South African real estate investors ask: howzit in CEE?

South African real estate investors ask: howzit in CEE?
Delta City Podgorica, now owned by South African REIT Hyprop Investments. / Photo by CC
By Nicholas Watson in Prague March 14, 2017

Central and Eastern Europe’s property markets have been at one time or another over the past 25 years a magnet for investors from North America, Western Europe, Russia and China. Now it seems to be the turn of the South Africans.

Although the trend of South African money flowing into CEE real estate, particularly Romania, began in 2008, over the last three years it has ramped up to the point where the volume of investment from South Africa is now on a par with that from North America and Asia.

According to the latest data from Colliers International, South Africa’s share of real estate investment going into six markets of CEE (the Visegrad Four of Czech Republic, Hungary, Poland, Slovakia plus Romania and Bulgaria) has grown from 2% in 2012, to 5% in 2015, soaring to 20% in 2016. “There are at least 10 South African listed REITs that are directly or indirectly active in Central and Eastern Europe now – it’s a bit like ‘me too’, in that if one does it, then others have to sit up and take notice because as listed companies they are essentially competing with each other,” says Mark Robinson, CEE research specialist at Colliers.

Alex Morar, CEO of New Europe Property Investments (NEPI), tells bne IntelliNews that NEPI was probably the first South African company to plant its flag in the region, initially focusing on Romania, where it is now the largest real estate investor in Romania by asset value. “Obviously, the success of the business triggered additional interest from our competitors, but there’s room for everybody even though the market has become much more competitive and you aren’t the only player anymore,” Morar says.

Cushman & Wakefield, another global private commercial real estate services company, notes that the rise in South African investment in CEE has been accompanied by a fall in that from North America. Its data shows that the volume of North American investment into CEE real estate fell by an estimated 50% over the past year or so, while Middle Eastern investment was up 30-40%, African (largely South African) investment was up 300% and Asia-Pacific investment was up 500%. To put the sums in context, North American investment over the past year into CEE was worth about €1.5bn, African money was about €2bn and Asia-Pacific about €2bn.

“South African money to CEE has gone from next to nothing, to the point where it is now competing on a similar footing with North America and Asia-Pacific,” says Jeff Alson, international partner CEE Capital Markets at Cushman & Wakefield, though he adds that it is a “lumpy market” that can be skewed by one or two big deals.

Those big deals included the March 2016 acquisition by South Africa’s Redefine Properties of a 75% stake in Poland's Echo Prime Properties’ 18-asset portfolio, a deal valued at €1.2bn. The deal, which will be financed via debt and equity at a proposed 60% gearing at the property level, is the largest ever real estate investment transaction in Poland. It is also the largest ever single transaction of income-generating real estate assets in CEE.

On safari

Among the South African investors, there are varying geographies and varying strategies. For example, the trend may have been begun in Romania, where NEPI’s original investors had ties to the country, but the epicentre of the investment now appears to have shifted to Poland – the largest property market in the region (excluding Russia) backed by a population of around 38m and GDP growth of about 3.5% a year – which took a 36% share of the investment transaction volume registered across the CEE region in 2016. According to Colliers’ “Market Insights 2016” report, released in February, South African investors dominated the Polish real estate market last year with €1.8bn invested, accounting for 40% of the overall investment volume.

Redefine Properties says the return of big dealmaking is “supercharging the Polish property market”, which is slowly inching towards the heady highs of 2007 as the regional capitals start to catch up with the Warsaw market.

“From a NEPI point of view, we had established a pretty dominant retail base in Romania, but seeking further growth for the company we had to look beyond that, so first we went to Slovakia and then to the Czech Republic, which is a more expensive market than Romania, but as the company has grown we can afford higher quality assets,” says Morar of NEPI, which in December said it has agreed to merge with Rockcastle Global Real Estate, another South-African fund with similar businesses operating in Poland.

The retail sector appears to be a particular focus for South African investors; retail has outperformed other asset classes in South Africa and this preference is reflected in their strategies in CEE. For example, Rockcastle acquired the Bonarka City Center shopping mall in the Polish regional city Krakow for a reported €361mn in August 2016. Rockcastle entered Poland about 18 months ago, and has since assembled a portfolio of four completed shopping centres in the country, with another two under construction. Elsewhere, the specialist shopping centre REIT Hyprop Investments in February 2016 co-invested in two Delta City shopping malls in Serbia and Montenegro, with that €202mn investment being the largest single asset deal in Southeast Europe in the last five years. Greenbay Properties acquired the Planet Tus Shopping Centre in Slovenia, while Accelerate Property Fund in 2016 sealed a ZAR2.3bn (€164mn) property deal that includes retail assets in Austria and Slovakia.

“[South African investors] are mostly interested in retail but not only. For them the attractiveness of Central Europe is quite simple: it is safe enough that it is comparable to Western Europe in terms of legal safety and stability, with much more attractive yields,” says Pawel Debowski, chairman of Denton’s European Real Estate Group.

As well as the idea of “keeping up with the Joneses” and the pull of the relatively strong economies of CEE and the associated strength of their property markets, South African investors are also being pushed further afield by problems at home.

South Africa suffers from structural inflation of 5-6%, which means that the economy is never really stable and people never fully trust the currency, leading to persistently high interest rates and thus high funding rates for South African REITs.

As Robinson of Colliers explains, the cost of debt in South Africa is in the 8-9% range, while the cost of equity is in the 13-14% range. Adding the cost of sovereign debt (8%) to a “market risk premium” for equities of, say, 5% gives a rate of around 13%. Blending the cost of debt and cost of equity together one arrives at an average “cost of capital” of 11-12% – though it varies for each company of course. By contrast, aggressive post-financial crisis quantitative easing schemes in the Eurozone have reduced the average debt cost to 3% and under, while average prime property yields have exceeded 6%.

“These South African investors have cut their teeth in a difficult business environment and are used to risk and assessing risk… They are therefore able to come to CEE and find similar sorts of yields, especially in Romania, Bulgaria and Serbia, and similar types of macro issues, yet lower funding rates, so the business case makes sense,” says Robinson of Colliers.

Another good year 

The question, of course, is how long this can continue. Jeff Alson of Cushman & Wakefield reckons there is more capital available to be raised by South African investors destined for the property markets of CEE. “From what we can ascertain it’s not going to suddenly change. I think there’s more to come and that money is looking at other locations in CEE,” says Alson.

This is backed by anecdotal evidence from players in the region. Miroslav Dubovsky, country managing partner for international law firm DLA Piper, tells bne IntelliNews that discussions with South African investment funds indicate that they remain very interested in the CEE region and will be continuing to invest here, including in the Balkan states. “When looking for opportunities to invest outside of South Africa, they identified CEE as a whole as an emerging region with huge potential, with low country and political risk, and with still good possibilities to invest in trophy assets,” says Dubovsky.

Robinson notes that the South African economy is largely driven by commodity prices, particularly gold, platinum, coal and steel, whose recent recovery notwithstanding are unlikely to see much higher, sustainable prices any time soon. “If we don’t see a big commodity price recovery in the near term, then I would surmise that the South African economy will continue to struggle along as it has done for the last few years. So if the push factor is to continue, the question is whether the pull factor continues. Does CEE stay attractive? Our view right now is that it is attractive due to the strong economies. Later on in 2017 it may become a little bit less attractive as funding yields slowly rise,” he says.

“Can the South African volumes be as large as they were in 2016? That might be a struggle, because that was a very big number. But while I don’t think it will be another €2.4bn, it won’t be significantly less if the push and pull factors stay in place,” he concludes.