It’s no secret that most South African companies’ forays into foreign territories have been less than successful. There is one notable exception: local real estate players’ push into Eastern Europe.
In fact, the expansion of JSE-listed property heavyweights into retail, office and logistics markets in the region has gone a long way to help prop up dwindling fortunes in local backyards.
That’s certainly the case for Growthpoint Properties and Redefine Properties, which both entered Central and Eastern Europe (CEE) in 2016.
The two real estate investment trusts (Reits) have become sizeable players in Eastern Europe via tie-ups with local players. Redefine’s interests in Poland, CEE’s largest economy, now amount to R34.7bn.
That represents almost 37% of total assets and follows last year’s take-over of EPP, in which it now owns a 95.5% stake. EPP is Poland’s largest retail-focused asset manager in terms of floor space.
It owns 29 retail centres and six office properties exceeding a million square metres. Redefine also has a 48.5% stake in European Logistics Investments, which has grown its portfolio of warehouse and distribution centres threefold since 2018, to 31 properties.
Redefine’s rapidly expanding footprint in Poland, where most operating metrics are now comfortably ahead of pre-pandemic levels, is paying off nicely for shareholders
Earlier this year it entered the underdeveloped self-storage market. Redefine’s rapidly expanding footprint in Poland, where most operating metrics are now comfortably ahead of pre-pandemic levels, is paying off for shareholders.
Distributable income for the six months to February grew by a respectable 7.2% to R1.6bn. EPP alone added R300m to the pot, the first time since 2020 that a dividend from EPP was paid out to shareholders.
The euro-based income streams that Growthpoint has earned from its Eastern Europe exposure has similarly boosted its earnings.
The company owns a R16.5bn (29.4%) stake in Globalworth Real Estate Investments (GWI), which is listed on London’s AIM and is one of the largest commercial landlords in Poland and Romania. Its R56bn portfolio consists of 71 office, mixed-use and logistics properties and is split roughly 50/50 between the two countries.
Unlike Redefine, whose offshore focus is solely on Poland, Growthpoint also has interests in Australia and the UK, with foreign interests making up 44% of its R174bn book value. Growthpoint’s hard currency dividend stream increased by a healthy 10.1% to R763m in the six months to December, of which GWI contributed R166.6m.
The question arises: is there still decent money to be made in Eastern Europe? Or has the region’s investment case dimmed as the Russia-Ukraine war continues?
Estienne de Klerk, Growthpoint’s South African CEO, says there’s no doubt that some investors, especially those from Western Europe, have become skittish and are steering clear of the region.
But lower economic growth prospects amid higher interest rates and inflation have squeezed real estate returns across the globe. “There are not necessarily better growth opportunities elsewhere,’’ he says.
Besides, De Klerk says, the exit of risk-averse investors has left the door open for South Africans hungry to diversify out of a local economy hamstrung by ongoing load-shedding, collapsing infrastructure and sky-high unemployment.
“When you’re trying to diversify out of South Africa’s difficult macro environment, the CEE’s risk-return prospects actually look pretty compelling,” he says. In fact, says De Klerk, Poland and Australia rank as the two best performing economies globally over the past 15 years.
When you’re trying to diversify out of South Africa’s difficult macro environment, the CEE’s risk-return prospects actually look pretty compelling
— Estienne de Klerk
“Poland has proven its resilience through down cycles, which is a key incentive when we look at which offshore countries to back,’’ he notes. “It also has a high skills level and an unemployment level below 6%. And its economy is nearly double the size of South Africa’s.’’
De Klerk refers to Poland’s attractive EU inflation-linked rental increases, saying landlords got rental increases of close to 9% this year. In contrast, South Africa is still seeing negative rental reversions on lease renewals.
Poland has also been an unintended beneficiary of the flow of wealthy and skilled Ukrainians out of that country. An estimated 3-million Ukrainians have crossed borders into Poland since the war broke out in February last year, of which about 1.5-million are expected to remain in the country longer-term.
De Klerk says many of these migrants are younger families, which will boost Poland’s ageing population and support the country’s economic recovery.
Economists expect Poland’s GDP growth to recover to 2.8% and 3.3% respectively in 2024 and 2025, up from -0.2% for this year. That’s ahead of 1% and 1.7% forecast for the EU as a whole for 2024/2025.
De Klerk concedes that it’s a tough time for offices globally but adds: “If you have scale and relevance you have a competitive advantage.’’
GWI’s overall office vacancy sits at just over 14%, slightly below Romania and Poland’s average 16%-17%. However, its flagship Romanian office buildings including Tower Centre International, Globalworth Tower and Globalworth Plaza in the capital, Bucharest, are virtually fully let.
The same goes for its West Gate office park in Poland’s Wroclaw, while vacancies in the high-rise Skylight & Lumen and Spektrum Tower, both in the CBD of Poland’s capital Warsaw, are below 10%.
The fortunes of Poland’s real estate market and economy are completely decoupled from what happens in South Africa, so it’s very important to have that diversification away from the headwinds we face back home
— Andrew Konig
Redefine CEO Andrew König, too, has no plans to exit Poland. “The fortunes of Poland’s real estate market and economy are completely decoupled from what happens in South Africa,’’ he says. “So it’s very important to have that diversification away from the headwinds we face back home.’’
König says Poland effectively offers the best of all worlds to property investors: “You’re earning a hard currency, euro-based income stream in a well-established market similar to any developed country. But you’re getting the level of growth typically seen only in emerging economies.’’
Redefine’s Polish portfolio seems well poised to cash in on the growth likely to come when the economy rebounds. Retail activity has already bounced back strongly after softer consumer spending, initially on the back of the pandemic and more recently due to higher energy costs and interest rates.
For instance, at EPP’s Galaxy shopping centre, which at 56,316m² is the largest mall in Szczecin, a popular student city in the northwest of Poland near Germany’s border, sales turnover and foot count are up 32.5% and 17% respectively in the 12 months to end-March.
Major US fast-food and restaurant brands Burger King and Popeyes recently took up space in Galaxy, pushing the mall’s occupancy to 100%. It now has a waiting list of international retailers — discount fashion giant Primark among them.
A few kilometres away from Galaxy, trade is equally brisk at EPP’s 28,000m² Outlet Park, a value offering in the densely populated outskirts of Szczecin. The centre has been extended three times since 2015 and also has zero vacancies. In the 12 months to March, turnover and foot count increased 22% and 11.5% respectively.
During a site visit to Outlet Park this month, a long line of shoppers were queuing at the tills of Nike, adidas, Puma and Tommy Hilfiger stores — despite it being midmorning on a Tuesday.
EPP’s flagship 80,765m² Galeria Młociny in Warsaw was completed in May 2019. It boasts the largest food, beverage and entertainment offering in Poland. Turnover and foot count are up 29.6% and 24% respectively in the 12 months to end-March.
König says the positive retail metrics at EPP’s malls speak to the resilience of the Polish economy. It also helps that Redefine’s entry into Poland in 2016 was followed by a three-year investment drive, which saw a number of malls undergo refurbishments, extensions and upgrades pre-Covid.
The upshot is that all EPP’s core retail assets are in “pristine condition”, says König. “Because we got in early we don’t need to spend any money on our assets. That’s a big plus given how expensive capital has become.’’
Poland’s logistics sector also remains buoyant and has been a major beneficiary of EU infrastructure funding.
“Poland’s improved road infrastructure has created easy access for German companies who want to establish manufacturing and distribution operations cross-border — at much lower rentals than what they have to pay in Berlin or Frankfurt,’’ says König.
Analysts agree that the investment case for Eastern Europe remains intact. Stefan Swanepoel, equities analyst at M&G Investments, says while the region’s macroeconomic factors are under pressure, it’s largely cyclical. “Even after accounting for the slowdown, the region’s growth prospects are still better than those in South Africa.’’
There are risks, though. Swanepoel notes that while it is very much “business as usual” in Ukraine’s border economies, Russian behaviour is unpredictable. “But we think spill-over effects are unlikely.’’
High inflation, higher interest rates and local currency weakness can also have an impact on growth, Swanepoel warns. Still, he believes both Redefine and Growthpoint offer an easy and attractive route to Eastern Europe.
Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, agrees. “Local Reits are generally trading at larger discounts to NAV than their offshore counterparts so they offer a cheaper entry point to the region,” he says.
“The significant depreciation of the rand against the euro in the past 12 months means it’s also not the best time to go 100% offshore.”
Muller was a guest of Redefine and Growthpoint in Poland
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