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REITs and pension funds to fuel Africa’s next property investment cycle

09.10.2019 by Marketing Concepts

Africa’s emerging real estate investment trust (REIT) market could become the catalyst for largescale investment into the continent’s growing, albeit still underdeveloped, property sector.

Recent years have seen the debut of Stanlib’s Fahari I-REIT in Kenya, and Morocco, Ghana and Uganda having either recently achieved REIT status or being in the final process of doing so. Other notable capital market milestones include Nigeria listing its first real estate linked Bond on the FMDQ Securities Exchange and Botswana’s listed property sector now has more than seven trading counters. This indicates a market maturing.

“The cap rate compression achieved by these REITs in a listed environment presents significant value-unlock for investors. Our experience, having listed Grit on the main market of the London Stock Exchange, underscores a definite appetite for African real estate,” says Bronwyn Corbett, CEO and co-founder of Grit Real Estate Income Group.

Speaking ahead of the API Summit set to take place on 2 and 3 October 2019 at the Sandton Convention Centre, Corbett believes that while there is interest, investors are still very selective about where they choose to invest.

“This is especially true for international investors who appreciate that Africa is a continent consisting of 54 odd countries. Geographic selection is, therefore, as important a property fundamental as choosing the appropriate asset class and location. Our approach has always been to be asset agnostic, focusing on what we call ‘investment grade Africa’ which includes Morocco, Mauritius and Botswana, and ‘high-growth Africa which is made up of Ghana, Kenya, Mozambique, and Senegal.”

Fellow API Summit speaker Nesi Chetty, Fund Manager of Stanlib, agrees that African property markets will continue to be appealing for investors who have a long-term view on the continent. “The various African countries all have different demand drivers, political climates and growth trajectories. The ability to select those property countries that will outperform through the cycle is key.”

African pension and insurance funds are also expected to be critical drivers for African housing and real estate’s next investment cycle. “Not only is it possible, but the role of long-term institutional capital in bridging Africa’s huge housing deficit could be made a reality through a concerted effort on the part of policymakers, regulators and industry players. There is a need to explore innovative and home-grown solutions that consider both housing and pensions simultaneously to achieve better outcomes,” says Sundeep Raichura, Zamara Group CEO, who will also speak at the API Summit.

“In countries with funded pension sectors, the size of the pension assets are growing, and the need for diversification in itself dictates that consideration be given to alternative asset classes of which housing and real estate is one. In each of these countries, there is a huge deficit in housing, particularly in the affordable housing space. Various countries are taking initiatives to address the housing gap, but sadly the role that pension funds can play does not appear to be fully appreciated, and more can and needs to be done.”

But, several African countries have existing and substantial state pension and insurance funds, and concerns over the governance of investment in housing and real estate still need to be addressed.

“There is a limited appetite to invest across jurisdictions other than South Africa, although Kenyan pension funds are taking more of a regional outlook, and there is an interest in investing across East Africa. Here, vehicles like REITs would make good sense,” he says.

Kfir Rusin, Managing Director for API Events, the host of the API Summit, says that investing in African property is, to a certain extent, considerably less complex now, due to the rapid rate of market formalilisation, transparency and greater understanding of the continent’s unique markets and its needs.

“For REITs to succeed in Africa we need to create enough investment grade stock (something which we are moving towards) for REITs to buy and create enough scale, as well as ensure the correct legislation and tax dispensation is in place across all key countries. Lobbying by industry bodies to gain government and tax authority buy-in will be critical in the formation of REITs across the continent. We are seeing great progress being made across all these key areas.”

Rusin notes that the short-termism of private equity models have often proven a poor match for African property investment and focused on the wrong development priorities. “We’re seeing new funds, platforms and vehicles with longer investment horizons allowing them to better weather emerging market volatilities and develop assets more tailored to local demand,” he points out.

According to Corbett, REIT promulgation in many African countries is expected to have the same catalytic impact on property markets as it did in South Africa.

“I do not expect this development to be as rapid as the South African market experienced in 2013, when the SA REIT dispensation was introduced, as the sector is still in many respects in its infancy. Real estate investments offer an entry point for some and an exit for others, and I feel strongly that this regulation will unlock much needed deeper pools of capital as pension funds and international investors will increasingly participate once a familiar and standardises platform has been established,” she says.

Grit is excited about the prospects of hospitality and logistics assets, depending on the appropriate region, but Corbett says luxury malls will continue to struggle. “The fundamentals are just not there to support this business concept. That said, I am still excited about large format convenience retail. These assets continue to outperform as they cater for everyday basic needs, fast-food and entertainment in conveniently accessible locations.”

Attendees at this year’s API Summit can expect further discussion on these topics and more with participation from over 500 + delegates, 60 speakers and 285 companies in attendance.

“I am looking to learn and share. There are many cross-cutting challenges across Africa, and I believe a forum like the API Summit will be a good opportunity to exchange ideas and look for areas of collaboration,” concludes Raichura.

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