Tim Gosling in Prague -
Investors were underwhelmed in late September when Polish real estate investor GTC announced a rights issue to fund an acquisitions drive across Central and Eastern Europe. But analysts also think that now is the time to strike on real estate in riskier markets in the region, although the strategy remains simplistic.
Saddled with a portfolio weighed down over the last five years or so by sluggish economic growth around the region, GTC has been struggling in recent years. The €70.1m loss it reported in the second quarter of the year was led by huge cuts in valuations, with assets in Croatia and Romania doing the most damage.
However, with US fund manager Lone Star in control since November, GTC is now hunting for more capital to finance acquisitions in the same region. The company announced on September 15 a plan to issue 140m shares, expanding outstanding stock by 43%. Shareholders will vote on the plan at a meeting on October 13.
GTC's share price, already having slumped on the poor recent results, instantly shed over 8% to a two-year low on the Warsaw Stock Exchange after the announcement. However, the shares recovered by the close on September 15 to reduce the loss to around 3%, with investors apparently split on whether the time is right to start buying CEE real estate again.
Recently appointed CEO Thomas Kurzmann tells bne that the company can't be left behind. "People are starting to move," he says, "and we must be involved in that." Many industry analysts agree, but opportunities remain highly speculative for the meantime.
The property market in CEE has been surprisingly quiet over the past six years, given that a furious boom met such a sudden and deep crisis in 2008. While a steep selloff might have been expected as investors struggled to reduce heavy debt on assets with rapidly dropping valuations, little actually happened.
That's because lenders had few options to enforce terms on that debt. On the one hand, they stood to make losses should they repossess and sell; on the other, with credit markets seized and a deep global crisis unfolding, there were few potential suitors. “Extend and pretend” was how one industry player termed it.
However, with banks again ready to lend, the markets are waking up, says Hadley Dean, managing partner for Eastern Europe at Colliers International. "We're likely to start seeing portfolio sales now," he suggests. "Low interest rates make property an attractive deal even with [real estate] yields pulling in, while the pricing in bonds and equities helps make the sector even more attractive."
In short, cheap money and the global hunt for yield are pushing investors into CEE. Lukasz Motyl, head of CEE Real Estate for UniCredit Group, adds that, "investors have now seen stable trends in the region for macro-economics and the real estate market for several quarters."
Following the macroeconomic recovery story, the more developed Central European markets such as Poland and the Czech Republic have already seen the arrival of money accelerating. Now, Hungary and Romania are rolling out the welcome mat.
Kurzmann pledges the geographic balance of GTC's portfolio will be maintained, with Poland accounting for the largest share, but the main focus of opportunity for many investors has clearly moved south. "The Polish market hit bottom some time ago," points out Dean, who says it makes sense that GTC is scouting in Budapest and Bucharest. Supply and demand in those two cities are balanced says Kurzmann, and leasing is now picking up.
That sets up a simple equation. "Russia and Turkey are out of the picture due to politics," Motyl says, "and Central European markets are already getting crowded." He adds that while clients are showing lots of interest in Hungary and Romania, their eyes are also being drawn farther afield to markets such as Serbia.
Bulgaria and Croatia, on the other hand, remain "very quiet," the banker adds. Oversupply in real estate and continued economic weakness means the banks are still not ready to lend to property investors in those markets, with the only activity centered on distressed assets.
That building interest is the driving force for the likes of GTC, which is looking to leverage its regional experience and greater appetite for risk to take advantage as arriving cash pushes prices higher. It's a simple plan that casts aside tricky issues such as fundamentals or asset management. "Developed markets are becoming very expensive now," argues Kurzmann. "We want to buy before investors arrive in CE and SEE. We can buy top assets for 8.5-9.0%, and with debt at 3.5-4.0%. Then you have the capital from institutions arriving to improve values."
As Motyl – clearly happy to see the US fund directing strategy at GTC – notes, Lone Star is opportunistic by nature. "Romania and Hungary have liquidity coming. I expect to see a lot flipping in the former especially." Kurzmann notes that if GTC sells newly acquired assets quickly, "it will be due to pressure from larger investors."
At the same time, as the caution of institutional investors illustrates it’s a strategy that carries risk. The economies in the region remain highly dependent on the Eurozone, which is seeing its recovery stall. The banks in Southeast Europe are still struggling under mountains of non-performing loans and government pressure, while the US Federal Reserve's winding down of quantitative easing threatens to raise the cost of capital and dampen the hunt for yield. To cap it all, the whole of CEE is on tenterhooks over the Ukraine crisis.
However, Kurzmann throws these concerns out one after the other. A weak Eurozone will mean continued low rates from the European Central Bank, more competition to lend by European banking groups, and attract investors hunting for faster economic growth compared with Western European markets, he claims.
The crisis in Ukraine offers similar opportunity, he suggests. "We're optimistic it will end soon," the CEO says. "Then we will see lots of money coming into the region."
Others without a shareholder meeting on the horizon are less bullish, even if they support the strategy. "These are very fragile markets," Dean admits, "and a global shock would see a retreat from Hungary and Romania. But the macro risk is priced into the yields already."
Yet that would hardly insure against another serious wave of crisis. In short, the dovish global environment has investors brushing aside the risk. "We can assume yield compression in these countries in the coming years purely powered by investor interest," sums up Motyl.
That sounds eerily reminiscent of the boom years before the crisis, albeit valuations are nowhere near the inflated state seen in 2006. However, the UniCredit analyst offers a note of caution. The banks, especially the German ones, are getting very keen, and are starting to underprice risk as they fight for business. "It's starting to remind me of 2007," Motyl worries.
Yet Kurzmann, who insists he has "no idea" why GTC stock dropped when the new strategy was announced, says he fully expects shareholders to vote in favour of the rights issue and acquisitions drive at the meeting later this month. The company has no choice but to buy and grow, he asserts. "We lost heavily on purchases made in 2006 and 2007," he sums up. "Now that the market is growing again, so must we. Otherwise we may as well give up on real estate and start in some other line of business."
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