What if you could make a 10.8% indicated yield
in US Dollars from African real estate?
Would you be interested?
The foundation of many personal and dynastic fortunes around the world, especially in densely populated Asian cities such as Singapore and Hong Kong, has been real estate. In Australia, too, most people who have accumulated wealth can usually attribute a significant portion of it to “bricks and mortar.”
Many of my friends therefore understandably ask me, “What about investing in African real estate? Wouldn’t it be simpler just to buy an apartment, house, or piece of land and sit on it for a couple of decades? Why mess about with the stock market?”
It’s a fair point.
And if you’re an experienced and dedicated real estate investor, I’d actively encourage you to seek out the possibilities in Africa.
As I am sure you’re aware, though, real estate is a very local asset class. Managing an investment property in a faraway land is a daunting task. Even savvy real estate investors who I know have tried and failed. Something my friends at Stansberry Research wrote recently dealt with exactly this topic.
The other thing about real estate is that it’s often the tax advantages, and opportunities for leveraging your equity via bank credit or other debt financing that makes it an attractive investment proposition. Investing in a foreign country with different tax rules and a low likelihood that you’d qualify for local debt financing probably also negates some of the usual benefits of investing in real estate.
Speaking as someone with a mixed track record in real estate investments (a story for another day), who is a stock market aficionado, I’ll likely stick with stocks. It’s just what I am good at. That’s probably because it’s what I really enjoy.
Don’t get me wrong. I follow real estate markets, too. To understand what’s going on in the wider economy, and the implications for the stock market, you also need to have your finger on the pulse of the real estate market.
Perhaps no other market more broadly affects all other aspects of the economy than real estate. The fortunes of many companies listed on the stock market are also inextricably tied to the real estate market, including building materials companies and banks, to cite just the two most obvious examples.
For instance, what do I personally own shares in, in Tanzania? The leading cement company, and the leading banks (one directly, and one indirectly, via an investment company that holds a large stake it).
All those companies’ earnings will be meaningfully affected by the real estate market. So real estate is already having a big impact on my portfolio, indirectly.
But if you want to invest in African real estate more directly, and you are wary of trying to manage a property portfolio from afar yourself, there is another option: real estate investment companies or trusts that are listed on stock exchanges.
Around Africa, there are plenty of dedicated real estate investment companies and investment trusts. There is also the occasional housing developer listed on local stock exchanges.
In Mauritius, for example a good number of the listed companies seem to be involved in real estate. They are in involved in a spectrum of different activities… everything from operating hotel and resort chains around the Indian Ocean region, to owning and leasing out commercial real estate around Africa.
A pan-African real estate stock on
a 10.8% indicated US Dollar yield,
trading at a 36% discount to net asset value
The African real estate stock I find most interesting is Grit Real Estate Income Group, listed in London, Johannesburg and Mauritius. It leases out A-grade commercial, residential, and leisure properties all over Africa (excluding South Africa).
Its business model is somewhat unique in that its leasing contracts are mostly negotiated in Euros and US dollars. Just over 94% of income was in these currencies for the 6 months ended December 31, 2019.
And usually the company’s rental contracts are with big multinational corporations, and even foreign governments as tenants. Some 92.8% of all rental income came from this type of tenant in the 6 months ended December 31, 2019.
That leaves your investment less exposed to depreciating African currencies. It should also help mitigate some of the risks of tenants not paying rents.
In Mozambique, for example, Grit owns the building the US State Department uses to house the US embassy. It also owns the VDE Housing estate that Brazilian mining giant Vale, and South African retailer Barloworld use to house some of their expat employees.
In all, Grit has a diversified exposure to seven different African countries: Mauritius, Mozambique, Morocco, Kenya, Zambia, Ghana and Botswana. The company is run by a predominantly South African management team led by CEO Bronwyn Corbett.
I haven’t completed my research into Grit yet. But, I like what I am seeing. And given people have asked me about investing in real estate in Africa, I thought I’d mention it.
Grit has reduced its dividend guidance for 2020 to US$0.0875 per share (from US$0.1225) due to the Covid-19 Pandemic temporarily affecting its leisure and retail portfolios (about 52% of total assets). With the shares trading at US$0.81 on the main board of the London Stock Exchange, that equates to a 10.8% indicated USD yield.
The last reported net asset value for the company as of December 31, 2019 according to international financial reporting standards (IFRS) was US$1.28 per share, leaving the shares trading on a discount of over 36% to net asset value.
If you have any thoughts on the company yourself, should you look more closely at it, I’d love to hear from you at: email@example.com