Preconnected property transactions are situations, where a real estate fund does not acquire land or properties from the open market, but from a company or person who is associated with the management company, in particular another group company, a shareholder or manager or a close relative. Preconnected property transactions involve a very high risk of conflict of interest that can lead to a situation, where the fund does not acquire the land or property for a fair market value.
In our view, preconnected property transactions are hardly or not compatible with the principles of a fair fund management due to conflicts of interests connected therewith. For this reason, for ›MLC Properties East Africa‹, we have ensured that no such transactions take place. The management acquires rights in land only from independent sellers and is endeavoured to achieve best possible results.
Yes, we implement a sustainability concept for our investments. This is because we want to create added value for investors and the people of Africa through our actions and make a contribution to ensuring that the positive development of the African growth market is ecologically and socially sustainable. Our sustainability criteria cover economically, ecologically and socially sustainable investments. Impact Investing is an important concern for us.
African states are often associated with corruption in a blanket manner. We assess the risk of corruption as non-existent.
Corruption typically occurs in the area of public (construction) contracts. This is a commonplace and also applies in Germany. Here there are a variety of situations in which official decision-makers are granted financial advantages (so-called kick-backs) in return for the award of contracts. We are not affected by this form of corruption because we do not apply for the award of public contracts.
Transparency International regularly evaluates the corruption perceived in politics and administration and summarises the results annually in the Corruption Perception Index. Among 180 assessed states, Rwanda ranks 51st and Tanzania 96th. These are basically good values – top values for Africa. Rwanda is rated as good as Italy and better than Greece, Turkey and China. Tanzania has made great progress in recent years thanks to an aggressive fight against corruption.
The Issuer, MLC Properties East Africa GmbH & Co. KG, and the property companies, MLC Properties Rwanda SPV GmbH & Co. KG and MLC Properties Tanzania SPV GmbH & Co. KG, only use equity capital. There are no debt capital risks.
The International Monetary Fund (IMF) expects growth rates of only +3.5 % for Rwanda and +2.0 % for Tanzania for the year 2020 (as of August 2020). In contrast, global growth will fall by -3.0 % and German growth by -7.0 %. This illustrates the high economic stability of Rwanda & Tanzania. With an investment in ‘MLC Properties East Africa’, portfolio risks can thus be effectively limited.
Heavy rainfall at the end of 2019 led to good breeding conditions for the desert locust (schistocerca gregaria). Since the beginning of 2020, flocks of this locust species have been migrating over the northern part of East Africa, among other places, and have posed major challenges for local food production. In Africa, according to FAO, the countries Ethiopia, Djibouti, Eritrea, Kenya and Somalia are severely affected. Less affected are the countries Sudan, South Sudan and Uganda.
Due to different climatic and soil conditions, Rwanda has not been affected by locust swarms at all and Tanzania has been minimally affected. For this reason we assume that the current locust infestation in the northern part of East Africa will not have a negative impact on agricultural production in Rwanda & Tanzania. Accordingly, we do not anticipate economic burden on these economies.
Further information can be found on the website of the Food and Agriculture Organization of the United Nations (FAO): http://www.fao.org/ag/locusts/en/info/info/index.html
The German property companies, in which the Issuer holds a 100% share of capital and voting rights, are subject to local corporate income tax in Rwanda or Tanzania of generally 30% of the operating income, in Tanzania additionally a 10% tax on profits repatriated to Germany. The income taxes are declared and paid by the property companies to the tax authorities (Rwanda Revenue Authority and Tanzania Revenue Authority).
As the Issuer and the property partnerships are limited partnerships, the partnerships and non-German Investors are not taxed under German law.
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A foreign exchange risk occurs, as far as the exchange rate of a foreign currency affects the value of an asset. The foreign exchange risk realises, if the price of a foreign currency develops negatively in relation to the own local currency. In particular, the risk comes into effect, if money or receivables denominate in a foreign currency.
In Rwanda & Tanzania, real estate transactions are predominantly made and construction works and commercial rents are predominantly paid in US dollar (USD). Furthermore, payments are made in Rwanda franc (RWF) and Tanzania shilling (TZS). For the purpose of minimising risks, the issuer and the property companies keep their foreign currency holdings as low as possible. As far as payments are received in a foreign currency, the money exchanged in euros timely.
Insofar as the issuer holds liquid funds as liquidity reserve, this is made in the the form of euro bank deposits. For the purpose of the avoidance or reduction of negative interests, the issuer is also entitled to hold short-term public bonds that are denominated in euro.
However, the major part of the assets is held by the object companies in the form of real estate. In general, the value of real estate is determined by the prospected income thereof for a certain period. If the income of a property is earned in, e.g., Rwanda franc (RWF), the exchange rate for EUR/RWF is relevant. A deterioation of the exchange rate, however, does not automatically lead to a loss of the property’s value. In general, exchange rate effects are counterbalanced by inflation effects, as it is shown for Rwanda & Tanzania in the following charts. Typically, inflation leads to a corresponding nominal appreciation of real assets and corresponding higher rental income.
|Average change of exchange rates against the euro (2010-2019)|
|Average inflation (2010-2019)|
The issuer will make semi-anual distributions after closure of the subscription phase (until December 2021 the longest). Distributions will be made on each 15th of June and December. The issuer makes its distributions from its cashflow it receives from its business, i.e. from rental income out of Rwanda & Tanzania.
It is intended to sell properties step by step from 2026 onwards. The realised capital will be paid back to the investors, unless the investors decide in a shareholders’ resolution that these funds shall be reinvested fully or in part.
A full winding up of the investment and a corresponding payout of the capital to the investors shall take place until the end of 2030.
The Issuer is a German limited partnership. Investors do not participate in the Issuer directly as limited partners, but indirectly as trustor via MLC Properties Treuhand GmbH, business adress: Gartenstr. 27, 61352 Bad Homburg v. d. Höhe, Germany. Due to the fiduciary agreement between the investor and the fiduciary company, the latter hold the the investor’s limited partnership interest in its own name and is registered as limited partner in the commercial register. However, the fiduciary company holds the limited partnership interest for the account and on behalf of the investor. Thereby, the investor becomes economically and also for tax reasons the beneficial owner of the limited partnership interest.
The interposition of the fiduciary company is customary for German closed-end funds. Reasons therefore are the reduction of administration costs due to fewer notifications to the commercial register and the protection of the investors’ personal data. Limited partners are to be registered in the publicly available commercial register.
The legal position of an indirectly participating investor is nearly identical to that of a direct limited partner. There are, in particular, corresponding rights against the Issuer to payout profits and co-determination rights via participating in partners’ meetings.
For German providers of capital investments, crowdfunding (also: swarm fund, crowd investing) is a possibility to offer the investment without the sales prospectus which is generally required by law. The investment’s accounts are also not to be audited by an auditor. The legal basis is §§ 2a to 2c of the German Investment Act (VermAnlG).
The preparation of a sales prospectus is associated with very high costs due to the approval process at BaFin. Additional costs arise from the annual audit of the investment by an auditor. The purpose of the exemptions for crowdfunding is to make the offering of smaller issues more attractive by reducing costs.
We at MLC Properties do not offer our Africa investment as crowd funding. The sales prospectus fulfils an important function. It must contain various details including costs, the investment strategy, possible conflicts of interest and the initiators. This makes the public offering as transparent as possible. In addition, the sales prospectus creates a basis of liability for investors in the event that false or unrealistic information is provided. We also consider the audit of the accounts by an independent auditor to be positive. It is our aim to offer our investors maximum security and transparency.
The issuer and the public offer to acquire an investment are regulated by the VermAnlG.
We have refrained from issuing an AIF because a large part (70%) of the real estate assets would then have had to be hedged against currency fluctuations. This would not only have caused very high costs because the RWF and the TZS are comparatively illiquid currencies. With an average currency fluctuation of around 3% p.a. between 2010 and 2019, the currency risk is not only manageable. Currency fluctuations are offset by the annual increase in income from the properties due to inflation. In our opinion, any remaining currency risk is more than compensated for by the high project returns.
Rödl AIF Verwahrstelle GmbH is responsible for ongoing monitoring of the use of funds. On the basis of the contract on the control of the use of funds, we are voluntarily subject to a control which is legally binding for AIF. The agreement runs for the entire term of the investment.