FIFI PETERS: Germany says that it is preparing for the worst-case scenario, where Russia stops exporting gas to the country. Like it said, it would do with Poland and Bulgaria. So now the reason why Russia stopped gas exports to Poland and Bulgaria was because it demanded to be paid in a Russian roubles and not in euros or dollars. Germany has been slowing its use of Russian gas in the past year; it has fallen from around 55% to 35% presently. But the German chancellor, Olaf Scholz, did warn that an abrupt halt in Russian exports of gas could have major consequences for the economy.
What does this mean for South African companies who are doing business in the thick of the storm in Eastern Europe, just regarding the ongoing Ukraine war?
We’re speaking to Estienne de Klerk, who is the chair of the SA Reit Association; he is also the CEO of Growthpoint South Africa. Estienne, [Germany’s] Chancellor Scholz is very worried about the current situation in Russia, in Europe, particularly where gas is concerned. How concerned are you What does this mean for your business?
ESTIENNE DE KLERK: There are obviously several South African Reits that have investments in Eastern Europe, mainly Poland and Romania, which would be the two largest jurisdictions in that area. To date, you can maybe say there are certain Reits that will be directly impacted, and then there’s the sort of indirect impact back here in South Africa.
So on the direct side I think that at this stage it’s actually very limited. It is our understanding that those jurisdictions have over the past couple of years been working on alternative supply sources, either via their port – so Gdansk for Poland – and they are working with the Nordic countries and Qatar on ensuring supply.
It is our understanding, certainly from direct feedback from our management team there, that at this stage it’s sort of reasonably ‘business as usual’.
What we have seen in those markets, specifically for those companies that are developers, is that there’s obviously been quite significant cost inflation on the development side. Quite a lot of steel comes out of Russia and those supplies are clearly not available at this stage. That’s put quite a bit of inflation on new development costs and that will have an impact on inflation in the real estate sector, certainly on the development side.
In a strange kind of way that’s not the worst thing for existing real estate owners because, if new rentals are significantly higher, that means that if there is demand then clearly there’ll be pressure on rental levels over time. So it’s a play that probably will take some time to flush through that system. That’s sort of a direct impact from our perspective at this stage.
If we look directly onto South Africa, I think in the global context what we’ve seen is that cost of debt and interest rates have moved up probably more as a result of what’s happening in US treasuries; but ultimately that will flush through into the South African economy, where ultimately debt will cost us more. The inflation and energy costs are already something that we’ve been working with over the past several years.
So I think it really focuses the tension more on investment in sustainability. And I think most of the Reits locally are looking at quite aggressive rollouts on solar programmes.
The new legislation there has assisted in terms of lifting the levels which, certainly from a Growthpoint perspective, we’ve revisited all our existing plants and we’re going to be expanding probably most of them.
The difficulty that we do suffer is that without there being, let’s call it, well-documented wheeling arrangements with the cities and to a lesser extent Eskom, it makes it difficult for us to invest into let’s call it significant plant, which you can then wheel across the networks to your real estate. I think that area of let’s call it deregulation still needs to be worked on, certainly locally. I think that will obviously improve things for us quite a bit.
FIFI PETERS: Right. Am I understanding you correctly? In essence, in a nutshell, the direct impact of the situation in the Ukraine [is] quite minimal. It’s not something that the group is too worried about right now. The war has been going on for two months, we’ve seen major institutions slashing global growth just as a result of it; today we’ve even had the US going into a contraction in the first quarter unexpectedly as a result also of it. But are you saying, from a South African Reit perspective you guys are sleeping well at night?
ESTIENNE DE KLERK: Yes. I think one has to contextualise that these exposures…most of these companies are reasonably diversified. So if you look at Growthpoint it is a significant investment, but it is part of a diversified portfolio in terms of the global growth aspects.
I don’t think the only factor is in fact the Russian/Ukrainian war that has an impact on those growth numbers. I think the activity in the US markets in the debt market probably has an equally big impact on that.
I do think, from our perspective at this stage, we are basically going on the information that we’ve been provided by our management teams there and certainly, when I speak to my colleagues in the South African Reits that do have investments, yes, there are concerns, because clearly no conflict is ideal, and certainly not close to the borders where we have investments.
So we do think it’ll probably over time have a bit of a negative impact, but we don’t believe it’s going to be that significant in the short or medium term – unless, obviously, if this war spreads past the borders of Ukraine.
What I’ve been led to believe is that in fact there are quite a few people that are moving back to Ukraine. Certainly the central and Western parts of Ukraine seem to have been secured and that the issues are more on the east. So that obviously helps the situation a little bit. So certainly for Poland and Romania the amount of people that are moving across the borders and having to be sort of accommodated in those markets will be slightly less.
Interestingly enough, for Poland specifically, one of their largest constraints has in fact been people. They’ve had an incredibly strong growing economy over several years, and additional people aren’t the worst thing that can happen to Poland.
FIFI PETERS: All right, Etienne, thanks so much for giving us that perspective. We are here in Africa, in South Africa, and we don’t see the situation on the ground. But thank you for giving us that first-hand account – based on your operations and the management team over on that end – that the situation is not as dire as one would think, just reading the headlines from another continent.
We’ll leave it there, sir. Estienne de Klerk is the chair of the SA Reit Association.