When I first invested in Mara Delta Africa Properties (MDP), it owned just two properties, a Shopping Mall in Cassablanca and an Office Building in Maputo, but it had big ambitions to grow into a larger Africa focussed property fund. Importantly, this excludes the saturated South African market.
Under the leadership of Bronwyn Corbett and her impressive and aggressive management team, they are executing on exactly this strategy. They have acquired Shopping Malls in Zambia and Kenya, Office Buildings in Mozambique and Mauritius, and Logistics and Residential Compounds – also in Mozambique. I could show pie charts of their geographical breakdown or the property market segments, but the company has further acquisitions in the pipeline, which would change the entire picture. After the release of their last annual results, they are finalising the acquisition of two large hotel resorts in Mauritius and a logistics centre in Nairobi. This will further enlarge their property portfolio from the current US$350m.
Management has the stated vision to grow the value of the property portfolio to $1bn in the next 3 to 5 years by growing in existing jurisdictions and the high growth East Africa region.
Fundamentals and long term trends
Opinions about the property business vary fundamentally. It is true that the property business and the unique opportunity for gearing that it offers has made many people fabulously wealthy. It is also true that margins and growth are limited and often property offers predictable cashflows without delivering large growth. In addition, in an increasingly digitising world, it is likely that demand for property is likely to decrease. A move towards online retailing, will reduce the value of Shopping Malls as much as increased virtual and online entertainment will reduce the need for large housing, hotels and resorts or Digital Offices will replace the need for large collective office space.
However, these trends are opposed in Africa by several factors:
- Growing demographics: Populations in Africa are growing faster than anywhere else in the world. Nigeria’s population alone is set to double in the next 50 years and it will have overtaken the USA by 2050. More people will need more space to eat, sleep, entertain and work.
- Economic Growth: Africa is growing of a low base and has far to go in the next few decades. Of course, resource based economies have slumped in the last year, but we should regard this as an opportune time to buy property in these countries, an opportunity that MDP is seizing with both hands.
- Poverty: It is easy to argue that you will go on virtual holidays, shop and work all from the comforts of your apartment, if you have a comfortable apartment. However, if you live in a shambolic hut, you will do everything to escape to a good, clean, “Western” office or mall or hotel. This more than any other trend is a visible manifestation of the need for quality property in Africa.
For these reasons, I am of the opinion, that property is an excellent low-risk means of benefiting from demographic and economic growth trends on the African in the decades to come.
MDP, like most property companies is a solid dividend payer. They bring a Rand hedge component, as the dividend is dominated in US$. Last year’s annual dividend was US$11.75c, which at the current exchange rate and share price equates to a dividend yield of 8.6%. Whilst, it is difficult to judge the sustainable cashflows of a company that is growing rapidly and acquisitively, it appears that the dividends are covered with funds from operations.
The NAV per share is reported to be R22/share, which at the current share price of R18.50/share puts the company on a 19% discount. However, new shares issued for acquisitions have been issued at slight premiums to the NAV, implying that major shareholders have been buying shares throughout the year at a 20%+ premium.
Barriers to Entry
Operating in Africa is far from easy, as has been evidenced by many South African businesses burning their fingers on the continent. Partially, this results from a failure to differentiate between the over 50 individual countries in Africa, each with its own cultural, political, fiscal and logistical challenges. MDP has built up operational experience in Morocco, Mozambique, Kenya, Zambia and Mauritius, with a management and operational team that has now learned from the challenges in North, East and Southern Africa.
Whilst it may be argued that property is a relatively easy business to operate – and it is certainly less challenging then retail in the same location – MDP will still reap the benefits of first mover advantage on the continent. They will be ahead of other players in discovering the unique security, tax, utilities, customer and fund repatriation challenges of their various jurisdictions.
In my various travels in Africa I have often encountered hotel, retail or office properties that were clearly inefficiently used. Often space was poorly managed, maintenance apparently non-existent, operational staff untrained and many opportunities for monetisation of the property were foregone. As MDP continue to acquire additional properties, the company will build up scale, which allows it to keep costs low, but maintain and build a team of experts that can maximise the value of each individual property in the portfolio. I have no doubt that with a South African trained team of experts, significant value can be extracted from almost any property in Africa.
According to their latest Annual Report, Directors and Associates control just over 9% of the company. This is a sizable amount and ensures that the chairman and CEO are well aligned with shareholder interests. There are also two key shareholders. The Delta Property Fund owns 24% of the company, a legacy shareholding from when the company was created as a spin off from its parent, and the Government Employees Pension Fund, as a 28% cornerstone shareholder.
MDP represents a phenomenal opportunity to participate in the expected African growth over the next few decades through a low risk property vehicle. The company is growing rapidly and intelligently, looking to leverage their built-up knowledge in several jurisdictions. I for one am happy to sit on my healthy US$ denominated dividend yield, while I wait for this growth story to play out on a continent with a population that is desperate for quality property.