CEO Today Africa Awards

www.ceotodaymagazine.com CEO Today Africa Awards 2017 MAURITIUS 25 Where there was political motivation for partnerships, real estate development has been a catalyst for socio economic reform: Nodal development is ultimately a function of infrastructure since large Public Private Partnerships such as transport infrastructure and port infrastructure (including rail, air and sea) developments lead to real estate opportunities. A downstream benefit of real estate development is that the developers are increasingly taking care of issues “beyond their own fence line,” such as secondary road, water, power and sanitation infrastructure. This is the DNA of nodal development and sustainability. The increased understanding of income funds holds potential to become the greatest catalyst for real estate growth on the continent. Listed property has always been regarded as a relatively low risk investment. Given the see-through and longer-term predictability of earnings, the asset class provides investors with a much more stable earnings profile than other equity classes and its exposure to interest rates makes listed property a proxy for bonds. These characteristics, coupled with a global environment marked by relatively low interest rates and exceptional market volatility increasingly attracts stable income and fixed income investors into listed property. Currently, there are only four countries with real estate investment trust (REIT) type structures promulgated in Africa, although this is fast changing. The impact of such regulation in more sophisticated markets such as the JSE bares testimony to its underlying potential. With the introduction of REIT status in 2013, the sector catapulted from obscurity to Rockstar status, with the asset class outperforming equities on the exchange over the past number of years. From a ZAR5 billion market capitalisation in 1998, the sector has grown exponentially and today the combinedmarket capitalisation of listed property companies in South Africa exceeds ZAR500 billion. To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. Listed property has therefore proven itself as an ideal asset class for investors saving for retirement in an investment vehicle that is www.grit.group sheltered from tax (like a living annuity or provident fund), as well as for providing an inflation-hedged income in retirement. The combination of a relatively high initial income yield and inflation-beating distribution and capital growth allows investors the opportunity to maximise total returns through time. Instead of just relying on capital appreciation or an income yield to generate their returns, investors in listed property can enjoy both sources of return as well as the benefits of compounding the income if it is reinvested and not consumed. REITs also provide a down-stream benefit to infrastructure development – it’s an exit from some and an entry for others. Pension Funds can play a role on both sides of the equation. Despite pockets of growth, securing solid property fundamentals and valuations remain a major barrier to entry for most property players on the continent: Most large-scale developers will only break ground based on having secured competitively priced funding, strong anchor tenants and a clear exit strategy to achieve a target IRR. A distribution fund such as Grit Real Estate Income Group will only invest if the property fundamentals are in place: strong anchor tenants with long-term leases, some trading history and track record, quality assets in a good location with growth opportunities. Pension funds can stimulate thedevelopment of fit for purposeassets by participating in the funding of such ventures. More importantly though, REITS could provide a clear exit for such developers and this is where pension funds can play a major role. Despite offering a clear mechanism to accelerate growth in infrastructure development, REITs are still in its infancy on the continent – the JSE only promulgated this legislation in 2013. Kenya followed suit and similar legislation is imminent in Morocco and potentially in Tanzania. Pension funds will likely play a leading role as an in-country proof of concept that will not only support closing the infrastructure gap, but stimulate local capital markets as well. Whilst Africa remains the undeserved Cinderella of real estate investment, it offers attractive opportunities for those with the know- how, tenacity and patience to look further than skin-deep.