A look into the Lusaka Real Es­tate In­vest­ment Mar­ket…

Zambian Business Times - - FRONT PAGE -

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.

*based on 100% value

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