AFRICAN PROP­ERTY

Who’s ex­plor­ing the op­por­tu­ni­ties?

Financial Mail - Investors Monthly - - Front Page -

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.”

Mara Delta's Vo­da­com of­fice build­ing in Mozam­bique.

Ka­fubu Mall in Ndola, Zam­bia. Be­low: Bron­wyn Cor­bett, CEO of Mara Delta.

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