A yield of 8.5 per cent is generally associated with a high risk of default, particularly in the current low interest rate environment. And, when an investment trust is receiving this sum for an asset based in the African country of Mozambique, many investors will decide the high yield does not outweigh the potential risks.
However, it is this aversion to anything associated with Africa that has allowed the Grit Real Income Group to obtain a yield of up to 8.5 per cent from leasing an asset to the US, the country with the highest credit rating on the planet.
The trust, which operates in a similar way to a REIT (real estate investment trust), aims to deliver an 8.5 per cent yield and 12 per cent total return each year (in US dollars) by becoming the preferred landlord for global corporates operating in Africa.
Chief financial officer Leon van de Moortele said the way to think about Grit is that it is a portfolio of European or US assets that just happen to be located in Africa.
“The ability for you to get much higher yields out of these properties is there because of the perceived African risk,” he explained.
“But ultimately the money that is paying for them is the same money that is paying for a building here in London or a building in New York and I think that’s really what we are striving for: to have a first-world portfolio sitting in a third-world country that benefits from third-world rates.”
Source: Grit Real Income Group
Van de Moortele said the American embassy housing compound that Grit bought in Mozambique is the perfect example.
“We effectively have US paper for 8.25, 8.5 per cent, that seems almost unheard of. But because it sits in Mozambique, that is what is driving the return,” he explained.
“There we have four of their apartments that have a 7 per cent escalation in dollars. So it is good revenue growth, and ultimately that yield is being paid out of the US. We actually signed the lease with the US government, which is fairly odd.
“But it is the same funding you are going to get for any embassy building around the world and the fact it is in Mozambique gives us the opportunity to ratchet up the return.”
Of course, just because Grit rents predominantly to European and US corporates, this doesn’t negate many of the other risks associated with operating in Africa.
Before moving into any country, the managers of the trust look at a number of factors they call “the margin of safety”. This includes the ability to trade in hard currency – countries such as South Africa won’t allow you to operate in US dollars – and the ease with which funds are allowed to flow in and out of the country, based on tax rules and central bank regulations, for example.
Van de Moortele said security of land is another important consideration.
“Knowing that when you buy land it is properly registered in your name, no one can come and lay claim to it, is important,” he continued.
“In an environment like the Democratic Republic of Congo, if you put out a ‘to let’ board or you start developing something, suddenly 50 people come with the title deed and you don’t know which is real and which one is fake because there is no registration process. So countries like that are all blacklisted for us.”
Aside from the higher yields there are other reasons why the perception of risk associated with Africa works in the trust’s favour. Corporate governance is a major issue for western firms and Van de Moortele said going through Grit means they can be sure they won’t be involved in a money laundering scandal.
“And what you find is you don’t want a local operator to own their corporate head office in Ghana because of the risk that he may default with the bank, it actually puts their whole operation at risk.
“That’s why they don’t like doing it whatsoever. Especially in the industrial space, so nothing can upset the operations. If the bank that financed them comes and locks the doors, that’s their entire operation and they cannot afford that whatsoever.”
Van de Moortele said Grit’s strong performance during the years when Mozambique – where the bulk of its portfolio is based – has seen major issues is testament to the strength of its process.
He added the country "has gone through absolute macroeconomic hell", with the exchange rate on the local currency going from 27 meticals to a dollar to 80 meticals.
“There were dollar liquidity issues, there were fraud allegations against some very senior members of parliament, but through that entire process our portfolio performed as expected,” the chief financial officer continued.
"We didn’t see any pressure in terms of lease renewals or increased debtors. We didn’t see any issues apart from a frustratingly long admin process for moving cash out of the country.
“So it is nice to see the investment platform we put in on day one has really paid fruits and has shown its resilience.”
Grit is up 1.13 per cent since listing in the UK in July last year, although this period is too short to draw any conclusions about performance.
Performance of trust since launch
Source: FE Analytics
It is currently yielding 7.5 per cent.