Bucharest may be only 300km away from Ukraine’s border, but there is no sign in the bustling East European capital that Russia’s war has dampened spirits. Romanians’ newfound penchant for la dolce vita is visibly intact.
The high-end eateries, bars and shops that have mushroomed in leafy neighbourhoods across the former communist country’s capital city in recent years are doing a roaring trade.
Luxury German and French car brands jostle for position along Bucharest’s congested roads. And dozens of construction cranes dot the skyline, replacing the drab high-rise flats built before the fall of communism in 1989 to make way for modern, Western-style apartments.
By all accounts, Romania appears to have shrugged off Russia’s war in Ukraine as swiftly as it has Covid, with not a mask in sight.
Ex-South African Martin Slabbert, who has lived in Romania for the past 15 years, says that when Russia invaded Ukraine in late February, everyone had a few restless nights. But as soon as people realised the conflict would be contained to Ukraine, with zero risk of its NATO neighbours being invaded, it was “business as usual’’, he says.
Slabbert moved to Romania in 2007 when he co-founded Nepi Rockcastle along with SA’s Resilient Group, turning it into the largest mall owner in Central & Eastern Europe (CEE).
In 2015, Slabbert and a number of Nepi Rockcastle executives left the company to start unlisted developer Prime Kapital, which is now the Romania-based partner of the JSE-listed property firm MAS Real Estate.
Slabbert had been the CEO of MAS for 2½ years, overseeing its transition from a West European-focused property firm to one specialising in the CEE region. Last month he stepped down to return to Prime Kapital full time, though he remains on MAS’s board.
Romanian Irina Grigore, MAS’s deputy CEO, took over the top job.
Last week, she announced a major acquisition to bulk up the company’s retail portfolio: a €319.7m purchase of six shopping centres from the joint venture with Prime Kapital.
If approved by shareholders, the deal will expedite the ambitious plan to grow assets by 50% over the next four years — from €1.3bn to about €1.9bn by June 2026. This is MAS’s first acquisition since 2018, when it bought the 27,400m2 Atrium Mall, the largest shopping centre in Arad, in western Romania.
Grigore believes the timing makes sense, as it will allow MAS to cash in on Romanians’ growing propensity for retail therapy, as the economy resumes its pre-pandemic growth.
Romania started off a low base in 1989, only after the fall of communism, so the country still has plenty of catching up to do with its European capitalist counterparts
— Irina Grigore
That’s evident from sales turnover and foot count in most of MAS and Prime Kapital’s 20-odd retail centres which, in some cases, are even exceeding pre-Covid levels.
Scope for growth
Grigore cites World Bank projections that Romania will again top Europe’s consumer spending charts over the next few years. In the 20 years to end-2019, Romania achieved the highest retail consumption growth among Europe’s 31 countries: 9.9% compound annual growth rate per person.
Fellow CEE countries Bulgaria and Lithuania came in at second and third spot at 8.4% and 8.2% respectively. By comparison, the UK, Italy and Germany averaged between 1.4% and 1.5% growth over that period.
Yet Romania is still underdeveloped in terms of shopping centre supply. For instance Poland, another CEE destination which has attracted huge money from property investors, has more than 1,000m2 of retail space per 1,000 people. Romania has about 500m2 per 1,000 people.
Grigore says Romania’s household consumption growth will be supported by a large pool of aspirational consumers keen to enjoy their newfound wealth.
“Romania started off a low base in 1989, only after the fall of communism, so the country still has plenty of catching up to do with its European capitalist counterparts where significant wealth has been assembled over centuries,” she says.
Though there is concern about rising food, fuel and energy costs due to sanctions against Russia, Grigore says the long-term fundamentals for the CEE region haven’t changed. Inflation in Romania sits at just more than 4%, which analysts believe should stabilise at about 2% a year over the medium term.
“Besides, MAS will benefit from higher inflation as it will capture a significant portion of increased spending through turnover rentals built into retail leases,” she says.
In this new deal, all six centres are newly developed and only opened between November 2019 and December 2021 — just before or during Covid. So there is little, if any, capital expenditure needed, but strong potential for rental and foot count growth.
Most of the centres could also be extended. Grigore says there will be a particular focus on expanding dining, leisure and entertainment components. The deal is also fairly low risk, given that MAS already manages all six properties. “So we know exactly what we are buying,” says Grigore.
These are mostly value centres sized between 16,400m2 and 21,700m2, typically anchored by grocery chains such as Carrefour and Lidl and complemented by convenience and fashion retailers.
Two of the properties, Barlad Value Centre near the border of the Republic of Moldova, as well as Zalau Value Centre in the western region of Transylvania, are the only shopping centres within a 100km radius.
An end to drab communist-era homes
While this will provide a shot in the arm for MAS’s exposure to Romania’s burgeoning retail sector, its residential development plans are particularly intriguing. MAS entered Romania’s housing market in 2018, which it expects to be a major driver of profit growth over the next few years.
By June 2026, Grigore hopes to generate €200m a year in residential sales, with a 20% net after-tax margin. That is based on the secured pipeline of €932.4m, which consists of eight developments totalling 11,000 individual residential units in key cities such as Bucharest, Iasi and Ploiesti.
Development profits from residential operations will be included in MAS’s earnings for the first time this year, as two of the eight projects, both in the upmarket northern parts of Bucharest, near completion.
We’re the only developer that’s integrating mixed-use facilities in our projects and adding attractive landscaped areas and communal public spaces
— Maggie Kitshoff
That includes Romania’s first high-rise gated community, Avalon Estate, and Marmura Residence, a mixed-use concept incorporating convenience retail and offices, as well as 459 studio, one-, two- and three-bedroom units priced between €80,000 and €260,000.
Avalon is set on a large 8ha plot and offers a mix of 746 dwellings and unheard of “luxuries” such as private gardens and communal facilities, including a pool and clubhouse. Prices of apartments vary from €100,000-€365,000 while stand-alone villas, with lake views, fetch between €700,000 and €1m.
Maggie Kitshoff, who leads the residential division of MAS and Prime Kapital’s development joint venture, says Marmura is 82% sold out, while the first phase of Avalon is 70% sold out. At Marmura selling prices have already increased by about 40% since the project was launched in 2018.
While home ownership is strongly embedded in Romanian culture, buyers have until recently had little choice, as most of the country’s existing residential stock dates from pre-1989.
“These are typically ugly blocks of flats with poky units that are badly built and poorly insulated against Romania’s super-cold winters and very hot summers,’’ says Kitshoff.
Though other residential developers have also entered the market at the same price point in recent years, she believes MAS offers a superior product in terms of design and quality of finishes.
“We’re also the only developer that’s integrating mixed-use facilities in our projects and adding attractive landscaped areas and communal public spaces,’’ she says. “We’re essentially building new neighbourhoods.’’
It’s also not easy to get residential developments off the ground. It can take several years for developers to comply with Romania’s strict zoning and building approval regulations.
Dividends could double
Analysts have placed a strong buy recommendation on MAS.
Brendon Hubbard, portfolio manager of boutique asset manager ClucasGray, says MAS is its preferred route to CEE real estate markets, thanks to its earnings potential from the residential developments and strong management.
“Under Slabbert and his fellow ex-Nepi Rockcastle directors, you have a proven track record of creating huge value for shareholders.”
Given MAS’s policy of a 100% dividend payout ratio, Hubbard says investors can expect dividends to effectively double over the next four years, which should also support further share price growth.
Though the MAS share price has already doubled from its late 2020 lows, it still trades at a 10% discount to its net asset value (NAV), and boasts a euro-based dividend yield of about 7%. Hubbard believes the stock is undervalued and should actually be trading at a premium to NAV.
“You have a mini-Balwin in MAS, but the huge value unlock that will come from the rollout of its residential pipeline isn’t yet reflected in the share price,” he says.
Imdaad Nana, analyst and portfolio manager at Catalyst Fund Managers, agrees that the investment case for the CEE region in general, and for MAS in particular, remains intact.
Nana says there’s still opportunity for SA real estate investors to make money in the region.
“MAS is taking advantage of Romania’s continued growth potential through its retail and residential development pipeline. The portfolio mostly comprises newly built assets that will mature over time, so investors aren’t just buying an existing portfolio of tired assets with limited future upside.’’
But an investment in MAS is not risk-free. Nana says the region does pose economic risk, especially given the Ukraine-Russia conflict, which has raised stagflation fears and could delay the rollout of MAS’s residential pipeline.
“The reality is that while the war is likely to be contained in Ukraine, no-one really knows how the conflict will eventually play out,” he says.
* Muller visited Romania with MAS Real Estate
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