 2 https://housingfinanceafrica.org/countries/tanzania/ 3 Bank of Tanzania: Tanzania mortgage market update, 30 September 2023

Infrastructure Deficiencies: Many areas targeted for affordable housing lack essential infrastructure such as roads, water supply, and electricity. This increases development costs, as developers are often required to invest in basic infrastructure in addition to building homes. Luxury Developments: A High-End Niche Market Target Audience: Tanzania’s luxury real estate market caters to a distinct audience of highnet-worth individuals (HNWIs), expatriates, and international investors. The number of HNWIs in Tanzania has been steadily increasing, particularly in Dar es Salaam and Arusha, driven by the country’s growing economy, regional influence, and expansion in key sectors like finance, mining, and tourism.

According to a 2023 Knight Frank Wealth Report, Tanzania has seen a significant rise in HNWIs, with a growth rate of 8% over the past five years.4 These individuals are seeking premium homes that offer a combination of comfort, exclusivity, and modern amenities. Key Locations: Dar es Salaam is the epicentre of luxury real estate development in Tanzania, with key neighbourhoods such as Oyster Bay, Masaki, and Msasani Peninsula attracting wealthy locals and expatriates. Oyster Bay, in particular, has long been regarded as the most exclusive residential area in Dar es Salaam, offering properties with oceanfront views, spacious layouts, and proximity to international schools, embassies, and business hubs. Property prices in these areas can range from USD 300,000 to over USD 2 million, depending on location, size, and amenities.

Zanzibar is also a prime location for luxury real estate, with its stunning beaches, rich cultural heritage, and growing tourism sector making it a hotspot for international buyers seeking vacation homes or investment properties. According to data from the Zanzibar Investment Promotion Authority (ZIPA), foreign investment in Zanzibar's real estate market grew by 12% in 2022, with the majority of interest coming from Europe and the Middle East. Challenges in Luxury Real Estate High Construction Costs : Developing luxury properties in Tanzania is associated with elevated construction costs due to the need for imported building materials, high-quality finishes, and modern amenities that meet the expectations of HNWIs and international buyers. Importing materials such as marble, high-end fixtures, and smart home systems can raise development costs by 20% to 30%.

Additionally, the availability of skilled labour for complex architectural designs is limited, further inflating construction budgets. Limited Buyer Pool: The buyer pool for luxury real estate in Tanzania is relatively tiny compared to more mature markets like South Africa or Kenya. While there is growing interest from expatriates and foreign investors, the local market remains limited to a few affluent buyers. This restricted market size can lead to longer sales cycles for high-end properties, and developers may need to offer incentives such as flexible payment plans or customisation options to attract buyers. In Zanzibar, luxury beachfront properties can take up to 12-18 months to sell, particularly for properties priced above USD 1 million. Economic Volatility: Tanzania’s luxury real estate market is sensitive to fluctuations in the global and national economy.

Changes in government policies, inflation, and foreign exchange rates can affect the purchasing power of both local and foreign buyers. For instance, the depreciation of the Tanzanian shilling against the US dollar has impacted the affordability of high-end properties for local HNWIs who may earn their income in local currency but are expected to pay for properties priced in foreign currency. 4 knightfrank.com/wealthreport 2024

Regulatory and Legal Hurdles: Foreign ownership of land in Tanzania is governed by strict regulations, and foreign investors can only lease land for up to 99 years rather than owning it outright. This can deter foreign buyers who may prefer ownership models offering more permanence and security. Developers targeting foreign buyers must navigate these legal frameworks carefully, often working with local partners to structure leases and ensure compliance with Tanzania’s land laws. Conclusion The choice between investing in affordable housing and luxury developments in Tanzania comes down to an investor’s risk tolerance and financial goals. Affordable housing offers stability and a larger buyer pool, but lower margins and financing challenges can affect the speed of sales.

In contrast, luxury developments promise high returns, but the risks are more significant due to a smaller, niche market and higher sensitivity to economic and regulatory factors. Investors must carefully consider these dynamics to optimise their investments in Tanzania’s diverse real estate market. Disclaimer The views expressed in this paper are those of the author only and should not be considered as an official interpretation, defamatory or interference of any legislation, laws or policies of any country including Tanzania. The contents of this paper should not under any circumstances be reproduced or used without our express written consent. It should not be considered as a legal advice to any of its recipient(s) and should not be relied upon without obtaining further legal advice. We accept no liability for any loss occasioned or suffered due to the contents of this paper.