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Investing in Africa property not cheap

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Cape Town - Africa features prominently on asset managers’ radars for its emerging market growth and return prospects.

There are myriad investment opportunities in the continent’s 50-plus country markets that offer yields way in excess of those on offer in the developed world.

Property is one of the asset classes singled out by Sanlam [JSE:SLM] Investments with potential to deliver double-digit dollar returns.

The group launched its Africa Core Real Estate Fund in February 2013 and listed it on the Mauritian stock exchange in May to pave the way for retail investors to potentially gain a foothold in a market typically reserved for institutions and ultra-high net worth individuals.

The fund is similar in nature to locally listed property companies and operates as an income fund, better understood by international investors as a Retail Estate Investment Trust (Reit).

Reits invest in and own properties and generate revenues from rentals on these properties.

The fund allows local and international investors to invest in high quality retail and commercial real estate assets across select sub-Saharan African countries (excluding South Africa).

Initial investments have been made in Ghana and Tanzania with transactions being evaluated in Nigeria, Kenya and Mozambique.

Supply and demand imbalance


“There is a massive supply and demand imbalance for quality real estate across the subcontinent,” said Johan van der Merwe, CEO of Sanlam Investments.

Growing populations and rapid urbanisation combined with improved per capita income has ignited an Africa-wide retail property boom.

The demand for quality office space is also on the rise as large multinationals chase oil, gas and commodity opportunities across the region.

Investing in Africa property does not come cheap. Large institutional investors – who manage pension and provident funds – have already committed nearly $100m to the fund.

High net worth individuals, who participated in the first round of capital-raising, would have parted with lump sums of $5m or more.

The fund is structured to international standards and provides a first platform for investors to tap the growth potential of the sub-Saharan African real estate market with minimal development risk.

Sanlam decided to list the fund in Mauritius because many of the fund targeted assets and leases concluded on these assets are denominated in US dollars.

It also expects a large percentage of future inward investment to the fund to come from international investors.

“South Africa’s exchange control regulations mean that it is impossible to list a dollar denominated fund locally,” said Thomas Reilly, CEO of the Fund’s advisor.

Liquidity

Retail investors who purchase shares in the first pan Sub-Saharan Africa real estate fund must do so with due consideration for liquidity constraints.

"Liquidity is a measure of the supply and demand for a listed entity or, in layperson’s terms, the ability to find a buyer for your shares when you wish to sell your investment," said Reilly.

“At the moment we are a relatively small listing, but as we grow liquidity should improve and we will become a feasible option for the lay investor.”

Sanlam will manage the fund with low levels of gearing and high levels of income distributions and hopes to deliver double-digit dollar-based yields to investors.

High returns often go hand in hand with high risks and an investment in the fund must be considered against the backdrop of the unique challenges Africa property investors face.

The property rights issue is held up as one reason why even high net worth individuals should not attempt to “go it alone” when investing in commercial property in Africa.

“Property rights is often considered as one of the biggest risks to the portfolio we are building,” said Reilly.

“We address this risk by being very specific about the due diligence elements surrounding both the assets and regions we’ll consider investing in.”

There are some countries that have such comparatively poor property and land rights track records that Sanlam will not consider investing in them.

Others have land registries and title deed offices that are arguably on par with those in South Africa.

“The secret to success in Africa is to be thorough with regard to your level of diligence concerning land and property rights,” said Reilly.

“The Africa Core Real Estate Fund compares favourably with the private equity development funds on a risk return basis.”

 - Fin24

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