The investing community is looking forward to the maiden listing of a Real Estate Investment Trust (REIT) on the Zimbabwe Stock Exchange in what has been a most exciting year for local capital markets. Much about this asset class has been discussed in Zimbabwe’s forums and social media spaces since the beginning of the year, but latest developments merit one more look. Zimbabwe’s first REIT is finally coming out of the shadows under the name Tigere. The Tigere REIT’s prospectus was published last week, and the IPO process is already underway. We look at some of the salient features of the REIT below
The Tigere REIT is the brainchild of Terrace Africa, which is credited with the Village Walk retail development project in the affluent suburb of Borrowdale. The REIT itself will not have the Village Walk development in its portfolio, but instead it will start off with the recently opened Highland Park Phase 1 and Chinamano Corner. Highland Park Phase 1 features Pick n Pay as its anchor tenant as well as a fuel station, restaurants and a few other FMCG retailers on 6 704sqm of gross leasable area (GLA). Chinamano Corner is relatively smaller with a GLA of 2 007sqm but also features popular outlets under Simbisa Brands and a fuel station. In addition, there are at least five other developments in the pipeline which could see the REIT’s total GLA increasing by 18 000sqm in the coming years.
According to the prospectus, the IPO price was set at ZWL$28 for each unit of the REIT. In order to interrogate the IPO price, we performed a valuation of the REIT using three models namely Price-to-Book (PBV) Value, Net Operating Income (NOI) method, and the Dividend Discount Model (DDM). The first two methods equally accounted for 50% of the final valuation because they are relative valuation models, while the DDM accounted for the other 50% because it is an objective valuation model.
The NOI model is a fairly simple method that ascertains the value of a property - or in this case, a REIT - based on comparable capitalisation rates and the REIT’s net operating income. A capitalisation rate of 6,4% was calculated from First Mutual Properties’ and Mashonaland Holdings’ latest full year investment portfolio performance in the retail sub-sector. Together with Tigere REIT’s 12-month prorated net operating income forecast of US$1,7m, this resulted in a fair value of US$25, 9m, or US3,68c per unit which translates to a ZWL equivalent of ZWL$28,79 based on current market rates.
The PBV model, on the other hand, ascertains a fair price of the REIT based on comparable instruments’ PBV multiple and the REIT’s net asset value of US3,09c. Given that the Tigere REIT is the first of its kind in Zimbabwe, a comparable PBV multiple of 1,2x was sourced from a database of REITs in the US and a country risk discount of 11,6% was applied. Similar market rates as above were applied, and the model valued the Tigere REIT at ZWL$26,45.
The DDM was also in line with the relative valuation models. Among the assumptions that formed the building blocks of this valuation was a cost of equity of 7,8%, a terminal growth rate of 4%, and a dividend withholding tax of 10%. The model yielded a fair price of ZWL$27,26 using current market rates. An overall valuation that incorporated all three models placed the value of the REIT at ZWL$27,44 which is marginally below the IPO price of ZWL$28.
We opine that there are other qualitative factors that might have influenced the slight premium to the fair price such as (i) an appetising blend of equity and real estate characteristics, (ii) income tax exemption, and (iii) an assured quarterly dividend pay-out. REITs are favoured by many investors because they exhibit characteristics of equity instruments in the short term but in the long term they behave more like real estate. As a result, REITs typically have a lower risk profile than equities and real estate, and investors who want to be exposed to real estate over the long-term but with low liquidity risk often consider REITs as a suitable investment.
Unlike real estate equity instruments such as FMP and Mashonaland Holdings, REITs are mandated to distribute at least 80% of rentals to unit holders. This means that the Tigere REIT offers more dividend per unit of earnings compared to real estate equities. At an IPO price of ZWL$28, the REIT comes with a prospective dividend yield of roughly 5% versus FMP and Masholdings’ respective dividend yields of 2,7% and 1,1%. As a cherry on top, the REIT will receive roughly 75% of its rentals in USD and opens the door to ZWL investors looking for USD returns. We note that the REIT is exempt from income tax and these tax benefits mean that investors get more distributable returns through dividends.
The IPO opened to the investing community on Monday October 31 2022 and investors have until November 18 2022 to subscribe for units. Retail investors can make use of C-Trade and ZSE Direct platforms to participate in the IPO before the REIT lists on the ZSE on November 23 2022.
Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.