ALMOST a year after Tigere made history by being the first Real Estate Investment Trust (REIT) to be listed on the Zimbabwe Stock Exchange (ZSE), the second REIT has started its roadshows and plans to list on December 15.
Any avid follower of our local capital markets can almost be certain that more are to follow. I think just like what happened with Exchange Traded Funds (ETFs) not so long ago, the excitement with REITs is very clear in the market.
In its most basic form, a REIT is a property-owning vehicle that allows its investors to have a financial claim on the rental income generated from the properties that the vehicle owns.
Similar to owning shares in a Real Estate Operating Company except for the fact that the REIT has a mandate to distribute a minimum of 80% of its distributable income as dividends and is not subject to corporate tax before distributing dividends.
The distribution of dividends, although attractive to certain types of investors, limits the REIT’s growth capacity.
One of the oldest and biggest pension funds in the country, National Railways of Zimbabwe (NRZ Pension Fund) has noticed an opportunity in the market and it wants to give the Central Business District (CBD) a new look through renovating and reorienting some of the dilapidated buildings.
According to their strategy, as articulated in the prospectus, they are convinced that these buildings can be bought for a song, and given a new life by investing a few dollars.
With this in mind, the pension fund has seeded five properties namely Chester House, Electra House, Pioneer House, Africa House and Atlas House.
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This has been made possible because pension funds do not have to comply with the greenfield rule that properties that are transferred to a REIT should have been constructed after February 2020.
In addition to these five seeded properties, the REIT also has a pipeline of other prospective buildings that they might need to renovate or repurpose in the future.
Essentially, these five properties form the initial of Revitus Income REIT.
According to the prospectus, four of the five properties have a combined market value of US$8,76 million and the gross replacement value for the entire portfolio is just under US$50 million.
However, balance sheet assets are reflecting a US$18 416 312 value and since the REIT has no liabilities at initiation, this becomes the net asset value.
These net assets are against 368 326 244 REIT units with an initial price of ZW$400 per unit.
The placements leading to the initial public offering seek to dispose off a third of the unit and raise circa US$7 (sensitive to the exchange rate one used).
The plan goes like this, upon a successful Initial Public Offering (IPO), the proceeds will be used to renovate and repurpose Chester House building in Harare CBD from office space use to residential.
The re-oriented building will have apartments, shops and restaurants amongst others and is expected to take place during the course of 2024.
The prospectus went on to disclose that town planning approvals for change of use are already in place for Chester House, making it fall under Phase 1, with the remaining seeded properties falling under Phase 2.
This is a key differentiating factor between Tigere and Revitus. The former, because it is not a pension fund brought in new properties and already hit the ground running, such that within a few months of trading it paid its maiden dividend.
However, although the latter can pay dividends soon enough, it has a clear commitment to renovating these properties to the levels that allow them the squeeze maximum return.
Although technically, Revitus is not a developmental REIT because another phase 2 properties will be collecting rental during the refurbishment period of phase 1, in my opinion, it exhibits some characteristics of a developmental REIT.
However, it has been written in black and white that the REIT will not invest in properties that do not have title or hold land for speculative reasons.
This does not by any means suggest that one is better than the other but just explains to potential investors the difference between the two.
The long-term plan of this REIT is to have a presence in most of the major cities in the country, by rejuvenating dilapidated buildings and giving them a new appeal that allows to increase the asset turnover.
The REIT will leverage its relations with the National Railways of Zimbabwe, the promoter of achieving this dream.
I think the REIT is taking a bullish stance on the revitalisation of the CBD despite current evidence pointing out that properties in that area are under pressure due to the state of the CBD.
The orientation part brings some excitement, and it is a trend that we are witnessing whereby buildings in town are reconfigured to match the demands of the day.
However, it might be a bit of time before the CBD gets back to its glory days, such that things like parking, congestion and vendors might temporarily restrict CBD properties from earning their fair rentals despite the renovations.
I am impressed by the diversification of the properties out of Harare and the plan to have a property across the cities.
However, I am worried that the promoter NRZ might see Revitus as a dumping site for its old, dilapidated and past-prime buildings and unless this concern is clearly addressed, it might impede the success of the Investment Trust. The fact that the prospectus did not disclose the market value of Pioneer House is a red flag to potential investors, especially considering that it has the highest Gross Replacement Value.
Perhaps a justification of the US$18 million assets might go a long way in winning investor confidence.
I think the future of capital markets in Zimbabwe is exciting and these are some of the bits and pieces.
- Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.