A very alternative source of yield

When thinking about high yield investments, I suspect that Africa ex SA property does not sit high in many people’s minds.

However, we believe this asset class has the potential to provide investors with an attractive hard currency yield. For example, our Momentum Africa Real Estate Fund (or “MAREF”) is currently completing two office block developments in the city of Accra, Ghana. We forecast that the initial rental yields on these projects will exceed 10%. Lease agreements are dollar-denominated and annual escalations are 3 – 4%. We therefore anticipate that these cash flows will provide a healthy contribution to the total return for MAREF’s investors.

The institutional real estate market in Africa outside of South Africa is still in its infancy and is not presently in a suitable state for largescale retail investor flows. This will change in time: South Africa’s listed property market was in a similar state at the turn of the century (not long after Nelson Mandela was voted in). The market cap was only $1bn and it was trading at double digit yields. Today that market has matured – the market cap is at least twenty times larger and yields have dropped into the high to mid-single digits. We believe that the property market in Africa ex SA will follow a similar trend over the next 20 years as liquidity deepens and the quality of assets improves.

Whilst not being without risk, we believe that it is possible to sustain attractive hard currency yields. Commercial rentals in Africa ex SA are often charged in US dollars. However, earning rentals in hard currency doesn’t necessarily protect investors from Africa’s sometimes infamous currency volatility. If a tenant earns its income in local currency, it will struggle to pay hard currency rentals when the local currency plummets. In contrast, tenants earning US dollars (such as international oil or financial services companies) are well positioned to withstand local currency volatility.

A healthy yield is scant consolation if there is a simultaneous erosion of the capital base. In the real estate sector this means that assets need to be of a high and sustainable quality and they need to be properly managed. We are fortunate that fellow MMI subsidiary Eris Property Group oversees the development and management of MAREF’s assets. Eris has a 30 year history in African property, so it can apply its considerable experience to MAREF’s assets for the benefit of our investors. The importance of factors such as designing practical yet aesthetically pleasing buildings and paying meticulous attention to cost control cannot be over emphasised. These skills are unique to the real estate sector and they can only be learned through hard lessons over a considerable period of time.

Another key factor in creating a sustainable portfolio yield from Africa is geographical diversification. While it is often viewed as a single bloc, Africa is a continent of 54 countries with very different economies and political cycles which provides a degree of diversification.

Due to the challenges inherent in the market, MAREF is currently an institutional fund. However, we hope that the future funds will be accessible to sophisticated retail clients. The market will adapt slowly but as early adopters in this space we will be very well placed to provide access when the local markets – and our investors – are ready. 

David Lashbrook, CFA