Offshore deals continue to court South Africa real estate companies, this time with capital growth play Pivotal Property Fund being the latest to diversify into Eastern Europe.
Pivotal announced on Friday that it will invest in Poland-based developer Echo Prime Properties, which sector heavyweight Redefine Properties acquired a 75% stake in last month.
Pivotal will co-invest with Redefine by acquiring a 6% stake in Echo for €30 million (R505 million), marking its first offshore move. Over time, Redefine’s intention is to reduce its shareholding in Echo to approximately 50% through the sale of its 25% stake.
Pivotal management says its investment with Redefine is in line with its strategy of investing up to 15% of its assets in mature emerging markets.
Pivotal owns a property portfolio of more than R10 billion, making up of retail, office and industrial properties. This includes Alice Lane office buildings in Sandton, retail properties such as Wonderboom Junction in Pretoria; Centurion Lifestyle Centre; a 40% stake in Cradlestone Mall on the West Rand; and Goldfields Mall in Welkom.
Beyond South Africa, Pivotal has a stake in an office development in Nigeria. Much of Pivotal’s investment activities are in its development pipeline, which includes the flagship development of the 53 994 square metre Loftus Park mixed-use development in Pretoria. Another sizeable development is the Kyalami Corner shopping centre, north of Johannesburg, where Pivotal is planning a 29 160 square metre convenience shopping centre.
Pivotal says the co-investment into Echo offers it participation in a substantial development pipeline with a value on completion in excess of €500 million (R8.4 billion).
Echo develops properties and sells them. Its biggest retail properties include the 77 000 square metre Galeria Echo Kielce in Kielce, the 49 402 square metre Pasaz Grunwaldzki in Wrocław and the 41 297 square metre Galaxy in Szczecin. The biggest office property the company owns is the 33 000 square metres Malta Office Park in Poznan. Echo also has a development pipeline, which includes refurbishment projects to its retail properties.
Says Meago Asset Managers director Jay Padayatchi: “The underlying assets appear to be of high quality even though the rentals and pricing are full. The key lies in the further value extraction from the asset management opportunities and development pipeline rollout that will be enhancing over the short to medium term.”
For Pivotal, the deal gives it instant access to Europe, a high-growth region with sound underlying assets in a single transaction, says Padayatchi.
In theory, the investment case in Europe is appealing, given the low cost of debt and high yields on properties compared with the South African market. Funding costs in most European regions are under 2% with property yields of about 6%, while in SA property yields are trading at up to 8% and the five-year cost of debt is well over 9%.
Some analysts have recently warned that there are a lot of counters chasing offshore assets in a highly competitive environment, which might lead to some overpaying for assets.
Grindrod Asset Management chief investment officer Ian Anderson, says local property counters 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. “Perhaps fortune will favour the brave in the long term, but the short-term risks of investing in Poland have increased substantially.”
Other property companies to be invested in Europe include rand hedge Rockcastle Global Real Estate, an early backer of shopping malls in Poland; Tower Property Fund, which bought properties in Croatia; Attacq Limited, which acquired malls in Serbia and Hyprop Investments, which acquired a stake in two malls, located in Serbia and Montenegro.