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EPP and Redefine plunge on Polish Covid-19 concerns

Double-digit share price declines in both funds amid the global stock market turmoil.
EPP’s Galeria Echo shopping centre in Kielce, Poland, one of 25 retail properties it owns in the country. The Polish retail property giant experienced a double-digit decline in its share price on Thursday, amid concerns about the Covid-19 outbreak. Image: Supplied

Polish retail property giant EPP, in which SA’s Redefine Properties owns a significant 45% stake, saw its share price plunge more than 12% on the JSE on Thursday, as heightened Covid-19 concerns in Poland saw the group opting not to give guidance for 2020.

The “no guidance” move by EPP, announced during the release of its full-year results to the end of December 2019, also resulted in Redefine’s share price sliding almost 13% to a new record low, below the key R5 level.

About 17% of Redefine’s asset base is invested in Poland via EPP and a logistics property platform. Besides its SA home base, Redefine also has offshore exposure to Australia and the UK. The coronavirus (or Covid-19) outbreak has affected all these nations and rattled stock markets across the globe.

Read: European stocks plunge most this century after ECB underwhelms

EPP, which is the largest retail real estate investment trust (Reit) in Poland, has been a top offshore performer for Redefine. However, EPP now finds itself in uncertain territory, as the Polish government has decided to close all schools, universities, museums and cinemas from Monday to prevent the spread of Covid-19, with some 50 cases confirmed.

With shopping centres and other businesses still allowed to operate, the Polish government has not instituted a lockdown on the scale seen in Italy – the worst coronavirus-affected European nation. However, property sector analysts have warned that if the virus spreads and forces a bigger shutdown of the Central Eastern European (CEE) nation, it will curtail economic activity and hit companies invested there.

Read: Capital flight: SA property companies invest billions more offshore

Big local property counters invested in Europe include Redefine’s main rival, Growthpoint Properties, in addition to the likes of Vukile Property Fund, Resilient, Investec Property Fund, Fortress, Hyprop and Attacq. Redefine and Vukile saw the biggest share price slides on Thursday among the major South Africa Reits. Vukile, which has a significant presence in Spain, was down more than 11%.

Hadley Dean, outgoing CEO of EPP, played down the potential impact of the virus in an interview with Moneyweb, saying that Poland is one of the strongest-growing economies in the CEE region.

Hadley Dean, the outgoing CEO of Polish retail property fund EPP. Image: Supplied

“Poland is a resilient nation and has been through tougher times before, so I believe they will get through this.

“There is some uncertainty around the virus and what will happen, that is why we have not given a forecast or guidance for the upcoming 2020 half-year. However, we believe the fundamentals of EPP as a business is still strong,” he adds.

Read: SA Reit sector worst performing asset class again in 2019

EPP, which owns a predominantly retail-focused property portfolio (some 25 centres) valued at more than €2 billion and covering more than 1 million square metres, reported a 0.2% increase in distributable income per share to 11.62-euro cents for its year to end-December.

Dean notes that this is within its guidance for the period, as the group alerted the market last year to its decision to bring down its loan-to-value (LTV) ratio. Its LTV was reduced by 1.9% to 50% by the end of its 2019 financial year.

“We would like to bring our LTV down further, by around another 5%. However, in Europe a LTV of 50% is not unusual, considering the very low interest rates,” he says.

He points out that EPP’s 3.8% net property income growth for the year to €148 million, is noteworthy. Like-for-like net rental income increased by 3.3%, which he says highlights the group’s well-managed portfolio.

Reitway Global’s chief investment officer, Garreth Elston, says EPP’s latest full-year results are solid in the context of the European retail market.

“Within the constraints of the Polish retail landscape the company has arguably done well to deliver the results it has. However, we are concerned about several headwinds that the company will be facing in the year ahead. Chiefly we believe that continental retail is facing a severe challenge from Covid-19,” he notes.

“EPP will be facing this challenge with a new CEO, arguably one with limited physical property experience, and a continuing high level of debt,” Elston adds.

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