Grit Real Estate sticks it out in Africa
The JSE’s only Africa-focused property play remains committed to the continent even as others are looking to exit
Unlike their SA counterparts, it seems that UK investors didn’t need much convincing to buy into the African growth story. UK fund managers have already increased their exposure to Grit Real Estate Income Group from 12% to 20% since the Africa-focused company’s listing on the main market of the London Stock Exchange (LSE) at the end of July 2018.
Grit’s LSE listing was preceded by a $132m bookbuild.
Grit, which was co-founded in 2012 by SA chartered accountant Bronwyn Corbett in its former guise as Delta International (later renamed Mara Delta), now holds primary listings on the JSE, the LSE and the Stock Exchange of Mauritius. Corbett, with a team of 80 staff, runs Grit from Mauritius.
She has grown assets under management nearly fourfold since 2012, from $220m to $800m.
Investors who bought shares in the weeks leading up to Grit’s LSE listing have already made a decent profit — the share price shot up 25% from the end of June to early September. The stock has since traded in a narrow band around R20.
"We supported Grit’s LSE listing because it offers an 8.5% dollar-based income yield, which is attractive compared to the ridiculously low yields of sub-6% from UK-and European-based property companies," says Nicholas Hooper, director of UK-based fund manager London Investment Management.
He concedes that there is still a view among some UK investors that Africa is a place to be avoided. "But Grit has taken the necessary steps to insure against both currency and default risk. So it has done everything possible to make African risk interesting," says Hooper.
He adds: "We are taking a longer-term view considering the growth potential still to be unlocked in many African real estate markets. Besides, diversification away from the UK is important given the uncertainty around Brexit."
Local fund managers are understandably adopting a more cautious view on the outlook for Africa as a real estate investment destination, given that several SA property players that have entered the continent over the past five to seven years got burnt on the back of the sharp oil and commodity price slump and currency crises that hit a number of countries in 2015/2016.
JSE-listed Hyprop Investments, Attacq and Resilient Reit, among others, have all reported impairments on their shopping centre portfolios in Nigeria, Ghana and Zambia in the past year or two as higher vacancies and negative rental reversions placed pressure on valuations.
Most are now trying to exit these markets.
But Corbett, who has built a formidable reputation as one of the most driven and enterprising CEOs in the JSE’s property sector, has no such plans.
She remains committed to Africa and plans to grow Grit’s assets to more than $1bn in the next year.
Corbett believes the company’s multigeography and multi-asset strategy sets it apart from others whose African ventures have been less than successful. "It’s important to avoid concentration risk. Too many businesses were chasing growth opportunities in only one or two African markets and when the commodity cycle turned they were in trouble."
Grit’s portfolio features a mix of 25 shopping centres, hotels, office and industrial buildings in seven African countries: Morocco, Zambia, Mozambique, Ghana, Kenya, Botswana and Mauritius. Corbett says every African market offers different challenges and opportunities that need to be carefully assessed.
"You’re dealing with a different legal system, currency and language in every country, so you have to know your jurisdictions really well."
To mitigate risk, Grit’s strategy is to have half of its investments in what Corbett refers to as "investment-grade Africa" — countries known for their stable economies and ease of doing business, such as Morocco, Mauritius and Botswana.
The other half goes into "growth Africa", where the risk is higher, but so too the potential returns. These countries include Kenya, Mozambique, Uganda and Ghana.
Corbett says they won’t invest in a country that doesn’t offer security of tenure, debt funding and the ability to get your money out.
"The DRC [Democratic Republic of Congo], Angola, Ethiopia and Nigeria don’t tick these boxes for us," she says.
In addition, Grit only signs leases with multinational companies that can afford to pay rent in euros or dollars.
Major tenants include US oil and gas giant ExxonMobil, the US embassy, Shoprite, Vodacom, Barclays, Lux Resorts & Hotels and Beachcomber. Another risk-mitigating factor is that most leases are guaranteed by parent companies to provide recourse against possible default.
Looking ahead, Corbett says they are excited about growth opportunities in Mozambique on the back of the country’s rapidly expanding oil, gas and coal exploration sectors. Grit is involved in a $100m project to develop a residential compound for ExxonMobil staff in Maputo. ExxonMobil plans to invest $25bn in Mozambique over the next five years.
Grit is also looking to invest $160m this year to buy two or three more hotels in Mauritius and, potentially, nearby Reunion Island. The company already owns stakes in four Mauritian hotels: Beachcomber’s Canonnier Golf Resort & Spa, Mauricia Resort & Spa and Victoria Resort & Spa in the north of the island near Grand Baie, as well as the Lux group’s Tamassa Resort in the south.
Grit derives its income from the Beachcomber and Lux hotels via fixed euro-based rental contracts with annual escalations linked to the EU inflation rate. So the company isn’t exposed to occupancy and revenue movements.
Pelo Manyeneng, fund manager and analyst at Momentum Investments, believes Grit’s exposure to the Mauritian hospitality market is particularly attractive given the island’s strong growth in tourism arrivals in recent years amid limited new hotel supply.
He refers to recent figures from JLL that show hotel occupancies in Mauritius experienced revenue per available room growth of 43% between 2014 and 2018, one of the highest growth rates in the world.
Average occupancies are also at a healthy 84%, way ahead of SA’s 65%.
"We believe Grit’s Indian Ocean hospitality assets provide much-needed diversification at this point of the African real estate cycle," says Manyeneng.
Grit is trading on the JSE at a dividend yield of around 8.5% in euros.
Anchor Securities forecast three-year rolling dividend growth per share of an average 3.9% per year, which is attractive compared to many SA-focused property stocks that are reporting flat or negative rand-based dividend growth.
* Muller was a guest of Grit in Mauritius.