South African real estate investors are coining it in Central and Eastern Europe (CEE), as consumers in most of Ukraine’s neighbouring countries continue to shop up a storm.
The region remains the South African listed property sector’s largest offshore investment jurisdiction by far.
CEE accounts for 31% of the 20-odd constituents of the JSE’s all property index’s geographic exposure, the bulk of which is skewed towards shopping centres and logistics (modern warehouses and distribution centres).
The remainder of the index’s assets is spread between South Africa (46%), Western Europe (12%), the UK (6%), Australia (4%) and the rest of Africa (1%), research by Metope Investment Managers shows.
It’s not difficult to understand why CEE remains a preferred rand hedge destination for South African investors.
The region has outperformed Western Europe in terms of economic and consumption growth for several years and is expected to continue to do so for at least the next two years.
Latest European Commission forecasts have GDP growth for the region at 2.9% in 2025 and 3% in 2026, while only 1.1% and 1.4% is expected for the euro area over the same period.
Nepi Rockcastle and MAS Plc offer JSE investors a direct entry to CEE as both generate 100% of their earnings in the region.
Nepi Rockcastle is the JSE’s biggest real estate investment trust, with a market cap of nearly R95bn, more than double the R44bn of South Africa-based heavyweight Growthpoint Properties.
However, Growthpoint, along with other domestic counters such as Fortress Real Estate Investments, Redefine Properties, Hyprop Investments, Emira Property Fund and Burstone Group, also offers partial exposure to CEE.
Last week, Nepi Rockcastle reported a second consecutive year of double-digit earnings growth. It’s the largest mall owner in CEE, with a €7.8bn portfolio of 60 malls spread across eight countries.
Distributable earnings for the 12 months to December increased 11.8%, no easy feat given it’s off an already high base.
CEO Rüdiger Dany says: “We achieved the best results in our history in 2023 but we’ve managed to deliver another record year in 2024.”
Earnings per share (EPS) growth, at 5.6%, was ahead of management’s earlier guidance of 4%.
That equates to a 90% payout ratio and includes the effect of an 8% increase in shares in issue after last year’s dilutive equity raise of €300m.
Earnings growth was bolstered by impressive trading metrics and inflation-beating rental income growth.
Like-for-like net operating income increased 9.2%, tenant sales were up 8.5% and the vacancy rate dropped to 1.7% in December, down from 2.7% in June, thanks to strong tenant demand. Dany says it’s the first time the company has had a vacancy rate of less than 2%.
“Western European retailers still want to open more stores in Eastern Europe because that’s where they’re getting the strongest turnover growth.”
The Inditex group (which includes Zara, Bershka and Lefties), Nike, Primark, Victoria’s Secret, Boss, Under Armour, JD Sports, LPP and Rituals count among the international brands that are on an expansion drive in CEE.
So how much upside is left? Dany believes decent GDP growth forecasts for CEE should continue to underpin consumption and retail sales.
Meanwhile, management continues to grow its footprint across the region. Late last year, two mega-malls were bought in Poland for €760m: Magnolia Park (100,000m²) in Wroclaw and Silesia City Center (88,400m²) in Katowice.
“The chance to acquire assets of this size and quality doesn’t come along often. And few have the firepower to execute such deals,” says Dany.
The chance to acquire assets of this size and quality doesn’t come along often
— Rüdiger Dany
He says both centres offer opportunities to unlock value through asset management initiatives. Meanwhile, Nepi Rockcastle continues to build new malls and extend existing ones, with a development pipeline worth €788m.
Analysts appear equally bullish about Nepi Rockcastle’s long-term prospects despite last week’s share sell-off.
Curwin Rittles, investment analyst at Metope Investment Managers, ascribes the 8% drop in Nepi Rockcastle’s share price to softer than expected growth guidance.
Management expects earnings growth of 5% this year, which should translate into EPS growth of 1.5%.
Rittles says that comes on the back of last year’s €300m equity raise, which has increased the number of shares in issue, and raised interest costs due to bond refinancing.
However, the latter should be offset by resilient operations, the recent Polish acquisitions and an accretive development pipeline, he says.
Rittles argues that the current share price weakness has created a compelling entry point.
Earlier this week the stock traded at R132, 12% below its recent five-year peak of R150, placing it at an attractive euro-based dividend yield of near 8%.
“Nepi Rockcastle remains a strong long-term hold, supported by a solid management team, strong balance sheet with gearing below 35% and a well-diversified CEE portfolio.
“The region’s economic strength, rising real incomes, and EU funding should continue to drive tenant performance and rental growth,” Rittles says.
Garreth Elston, MD of Golden Section Capital, has a similar view. He says despite slower distribution growth expectations and rising geopolitical tension in the region, Nepi Rockcastle will likely continue to deliver value for investors as management remains committed to fiscal and operational discipline.
“In our opinion it is still the premier operator of retail real estate in Eastern Europe.”
Investors looking for CEE exposure through a more diversified offering should take a fresh look at Fortress, which released an equally impressive set of results last week.
Fortress has a R16bn stake in Nepi Rockcastle and a directly owned logistics portfolio in Poland worth R4bn; together these account for 40% of its R50bn in assets.
The remaining 60% is split primarily between logistics and retail properties in South Africa (see graph).
The retail properties include commuter malls in CBDs, townships and rural areas that cater to low- and middle-income shoppers.
Distributable EPS were up 29.8% for the six months to December (on a normalised basis adjusted for the collapse of Fortress’s dual A and B share capital structure in early 2024).
Fortress is one of only a handful of property stocks still paying out 100% of profits to shareholders.
The company is making good headway in selling noncore and underperforming buildings. Disposals in the six months to December came to R809m, including several vacant office buildings to a developer who focuses on residential conversions.
Management is targeting sales worth another R3.4bn in the next three years, of which most of the proceeds will be reinvested to complete its R2.9bn logistics pipeline.
Total vacancies continue to shrink and ended December at 3.1%, down from a peak of 7.4% in June 2021.
CEO Steven Brown says the company is also starting to see rental growth on lease renewals for the first time in five years, most notably in the retail portfolio.
Fortress surprised the market by upgrading its earnings growth outlook for the full year to June from 16.9% to 24%. Brown says that this doesn’t come from “cross-currency swaps or fiddling with accounts but from genuine cash-backed income growth’’.
It was one of the biggest beneficiaries of last year’s rally in South Africa Inc property shares, ending 2024 with a total return of more than 50%.
Despite the strong run, Fortress is still trading 20% below its NAV of R25.23 and a dividend yield of about 7.8%.
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