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Listed property: Central and Eastern Europe on the radar

SA-focused property counters shift focus but analysts are cautious.
More SA-focused property companies are bullish on Europe.

In recent years, Central and Eastern Europe have never received a special mention or much attention in SA’s listed property market.   

But in the past week, the race for property deals into Europe has heated up with more SA-focused property counters hedging their bets on the region.

You don’t have to look far for reasons behind this: SA’s worrying state of the economy; and the drying up of quality property deals is pushing property counters to scout for opportunities overseas.

Hyprop Investments, the owner of blue-chip malls such as Johannesburg’s Rosebank Mall and Hyde Park Corner, and Cape Town’s Canal Walk, is the latest property company to take a bullish view on Eastern Europe.

After Hyprop’s foray in the region in February through the acquisition of a 60% stake in two malls, Delta City in Serbia and Delta City Podgorica in Montenegro, the company is now on the prowl for more deals. Hyprop is planning to grow its Eastern Europe property portfolio of shopping centres to €1 billion (R17 billion) from €209 million (R3.6 billion) over time.

Also piqued by Europe is sector heavyweight Redefine Properties, which is making bold moves into Poland. In what is believed by Redefine to be the largest single transaction by a South African property company, the counter has acquired a 75% stake in property developer Echo Prime Properties.

The deal boosts the company’s offshore exposure beyond the UK and Germany, where it owns a 30.1% stake in London-listed Redefine International, and the Australian market, where it has a 25.6% stake in Australia-listed Cromwell.

Redefine, whose retail, office and industrial property portfolio spanning across SA is valued at R65 billion, will be boosted to R69 billion after it concludes the Echo deal. Its offshore property assets as per its overall property portfolio will increase to 25% from 18%.

“There might be other opportunities to double the size of investments in Poland in the next two years,” says Redefine executive chairman Marc Wainer. Then, Redefine might consider a separate listing for the portfolio to raise capital to fund more deals.

Though Growthpoint Properties is keen to invest in Europe, it’s treading carefully. CEO Norbert Sasse says the company might consider acquisitions “only if the right opportunity came along and presented itself.” Its current offshore exposure is through a 65% stake in Australian-listed Growthpoint Australia. 

Hyprop, Redefine and possibly Growthpoint join the ranks of rand hedge Rockcastle Global Real Estate, an early backer of shopping malls in Poland, and developer Atterbury which is on the prowl for shopping centres in Serbia and Cyprus.

Analysts are cautious

In theory, the investment case in Europe is appealing, given the low cost of debt and high yields on properties compared with the SA market. Funding costs in most European regions are under 2% while property yields are about 6% while in SA property yields are trading at up to 8% while the five-year cost of debt is well over 9%.  

Latest figures show that approximately 35% of the FTSE/JSE South African property index’s earnings are exposed to offshore markets. Ten years ago the sector had no offshore exposure. Although income-chasing investors have made more money offshore than in their own backyards owing to the weakness of the rand, analysts are cautious about the rush to offshore markets.

Stanlib’s head of listed property funds Keillen Ndlovu, says the focus must be on property fundamentals for companies.  “There is money chasing offshore assets and the competition is high. But there are risks of overpaying and not getting prime assets because most companies are looking to expand.

Grindrod Asset Management chief investment officer Ian Anderson, says both Redefine and Rockcastle are entering Poland at a time when many established investors are “rapidly heading for the exit doors”.

In January Standard & Poor’s downgraded Poland’s credit rating and maintained a negative outlook with a view of cutting the country’s credit rating again within the next two years. Says Anderson: “Perhaps fortune will favour the brave in the long-term, but the short-term risks of investing in Poland have increased substantially.”




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