- African real estate set to benefit from fundamental regulatory shifts
- Grit Real Estate Income Group’s strict investment criteria prove to be a significant risk mitigant in volatile markets
- The Group is uniquely positioned to benefit from deepening real estate markets across Africa
- Grit’s focus on corporate governance provides independent assurance and may support liquidity and growth
The potential for African Real Estate
The African commercial real estate market is largely in its infancy. Historically, the challenges around security of land tenure, along with the lack of quality tenant counter-parties, and the complexities of navigating the commercial bankability of real estate transactions in Africa (versus more established markets such as South Africa and abroad) have proved a major barrier to entry for commercial developers.
Over time, with the appetite for African based investment becoming more robust as capital seeks to find higher yielding investments in high-growth economies, this has led to more buoyant, growing consumer markets.
This in turn continued to attract commerce, including international companies, increasing demand for suitable corporate accommodation.
AfCFTA a vehicle for Africa’s economic transformation
Hailed as the largest trade deal in the world, the Africa Continental Free Trade Agreement (AfCFTA) will merge 54 member countries into a single market of 1.3 billion people. According to the Mo Ibrahim Foundation, this resource, with the merit of enhancing sustainable markets, could create an economic block with a combined GDP of $3.4 trillion. Once in place, intra-African trade is expected to grow per cent, and Africa’s total trade deficit is likely to be cut to half. In addition, the AfCFTA could generate combined consumer and business spending of $6.7 trillion by 2030.
Trading under the African Continental Free Trade Area (AfCFTA) is set for January 2021 after being delayed by COVID-19 (or the pandemic).
The demand for high-quality corporate accommodation is expected to increase significantly on the back of AFCFTA, with especially certain sub-sectors such as logistics and warehousing as well as commercial offices expected to benefit both directly and indirectly from increased cross-border trade.
Promulgation of REIT status
In addition to the impact of AfCFTA, the next growth cycle in Africa’s fledgeling real estate market could significantly benefit from the implementation of emerging real estate investment trusts (REITs), especially if driven by African pension and insurance funds.
Countries with growing funded pension sectors are increasingly looking for diversification with alternative asset classes such as real estate, being a key consideration. In addition to diversification, real estate could provide enhanced investment performance through predictable dividends and long-term capital appreciation. Listed real estate adds an additional layer of transparency and is often the most cost-effective way for pension funds to access the sector.
Hedging the risks
Looking through the impact of COVID-19, the comparatively high progress of African real estate will continue to appeal to investors with a long-term view on Africa. The challenge for investors and real estate companies alike is managing the different demand drivers, political climates, and growth trajectories,
which will be significantly shaped by the pandemic for some time to come. The ability to select those asset classes and geographies that will outperform through the cycle is key.
Grit’s portfolio is differentiated by its diversification across geographies and asset classes. Considering the shifting dynamics, real estate investment in Africa requires a strategy that is built on core fundamentals but also is diverse and adaptable enough to continuously evolve.
The Group’s portfolio includes a diverse range of asset classes including corporate offices, light industrial, hospitality, retail, and corporate accommodation. Grit’s footprint is spread as wide as the continent itself with interests in investment grade countries including Morocco, Mauritius, and Botswana, and the balance in high-growth countries such as Kenya, Ghana, Senegal, Zambia, and Mozambique.
Contrarian to many “bulking up” strategies, Grit’s investment philosophy is founded in making sure of the quality of the assets and defensiveness of the geographies it invests in. To give life to this ethos, the Company has implemented various “gatekeepers” or hurdles that prospective investments have to satisfy before it can be tabled for consideration by Grit’s investment committee.
Although COVID-19 has created a challenging backdrop, which has impacted Grit's business over the past six months, the Company acted nimbly and decisively, taking action to ensure the stability of the portfolio and that Grit remains financially robust. These actions included tactical asset sales, successful renegotiations with major lenders and pioneering financing solutions which will enhance shareholder returns over the short and longer term.
The Group’s office, light industrial as well as the corporate accommodation sector assets have remained comparatively unaffected by the pandemic, and with Group rent collection showing improvement, including strong August and September rent collection that has averaged over 90 per cent, the Group is increasingly confident in its outlook.
This increasing confidence is additional bolstered by the recovery of the Euro post year-end, footfall demonstrating steady progress in its retail assets and arrears balances starting to expand.
All investment opportunities are thoroughly assessed under numerous criteria, including stable governance and political maturity, strong USD/FDI inflows, USD-based economies, high growth rates, acceptable sovereign ratings and outlook by rating agencies, solid economic fundamentals, clear tax regimes, amongst others.
In addition, the Company targets to limit exposure to not more than 25% of the gross asset value of the Group in any single asset class or country. Political risk insurance further covers the Group in the event of non-payment of distributions, or the inability to repatriate dividends.
(Image Source: Company Website)
Positioned for long-term growth
With its diversified footprint, Grit is uniquely positioned to benefit from deepening real estate markets across Africa in years to come, driven by ongoing REIT promulgation and the positive long-term impact expected from AfCFTA.
The new OPCI legislation framework offers new avenues dedicated to investment in real estate within a tax efficient structure, and with a deepening of local capital markets, is expected to induce more funds to the sector by providing both tax effective admittance for local investors and the probability for multiyear capitalisation rates compression in the sector.
Focus on corporate governance
Grit is currently at advanced stages of moving its corporate seat to Guernsey and has converted its quotation on the LSE from US Dollar to Sterling, part of the requirements to step up to the Premium listing segment of LSE’s main market.
These initiatives are expected to enable UK-oriented investors better access to Grit's shares and could support the Group's eligibility for inclusion in the FTSE UK Index Series, which will significantly improve liquidity in the Company's shares and further diversify its investor base.
Grit expects to deliver value to its shareholders by constant focus on maximising the yield of the current portfolio and unlocking value through the Company's operational expertise, financial strength, proactive asset management, and selective asset divestment strategies.
At the time of writing, Grit was expected to publish their abridged audited consolidated financial statements for the year ended 30 June 2020 on or about 15 December 2020.