Growthpoint, Investec take Africa gamble

Five years ago, Africa was still widely punted as the world’s next big growth story. Back then, a number of SA developers and listed property funds ventured north of SA’s borders to cash in on the continent’s rapidly growing middle class and shortage of formal retail space.

A key attraction was that most tenants paid rentals in US dollars, which provided a hard-currency income stream for SA investors. By mid-2014, at least six JSE-listed property companies operated in other African countries: Tradehold, Mara Delta (now Grit Real Estate), Rockcastle (now merged with Nepi), Hyprop Investments, Attacq and Resilient Reit. Asset managers such as Stanlib had also entered the fray via the creation of an African property-focused unit trust fund targeted at institutional investors. But by late 2015 the real estate party elsewhere in Africa came to an abrupt end on the back of the oil and commodity price crash, which dimmed the continent’s economic growth outlook.

Subsequently, many countries there were hit by greater volatility in local exchange rates.

That made it difficult for landlords to charge dollar-based rentals and expatriate rental earnings, which in turn triggered a rise in mall vacancies and valuation write-downs. By 2017, most SA property players had either canned further development plans or started to exit other African countries altogether.

Those that held on to their investments, such as Hyprop and Attacq, have reported sizeable losses over the past two years. In the six months to December alone, these two companies reported a valuation impairment of R1.07bn and R370m respectively on their Sub-Saharan shopping centres. Hyprop and Attacq co-own six malls across Ghana, Zambia and Nigeria via AttAfrica.

Stanlib’s Africa Property Fund also took a knock despite the fund delivering an average total annualised return of 6.4% in the six years before it was closed in August 2017.

At the time, 75% of the fund’s assets (R220m) were paid back to investors. The remaining R55m was locked into listed property companies on illiquid African stock markets, the value of which has since shrunk to R14m due to currency movements (R30m) and valuation write-downs (R11m).

Despite this, JSE heavyweight Growthpoint Properties and its joint venture partner, Investec Asset Management, have only just started their acquisition trail into the rest of Africa. Unlisted property fund Growthpoint Investec African Properties (Giap) has a war chest of $212m, which it intends to deploy in Ghana, Zambia, Nigeria and Tanzania, among other countries, to assemble a commercial property portfolio of mostly shopping centres and offices.

The fund announced its first acquisition last week, a 97.5% stake in the 15,000m² Achimota Retail Centre in the Ghanaian capital of Accra. It bought the stake for just over $50m from AttAfrica. The FM has heard that the Growthpoint-backed fund is also in talks with AttAfrica to buy its Manda Hill shopping centre in Lusaka. With 42,000m² of space, it is Zambia’s dominant retail offering and one of the continent’s largest shopping centres outside SA.

But the fact that most other SA property players have been badly burnt on the continent and are now keen to exit, if they haven’t done so already, has raised questions about the timing of Giap’s African entry. Is it perhaps a case of too little, too late?

Some analysts believe it would make more commercial sense for Growthpoint to focus on markets outside SA where it already has a presence and a core competence, such as Australia, Romania and Poland.

As Garreth Elston, CIO at Cape Town-based Reitway Global, puts it: "Africa, in general, has humbled many of SA’s savviest property investors over the years and is certainly not a fix for the low-growth environment in SA."

Elston believes the biggest risk when SA companies go into markets they don’t fully understand is that of overpaying.

He says: "My concern is that Growthpoint might believe it’s getting an asset cheaply only to discover that, like AttAfrica, it had inadvertently bought an albatross."

Stanlib’s head of listed property, Keillen Ndlovu, says the fact that it is difficult to call the bottom of the African real estate cycle means there are further potential valuation write-downs still to come. Though property prices in some African markets may have softened, he says, the lack of trading activity makes it hard to determine true market value. "Very few deals have taken place in the past 12 to 18 months, so it’s tricky to price assets correctly."

Another challenge facing late entrants to the market is high vacancies. Ndlovu says many African malls are sitting with large numbers of empty stores — some with vacancies of 20% or more. "How do you fill the empty space in a low economic growth climate, especially as there is very little, if any, new demand from SA or international retailers?" he asks.

However, former Sanlam Properties CEO Thomas Reilly, who now heads Giap, believes that the fund’s entry into Africa was well-timed. Instead of rushing into the market 15 months ago, when the fund had already secured investments of $212m, Reilly has been waiting patiently for the right buying opportunities. "We deliberately sat on our hands with the view that the market would get cheaper."

Reilly estimates that prime real estate prices in most African markets have come off at least 30% from where they were two to three years ago. "If we are not already at the bottom of the market we are very close to it," he says. "Besides, there is limited competition from other investors so we have good bargaining power. We can typically get these assets cheaper than what it would cost to build them."

Reilly says Giap also has the benefit of hindsight and can learn from the mistakes of those that went into Africa beyond SA at the peak of the continent’s development cycle from 2010 to 2013, many of which are now looking to liquidate their portfolios. "A lot of new malls were built in Africa over the past decade; some worked well, some worked OK and others didn’t work at all. We can sift through these opportunities and choose only the best."

Reilly believes the Achimota mall is a case in point. The purchase price of about $50m is a "touch" below replacement cost and translates into an acquisition yield of more than 9%, which Reilly says is attractive given the centre’s dominant offering in a densely populated area of Accra. The centre boasts a low vacancy rate of 3.4% (at December 31 2018, according to Hyprop’s interim results) and its more than 50 stores include large SA brands such as Game, Shoprite, Mr Price, Pizza Hut and KFC.

Reilly also likes the centre’s size. "We don’t think many African cities can sustain centres exceeding 12,000m²-15,000m². The mistake many developers made was that they built their malls too big."

Africa is also starting to look more compelling from a macro perspective. Reilly refers to the recovery now under way in several African economies, which has been supported by peaceful political changes.

"Currency issues have also been largely reversed and there has been a pick-up in overall tenant demand," he says.

Giap’s strategy is to build critical mass in only a few key African cities where it can become a landlord of choice for SA and international retailers. These include Accra, Lusaka, Lagos, Nairobi, Casablanca and Dar es Salaam.

Reilly is targeting a net total dollar return of 13%-16% a year, which includes a biannual dividend payout. He hopes to list Giap on the London Stock Exchange or the JSE, or both, in the next five years, once the fund has reached a market cap of $750m.

But he concedes that Africa is not a place to make a quick buck.

"It’s not a one-day game. You have to be in for the long haul."