In African listed property, size doesn’t matter — but stability does

The local listed property story made a big splash when the regulators consolidated property unit trusts and property loan stocks into one simple and tax-tight investment vehicle named a Real Estate Investment Trust (Reit). And investors rode the wave of double-digit capital growth rates and inflation-beating income distributions for many years.

But in 2018 the tide went out, taking 25% of the JSE’s South African Listed Property Index’s value with it. It is yet to return, as a sluggish economy keeps a recovery at bay. There are simply too many buildings and not enough tenants.

In future, they might not have to travel as far, with a couple of bourses already adopting the Reits regime and others considering the same route.

But Peter Clarke, property analyst at Investec Asset Management, says listings are still few and far between, and markets are still in their infancy.

“It will take some time to formalise structures, educate their own retail investors. They also lack the scale and liquidity to attract large institutional investors from abroad,” he says.

The first Reit listing outside South Africa’s borders was the STANLIB Fahari I-REIT on the Nairobi Stock Exchange in 2015 and was followed by a few small counters coming to market in Nigeria, all mainly focused on housing development. A couple of Reits have also since been made available in Botswana and Zimbabwe.

“There have been talks of other countries adopting the regime,” says Clark.

But if you believe in the African growth story, and want to put your money behind it, Clark says it will have to be for the long haul. The very long haul.

“The stocks have been very volatile over the short term for one, reacting to political and economic uncertainty and instability. The counters are also in the process of building up a stock of good underlying assets and the long-term corporate leases that go with it, which takes time,” he says.

“A lot of price discovery of the true value of rental properties still needs to be done.”

Also, property rights are not afforded to everyone in all jurisdictions, with large tracts of land owned by the government or by community trusts, and only leasehold or freehold arrangements are possible.

“And land registry systems are not sophisticated enough to even enforce or ensure these arrangements,” Clarke says.

But just like South Africa, the underlying real estate landscape is filled with office blocks and shopping malls.

Property companies piggy-backed on local retailers’ voyages into Africa, he says, and built these structures to accommodate them.

But not all these ventures worked out. Think Woolworths in Nigeria, MTN in Ghana and Pick n Pay in Botswana to name a few, and there were no local retailers to fill the gap. Retail and consumption patterns are very different across geographies, says Clarke.

It has been a tough experience for some landlords, he says, and Attaq and Highprop, for example, have decided to cut their losses and downscale their African exposure.

But others are toughing it out. SA Corporate has shares in office and retail centres in Zambia. Atterbury and Growthpoint, via its shareholding in Grit Real Estate’s investment, has a business in Ghana and Zambia, are looking to expand. Resilient has a presence in Nigeria.

But the expected growth has not been forthcoming, says Gareth Elston, CIO at Reitway Global.

“It is not easy to get a listed property sector off the ground and attract sufficient international capital,” he says. “There are over 1,000 funds around the world competing for the same cash.”

But headway has been made by countries such as Mauritius and Morocco. Albeit their few listed Reits are still small in comparison to the South African market, Elston says they are attracting capital and incentivising development. The regulatory landscape is also clear and it is relatively easy to conduct business in these countries.

Elston says government plays an integral role in its own property sector. It has to make it attractive for investors to fund projects and make it easy for investors to access markets and create wealth.

Furthermore, authorities need to support the industry as key tenants by committing to long-term leases and paying rent on time.

Incentives are also key, Elston says and refers to the success of the section 12 J tax regime that led to the development of much-needed student accommodation. BM