Grit Real Estate: The first African-focused property play on the LSE
Grit is poised for a rerating following this week’s UK listing. It is now the only African-focused property play on the LSE
South Africans have understandably been skittish about investing in the rest of Africa after the sharp oil and commodity price slump and the currency crises that hit a number of countries in 2015-2016.
In those years the sudden shift in the continent’s economic growth outlook forced a number of SA developers and JSE-listed property funds, which had entered the continent earlier this decade in search of US dollar-based returns, to reassess their investment strategies.
Most have either already exited countries on the continent beyond our borders or placed expansion plans on hold.
However, UK investors are now taking a fresh bet on the African growth story — and this may be an opportune time for SA investors to follow suit.
Grit Real Estate, the JSE’s only property play focused on Africa, last week raised $132m (R1.73bn) among UK fund managers in a bookbuild that preceded Grit’s listing on the main market of the London Stock Exchange (LSE) on Tuesday (July 31). Grit now holds primary listings on the JSE, the LSE and the Stock Exchange of Mauritius.
This capital raise will provide a significant boost for Grit’s market cap, pushing it to about R5.3bn, and also enable the company to grow its portfolio of shopping centres, hotels, logistics and office buildings on the continent from about $600m now to $1bn by year-end.
Grit owns 22 properties across seven African countries, which include shopping centres in Morocco and Zambia, a housing development leased to the US embassy in Maputo and four Beachcomber and Lux hotels in Mauritius. About 96% of Grit’s rental income is paid in US dollars by international companies.
Grit CEO Bronwyn Corbett, a chartered accountant who co-founded the company in 2012 in its former guise as Delta International (it was later renamed Mara Delta) hopes the LSE listing will encourage SA investors to take a second glance at Grit.
Though some big institutions such as Stanlib and the Public Investment Corp have backed Grit from inception, Corbett has had a tough time convincing more local property fund managers to invest in the company. As a result, Grit’s share price has been trading in a fairly narrow band of R15.50-R16.50 for most of the past two years.
"[Other countries in] Africa are still seen as too high risk, and most SA fund managers prefer to invest in listed property companies that offer exposure to the UK or Eastern Europe," Corbett says.
She says UK investors, on the other hand, still have sizeable emerging market allocations and many are keen to gain exposure to real estate elsewhere in Africa, given the economic recovery now under way in several countries. In addition, some African regions have undergone peaceful political regime changes of late, as well as the introduction of sound trade and investment policies. "Besides, Africa now offers better growth prospects than any other region in the world," Corbett notes.
Grit trades at a dividend yield of 9% (in dollars), which is comfortably ahead of the LSE real estate sector’s average 4%-5%. The company’s dividends are forecast to grow at about 3%-4% a year over the next two or three years, versus flat growth expected for most UK and European real estate players.
But Corbett stresses that Grit is not just an income story. "We are a total-return play targeting income and capital growth of a combined 12%-16% a year," she says.
Apart from attractive dollar-based returns, she believes Grit’s main selling points are its strong lease covenants with international corporates and its multigeographical spread across several African countries, which reduces concentration risk.
"Our UK investors also like the fact that we look very carefully at the investment case for each individual African country. For instance, the DRC, Angola and Tanzania are no-go areas for us because of political instability and onerous tax issues."
This week’s LSE listing will position Grit for inclusion in the FTSE and MSCI Frontier Tracker indices, which will place it on the radar of more UK and European tracker funds. Grit is also expected to enter the JSE’s SA-listed property index in September, which should bring more SA investors into the fund.
The money raised before the LSE listing will be used to acquire property assets in Ghana, Seychelles and Senegal. "We like the Francophone markets, which tend to be more stable from a political and currency perspective and are also more sophisticated in terms of infrastructure and real estate development," says Corbett.
Richard Henwood, investment analyst at Bridge Fund Managers, which has had a small exposure to Grit from its inception on the back of its strong management team, believes a London listing is essential to help the company achieve its long-term growth ambitions.
He says that unlike in the case of SA, there are large pools of foreign capital in the UK with mandates to expand into Africa. "These investors will find a UK-listed African real estate company very appealing. Given a stable global economy and a strong management team with sufficient access to capital, we believe Grit will continue to expand and deliver strong yield and capital growth for investors over time."