Financial Mail - Investors Monthly
AFRICAN PROPERTY
Who’s exploring the opportunities?
For JSE investors the question is which African-focused property stocks are now the best bets
Eighteen months ago Africa was still widely being punted as the world’s next big growth story. The investment case for SA real estate players to expand their footprints north of SA’s borders was compelling.
One could earn US dollar-based returns on the vastly underdeveloped continent. That placed Africa as the ideal investment destination for property stocks looking for a hard-currency income and capital growth alternative to the UK, Europe and Australia.
By June last year no less than seven JSE-listed property companies had entered other countries on the continent: Tradehold, Mara Delta, Rockcastle, Trustco, Hyprop Investments, Attacq and Resilient Reit. But the sudden shift in Africa’s growth outlook since mid-2015 on the back of the oil and commodity price slump and wild swings in local exchange rates have raised fears that the development boom could turn to bust. Most companies have been forced to reassess their African investment strategies.
Rockcastle, which broke ground on the first of three Zambian shopping centre developments in 2013, has already exited Africa. The company has sold its stakes in all three its Zambian malls to Mara Delta. Rockcastle stablemate Resilient, which entered Nigeria in 2012 through a R2bn joint venture with Shoprite, earlier this year placed seven of 10 planned shopping centres on hold.
Rockcastle CEO Spiro Noussis, who now runs Rockcastle out of Poland, says the company last year decided to shift its entire development focus to Eastern Europe with no plans to return to Africa. Over the past 12 months, Rockcastle has already assembled a portfolio of six shopping centres in Poland. Management is now looking to enter the Czech Republic and Hungary.
Noussis says Rockcastle managed to make money on the sale of the three Zambian malls only because the company was prepared to take development risk. “If the question is: ‘Did we earn a big enough return in Zambia to compensate for the level of risk?’ the answer is no.”
Noussis says: “Eastern Europe is now a much better bet than Africa on a risk-adjusted basis. It’s much easier to build critical mass there than in Africa; you have better access to debt funding and a far more stable currency.”
Resilient MD Des de Beer voiced a similar sentiment at the company’s results presentation in Johannesburg earlier this year. He said the exchange rate risk in Nigeria outweighed the potential returns. He noted that last year’s sharp drop in the oil price and the Nigerian government’s attempts to limit the depreciation of the naira against the US dollar by, among other things, introducing wide-ranging import controls had left large clothing retailers in Resilient’s Delta Mall without stock, forcing a number of tenants to close shop.
While Resilient’s R1.1bn exposure to Nigeria comprises only 2.7% of its total portfolio, valued at R38.9bn, projected returns from the company’s African foray would no doubt have provided a nice kicker to earnings. “We thought we would make development profits of about 30% in Nigeria. But that’s basically all gone,” said De Beer.
Hyprop and Attacq entered Ghana three years ago when they acquired the Accra Mall. They now jointly own stakes in four malls in Ghana, one in Zambia and one in Nigeria. Both management teams indicated at their respective results presentations earlier this year that they were not looking to grow their African portfolios.
But not everyone is running for cover. Mara Delta, the JSE’s only property play that is fully focused on Africa (excluding SA), and retail tycoon Christo Wiese’s Tradehold remain committed to the continent.
Tradehold’s £63m African portfolio represents 22% of total assets, the rest being predominantly UK property assets and a financial services business. The company’s African exposure is limited to Namibia, Mozambique, Botswana and Zambia, with the bulk of its development pipeline comprising two shopping centres in Namibia and two in Mozambique.
Tradehold joint CEO Friedrich Esterhuyse says the development
of all four shopping centres is going ahead as planned. He says the company is happy with the returns it has generated in Africa to date but that the focus is likely to shift increasingly to the UK.
Esterhuyse stresses that Africa is not a homogenous market. “Each country’s opportunities, risks and potential returns need to be assessed on its own merit. For instance, Namibia is stable and very similar to SA from a risk-return perspective.” But the deteriorating currency conversion and transfer risk in Mozambique is a big worry.
The key issue is that while shopping centre tenants in Mozambique sign leases in US dollars, many pay their rent in the local currency, albeit at dollar-equivalent exchange rates. Esterhuyse notes that the risk is that when landlords want to swap the local currency for US dollars, availability may in future be limited — which means they can be indefinitely exposed to exchange rate fluctuations.
Bronwyn Corbett, CEO of Mara Delta, known as Delta Africa before the recent tie-up with Abland’s African development fund, says the company remains bullish on the Africa growth story. “We are sitting out the downturn. However, we have decided to shift our investment focus from buying completed buildings to developing our own stock.”
Corbett says limited access to good quality completed properties has become a major challenge for African real estate investors. “Besides, the new partnership with Abland has created the opportunity for Mara Delta to develop its own properties at returns in excess of 20% in dollars.” In addition, the company has become nervous of large, SA-style shopping malls. “I don’t think the African market is ready for malls larger than 20,000m².”
Mara Delta has already identified a development pipeline worth $500m, with construction soon set to commence on three shopping centres outside Kenya’s Nairobi. The pipeline will help Mara Delta grow assets from the current 12 properties worth $463m to Corbett’s targeted $2bn within three years. Mara Delta will extend its African footprint from six countries now to eight, which will give the company a presence in Uganda, Morocco, Mozambique, Mauritius, Zambia, Kenya, Nigeria and Tanzania.
Though there is little appetite now from SA investors to provide equity funding for property developments on the continent, Corbett says international investors are still backing Africa. “After all, East African countries still present much better growth opportunities for developers than SA, which is already saturated.”
Some industry players believe the down cycle will help investors separate the wheat from the chaff. “The current slowdown in a number of sub-Saharan African economies will likely weed out investors and developers who have taken on too much risk or misjudged the risk, and identify those with a defensive and resilient real estate strategy,” says Craig Smith, associate director of capital markets in sub-Saharan Africa for Jones Lang LaSalle.
He notes that the long-term drivers of demand for real estate, being population growth and urbanisation, remain intact for many cities in sub-Saharan Africa. “Certain retailers still have their best-performing stores in Nigeria, Zambia and the like, supporting the rationale that these markets present attractive opportunities.”
For JSE investors the question is which African-focused property stocks are now the best bets. Hyprop and Attacq’s Africa exposure is so small relative to their total portfolios that it probably makes more sense for investors to focus on Mara Delta and Tradehold. Mara Delta has the backing of SA’s two largest property fund managers — the Public Investment Corp and Stanlib. The stock is trading at a forward dividend yield exceeding 9% (in dollars). That’s an attractive discount to the sector’s average 7% yield (in rand). Listed-property analyst at Stanlib Chloe Wing-See Ma says the company’s assets are of a high quality and Mara Delta is a great investment vehicle for investors looking specifically for African real estate exposure. “However, the stock is not very liquid, which may cause the share price to fluctuate.” Ma says JSE investors can still make money from African real estate due to the substantial supply-and-demand mismatch in most African countries. “But the weaker growth outlook means that investors need to extend their investment horizons.”
Tradehold may look expensive at first glance at current levels of about R31.50, up nearly 60% over the past 12 months alone. That places the counter a 68% premium to net asset value. But Oasis Group chief investment officer Adam Ebrahim believes there is still value to be had. “The reported net asset value does not capture all the elements of the intrinsic fair value of the company and adjustments need to be made.” Ebrahim refers to, among others, the development profit and potential uplift from projects under way in both the UK and Africa and the benefits from the R6bn acquisition of the Collins SA property portfolio, which are not yet reflected in the company’s valuation.
“Tradehold now has property management and development teams in the UK, SA, Namibia and Mozambique, giving it a significant platform to grow.”