Culled—-Proshare

August 19, 2016/CardinalStone Research

The Nigeria Sovereign Investment Authority (NSIA), managers of Nigeria’s Sovereign Wealth Fund recently signed a partnership agreement with South Africa’s Old Mutual Investment Group (OMIG) to establish a $700 million fund targeted at Agricultural and Real Estate investments in Nigeria. We examine the investment opportunities presented by this development in Nigeria’s real sector. Please see our thoughts below.

The recently announced partnership between the Nigeria Sovereign Investment Authority (NSIA) and Old Mutual Investment Group (OMIG) is geared towards the establishment of two investment vehicles – one focused on agriculture and the other on real estate in Nigeria. The overall objective is the investment of up to $500 million in commercial, retail and hospitality assets and up to $200 million in agriculture within the country.

Examining the opportunity – the agric component of the fund
The up to $200 million in agriculture will be made up of initial commitments of $25 million each from the NSIA and OMIG, and additional capital raised from third party funding. The agriculture investment will be managed in conjunction with OMIG’s subsidiary, the UFF African Agri Investment (UFF). The focus will be primarily production, processing and logistics with an aim to achieve food security, import substitution and job creation and in effect promote rural economic development.

Brief profile of the manager – UFF: The UFF African Agri Investment (UFF) is the exclusive partner of Old Mutual Group – a private sector investment manager, and specializes in advising on agriculture in Africa with a focus on production (farmland) and infrastructure. UFF’s investment strategy takes the form of direct purchases of farmlands and infrastructure, and then a lease to identified operators who will manage and develop the asset and run the entire agri-product value chain.

UFF’s investment process – a clue on the areas of focus and available opportunity

UFF investment process can be summarized with the flow chart diagram as follows:

The key areas of UFF’s investment process where there might opportunities for investors in the real sector to benefit from the agric fund include;

· Purchase of farm lands and infrastructure such as Silos, Cold Storage etc; beneficiaries will be large farm owners or businesses that supply farm equipment/assets.

· Appointment of Operators; beneficiaries will include established businesses/companies in agribusiness who can manage farm infrastructure end to end, seeking to expand without necessarily tying down capital to acquire farmlands and thus prefer a lease arrangement. Examples may include companies such as Okomu, Presco, Agri Palm Ltd – a wholly owned subsidiary of Flour Mills of Nigeria Plc, Olam Group and other mid-sized agriculture/agri-processing companies.

Whilst there might be modifications in the adoption of UFF’s investment process in Nigeria’s context, we expect that UFF will bring its expertise on board to manage the fund and to allow for efficiency, given its experience on the African continent. The investment process is thus a valuable hint at where the opportunities lie.

Examining the Real Estate Component
The up to $500 million real estate investment vehicle will be made up of equal commitments of $100 million each by the NSIA and OMIG, with the balance sought from third party investments. Deal origination and execution will also be undertaken jointly by the NSIA and OMIG. The NSIA’s investment will be made through its wholly owned subsidiary NSIA Property Investment Company Limited (NPIC) while OMIG’s investment will be made through its Old Mutual Property (OMP) subsidiary.

Brief profile of the managers
Old Mutual Property (OMP) – A leading developer of property spanning over four (4) decades, OMP investments are primarily in shopping centres, industrial parks and office assets. As at 2015, total AUM stood at approximately $1.5 billion with portfolio consisting of retail, industrial, office and mixed-use assets. According to OMP, property investments are influenced by the following factors:

― Sector diversification: a diversification across retail, office and industrial real estate with the hope to take advantage of changes in the property cycle.

― Node domination: preference for shopping centres that dominate their shopping surrounding specifically super-regional shopping centres i.e. malls of 50-100 thousand metre square or more.

― Appropriate tenant mix: a mix of national retail stores and lifestyle stores.

NSIA Property Investment Company (NSIC) – A special purpose vehicle through which strategic real estate investments are made by the Nigeria Sovereign Investment Authority.

Investment consideration and the available opportunity
With NSIA and OMP jointly managing the real estate component of the fund, we expect the two parties to align interests such that investments will be directed to areas of mutual interest. We do not have information on NSIA’s philosophy regarding its real estate investments.

However, in line with OMP’s investment ideology and the statements from NSIA on likely focus areas, we believe the fund will be deployed into the development of malls (commercial and retail real estate segments), hotels, office/industrial estates etc. Primary beneficiaries across Nigeria’s construction/real estate value chain will include:

· Cement, concrete and aggregate producers such as Dangote Cement, Lafarge WAPCO, CCNN and other small scale producers.

· Mid-sized construction companies largely dominant in commercial real estate and property development such as Persianas Group, UACN Property Development Company amongst others.

· Importers/suppliers of building materials and fittings such as iron rods, tiles etc. The benefit to this group is however limited to the extent of exchange rate volatility.

Outlook – All round positive for Nigeria’s economy
The partnership between the NSIA and OMIG is consistent with the goal of economic diversification and the need to encourage private sector involvement in critical sectors of the economy.

Agriculture is pivotal for development and diversification, as it contributes about 20.5% to overall gross domestic product (GDP) and is the largest employer of labour at 63.2% of total jobs created in the third quarter of 2015 (latest available data).

Access to credit has been a major constraint to growth in agriculture even as commercial banks shy away from lending to the sector primarily due to perceived high risks across activities within the agricultural value chain.

The proposed $200 million investment by the NSIA and OMIG will support existing funding initiatives by the Central Bank of Nigeria (CBN) such as NIRSAL – Nigeria Incentive-based Risk Sharing for Agricultural Lending and CACS – Commercial Agriculture Credit Scheme amongst others, and boost overall productivity.

The commercial and retail segments of Nigeria’s real estate sector (7% of GDP) has witnessed a lot of activity in the past few years with over 20 malls opened across major states in the country and about 10 registered as pipeline projects. Among other things, this investment is poised to boost job creation and productivity levels, and will be instrumental in improving overall socio-economic well-being.