Gaia Fund Managers announces the launch of South Africa’s first specialist real estate investment trust (REIT) investing in on-site private electricity generation for commercial and industrial clients.
In a first round of fundraising, Gaia Renewables REIT – as the fund is called – aims to attract R500 million from institutional investors, high-net-worth individuals, and family offices. The fund will allow investors to benefit directly from solving South Africa’s 10,000 MW electricity deficit.
Setting up Gaia Renewables REIT follows the liberalisation of South Africa’s electricity generation sector; the government has removed the historical 1 MW cap on power generation by private companies and individuals. The government’s response came amid rolling power blackouts, which have plunged households and businesses into darkness for up to 10 hours a day.
“Factories, mines and other businesses need electricity to operate,” says Renier de Wit, managing director of Gaia Fund Managers. “Currently, electricity supply is unreliable, and it does not look like it will improve; it is only going to get worse. We have seen the impact of rolling blackouts on South Africa’s GDP in the fourth quarter of 2022: it shrank by 1.3%.”
Ever since the government lifted the cap on private power generation, businesses and households have scrambled to install solar power at their premises in a bid to cushion the blow from Eskom’s failure to supply enough reliable electricity.
However, the cost of installing solar power and energy storage solutions can be prohibitive to many businesses. A brand-new system demands a hefty capital outlay and when megawatt systems enter the fray, it strains cash flows by tens of millions of rands. In addition, power generation is not part of the core operations of most businesses. They would rather invest in income-producing assets and have a recurring operating expense for their electricity bill.
This conundrum presents a unique opportunity to provide businesses with a renewable energy power solution owned by a third party, with predictable cash outflows over the medium term. “They will have certainty of supply and maintenance of the solar system while assured they can, well ahead of time, budget their electricity expenses,” explains De Wit. “In other words, it creates a predictable cash flow outcome for businesses; even more predictable than Eskom’s double-digit tariff increases that will come into effect this year and next. Also, it is a cheaper alternative to dirty gas-guzzling power generators, which can cost four times more than grid power and are susceptible to high oil prices.”
Hence, Gaia Renewables REIT is partnering with Blue Energy Africa, an on-site developer of bespoke, integrated clean energy solutions for commercial and industrial clients. Blue Energy has a well-developed pipeline of projects that aims to take a selective portion of the total market for commercial and industrial renewable energy, which is estimated to be worth over R200 billion.
Says De Wit: “Blue Energy was founded and is led by a combination of seasoned engineers, entrepreneurs and energy experts with experience in marketing to and managing large corporates’ off-balance sheet equipment needs.”
In terms of the structure, Gaia Renewables REIT will issue batches of preference shares, aimed to be listed on the Cape Town Stock Exchange, and open to qualified investors to trade it freely. The REIT will fund the on-site solar power projects. The first batch of preference shares – which will be listed after the current fundraising round – targets a listing in June 2023.
Gaia has raised and deployed more than R3.5 billion over 12 renewable energy transactions since 2012, showcasing its ability and track record of swiftly deploying investors’ capital to earn good, consistent and inflation-beating returns. Gaia Renewables REIT will be no exception and the speedy deployment of capital will be aided by the nature of the underlying projects.
Whereas large utility-scale renewable energy projects can take up to two years to construct and, thereafter, only offer a return to investors, on-site solar power solutions are built within a few months, with investors likely to receive their first distributions within 12 months. “This is an attractive proposition to investors as the lead time to receive inflation-beating returns is far shorter than with large utility-scale power projects,” adds De Wit.
The on-site solar power projects give investors a predictable period of cash flows as electricity off-takers (commercial and industrial clients) sign multiyear power purchase agreements with the developer. In terms of these 10- to 20-year agreements, the off-take price of electricity typically increases by a fraction of the inflation rate.
In addition, the renewable energy solutions to businesses dovetail with the UN’s Sustainable Development Goals and, therefore, fit in with investors’ ESG mandate. Solar energy, for example, aligns with the UN’s SDGs for affordable and clean energy, as well as climate action.
Finally, with underlying infrastructure assets (physical solar power-generation units), South African retirement funds can utilise the Gaia Renewables REIT when considering bulking their allocations to infrastructure. The REIT fits the description of infrastructure assets according to changes to Regulation 28 of the Pension Funds Act, which came into effect in January this year. According to these changes, retirement funds are allowed to invest up to 45% in infrastructure assets. Infrastructure investments have historically shown less correlation to the listed market – both debt and equity – and lower volatility in returns.
According to De Wit: “It’s a defensive asset with a stable and predictable cash flow profile. It is an attractive proposition for those investors with a long-term investment horizon who seek capital preservation.”
Interested investors can contact johannes@valeocapital.co.za.
