Growthpoint is on the prowl for deals in Central and Eastern Europe

As domestic headwinds bite.
Growthpoint's CEO Norbert Sasse.

Having taken a cautious approach to joining its listed property peers that have concluded deals in Central and Eastern Europe (CEE) with aplomb, sector heavyweight Growthpoint Properties has changed its position.

Growthpoint is now on the prowl for property deals, largely in mature CEE regions such as Poland, Romania, Czech Republic and Hungary.

You don’t have to look far for the reason behind Growthpoint’s new interest in offshore markets: South Africa’s worrying state of the economy is making it difficult for property companies to eke out growth and deliver above-inflation dividend growth.

Underscoring the headwinds is Growthpoint’s dividend growth of 6% to R1.83 (in line with market expectations) for the year to June 2016. The last time the sector heavyweight posted a dividend growth of this kind was in 2011. 

Says Growthpoint CEO Norbert Sasse: “It has been the toughest year we have experienced.”

The company is looking to CEE regions for growth. “We were quite sceptical of the Eastern Europe story and having done a bit of homework, there is merit in having a closer look,” says Sasse.

The race to CEE regions has heated among South African property counters in recent months, with the big spender being Redefine Properties, which invested R4 billion in a portfolio of 18 properties in Poland valued at €1.2 billion (R19.6 billion). 

Other big-ticket deals include blue-chip mall owner Hyprop Investments’ R2 billion-worth acquisition of a 60% stake in two in malls, Delta City in Serbia and Delta City Podgorica in Montenegro; small-cap (R2.6 billion) Tower Property Fund’s acquisition of an office tower and shopping malls in Croatia and Accelerate Property Fund’s purchase of retail assets in Austria and Slovakia worth approximately €140 million (R2.3 billion).

Growthpoint is looking to invest in what Sasse calls “institutional grade property markets” with quality real estate that can be bought and sold (without restrictions) and functional financial markets to raise debt funding.

The company is aiming for 30% of its distributable income (R5.1 billion for the period under review) to derive from offshore markets in the coming years. This is up from the current 15%, which comes from its 65% stake in Australian Stock Exchange-listed Growthpoint Australia.

The big draw-card for South African property companies in CEE regions is that acquisition yields on properties are typically higher (6.5% to 8.5%) than debt funding costs (2.5% to 3%), which boosts dividend payouts in year one. In South Africa, debt funding costs are higher than acquisition yields.

Also, property prices are lower in many CEE regions and leases on properties are about seven to ten years driven by the demand for rental space by global corporates. 

Due to the oversupply of properties in some areas, lease terms of three to four years in South Africa are the new norm compared with a minimum of five years in 2013, says Sasse.

The big question is whether Growthpoint has missed the boat in terms of tapping into CEE opportunities. Meago Asset Managers director Anas Madhi says Growthpoint is behind the curve in seeking opportunities in new markets and will need to play catch-up.

“Yet the company maintains a strong balance sheet and pressure is on management to deploy this balance sheet in seeking offshore acquisitions. We increasingly expect management to make a bold move soon,” Madhi tells Moneyweb.

Arguably, a big deal is necessary to move the needle for a juggernaut property company like Growthpoint with property assets worth R112.5 billion, including a 50% stake in Cape Town’s V&A Waterfront worth R7.8 billion.

Says Stanlib’s head of listed property funds Keillen Ndlovu: “It will be interesting to see what Growthpoint’s management will come up with, in a highly competitive European [including Eastern European] real estate market.”

Growthpoint’s shares finished 2% lower on Thursday to R24.90. 

Growthpoint share graph

Ian Anderson, chief investment officer at Grindrod Asset Management says Growthpoint is currently trading at a clean forward yield of 7.8% and a small premium to net asset value. “This is suggesting that the company is fairly valued by the market, given the tough and increasingly more uncertain economic backdrop in South Africa,” says Anderson.

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