Page 14 - Buy Russia - bne IntelliNews monthly magazine April 2017

14 I Companies & Markets bne April 2017
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 capi- tals start to catch up with the Warsaw market.
“From a NEPI point of view, we had established a pretty domi- nant retail base in Romania, but seeking further growth for the company we had to look beyond that, so first we went to Slova- kia 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 busi- nesses 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 strate- gies 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 coun-
try, 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 Prop-
erty 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 associat- ed 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 nev- er 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
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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 dif- ficult 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 inter- national law firm DLA Piper, tells bne IntelliNews that discus- sions with South African investment funds indicate that they remain very interested in the CEE region and will be continuing
“The return of big dealmaking is supercharging the Polish property market”
to invest there, including in the Balkan states. “When looking for opportunities to invest outside of South Africa, they identi- fied CEE as a whole as an emerging region with huge potential, with low country and political risk, and with still good possibili- ties 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 attrac- tive 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.