A look into the Lusaka Real Estate Investment Market…
As part of the positive growth cycle of the industry, a number of international investors have entered the Lusaka property market and these players have invested $716m in Zambia over the last four years, of which 74.6% (or $534m) was in Lusaka.
While South Africa accounts for 51% of the international funds invested, we have also logged investments from 10 other countries, showing some diversity in the investor base. We find it particularly interesting that more than 10% of the capital has come from Zambia’s neighbours’ Botswana and Tanzania.
The international investors transacting in Zambia include quality names such as Hyprop (SA), SA Corporate Real Estate (SA), Grit (Mauritius), Novare (SA), Actis (UK), PrimeTime (Botswana), Terrace Africa (SA) and Heriot Properties (SA). ...
International investors
As part of the positive growth cycle of the industry, a number of international investors have entered the Lusaka property market and these players have invested $716m in Zambia over the last four years, of which 74.6% (or $534m) was in Lusaka.
While South Africa accounts for 51% of the international funds invested, we have also logged investments from 10 other countries, showing some diversity in the investor base. We find it particularly interesting that more than 10% of the capital has come from Zambia’s neighbours’ Botswana and Tanzania.
The international investors transacting in Zambia include quality names such as Hyprop (SA), SA Corporate Real Estate (SA), Grit (Mauritius), Novare (SA), Actis (UK), PrimeTime (Botswana), Terrace Africa (SA) and Heriot Properties (SA). ShopRite also has a significant wholly- owned property portfolio in Zambia.
International investors currently looking at transactions in Zambia include: RMB Westport, Eris / Momentum Fund and Growth Point Investec Africa Fund. These international investors are following a range of investment strategies and retail is high on the agenda, being backed by strong covenants and brands already well-known to the investors and developers.
64% of the logged international investment has been into retail property with hotels, offices and residential equating to 13%, 11% and 10% of the invested funds, respectively, 2% has been invested in other asset classes.
Of the $716m we have logged for international property investment into Zambia (2014-17), this is relatively evenly spread between the purchase of cash-flow generating assets and the development of new assets (56% vs 44%), pointing to different risk appetites and return requirements for investors. We can expect that Lusaka will still be the main entry point for international investors and that as they become more comfortable with the Zambian market, will venture into other parts of the market.
From a pricing perspective, international investors have been willing to pay more market-related prices for prime assets than local investors, and have successfully secured a number of these. Many of these investors also have access to a lower cost funding than is available in the local market (mostly due to relationships with the head offices of international banks).
The cash-flow focused international investor generally prefers deals over $20m of which there are only a limited number and can handle deals as large as $150m. UARE expect that they will continue to keep a focus on retail, due to the backing by strong tenants, as well as some office assets tenanted by international occupiers. We have logged about $200m of dry powder allocated to Zambia from the cash flow generating investors known to us and in the range of $120m for developments from international investors.
Chinese investors are quite active in the market in residential and office and also, to a smaller extent, in retail. The 16,000m2 SunShare office across from East Park Mall and Arcades, has been a successful investment, although some of the retail developments have been less lucrative and seem to primarily be tenanted by Chinese retailers of lower priced goods. There is limited interaction between the Chinese players and the rest of the property community whether from a funding, leasing or tenant perspective but we expect that Chinese players will eventually become more integrated in the market.
Local institutional investors
We have currently logged about $5.1bn of Assets Under Management (AUM) for the local institutional investors we cover. Based on conversations with these institutions, we estimate that they have $825m of property AUM and most of them are below their target allocations for property, which are generally in the 25-30% range.
Consequently, we calculate that local institutions, excluding NAPSA, have about $210m of investment capacity for property, most of which they want to invest in cash flow generating assets, yielding about 10.0% currently. Some of the larger investors are also examining proposals to invest in partnerships with local developers, as it is recognized that property development is a specialized business and one where – as the old saying goes – “the best way to make a small fortune… is to start with a large one.”
NAPSA, the public pension fund, is about 80% of the AUM among local institutions and are clearly the dominant player. NAPSA has limited involvement with the rest of the industry and has never bought any cash flow generating assets, concentrating on the development of large assets (with mixed success) for its own balance sheet. For instance, the $232m Levy Mall mixed-use project, is generating a reported yield-on-cost of 2.0-3.0%.
The industry needs NAPSA to deploy a portion of its monthly $80m inflows and significant cash resources into property, its investment limits allowing, through buying existing assets and freeing up capital for developers to re- deploy into new developments, in turn, creating the jobs and taxes that Zambia needs.
Transactions
Of the $1.3bn of investments into Zambian property over the last four years. The vast majority of this is single-asset deals – we have noted two portfolio sales. While international investors are primarily looking for assets valued at more than $20m and preferably bigger than that, the local investors are happy to take assets up to $8m but prefer assets in the $3-6m range. Consequently, assets between those sizes are stuck in what we call ‘the valley of death’ – too big for the local investors, too small for the international investors. We see a possibility of aggregating these assets into portfolios that would then (a) be able to trade, and ( b) would see some yield compression.
Retail Transactions
Retail has clearly been the most active asset class from an investment perspective and has been dominated by international investors with all five transactions below completed by international buyers. We are starting to see significant interest from Zambian institutional investors in retail but, with exception to AfLife’s purchase of Kapiji Mall in Solwezi, have not seen any major transactions yet. There is a significant amount of development activity in retail and we expect that many of these assets will trade soon.
There are a number of retail assets in Lusaka that are stuck in the ‘valley of death’ and have been on the market for quite a while without selling. UARE broadly expects retail yields to remain stable, with super-prime yields possibly increasing slightly and prime and secondary yields tightening.
Office Transactions
Due to the significant over-renting of most properties ( i.e. contracted rents being higher than market), we have seen declining interest in office from investors and increasing yields. The most recent transactions in the market have been corporate occupiers (e.g., MTN and ZCCM-IH) buying new headquarters to optimize use and cost.
The market has yet to see the first single-user, international tenant building come to the market and we believe these types of assets will be priced much more keenly as the international investors will see through to the credit quality of the tenant.
Industrial d lT Transactions
The industrial and logistics segment has not been active from a transaction perspective as most developers have preferred to keep the assets on their own books. Estimated yields are consequently less supported by transactional activity. There is interest in the segment and we are aware of multiple Zambian institutional investors keen to acquire industrial property and so we expect to see more transactional activity in this asset class. We believe that modern logistics properties, let to good tenants, on long leases would likely also be of interest to international acquirers.
Hotel Transactions
The old hotel room valuation rule of thumb is that the value per room is the rack rate multiplied by 1,000. This broadly holds true for the only observed transaction in the Lusaka property market which was the purchase of Intercontinental in 2016. HVS’s latest report in 2015 assessed the average value per bed at $120,000 which we believe is still broadly correct, given reasonably unchanged rates and occupancies across the market but may trend down as significant new supply is coming to the market.
Residential Transactions
Large scale residential transactions have not been common in the Lusaka investment market. There has, however, been a notable recent rise in interest in this asset class and we understand that there are a number of institutions active in the sector at present.