BUSINESS DAY TV: What Growthpoint plans with its Romanian investment
Norbert Sasse, CEO of Growthpoint, discusses the property group’s first-half performance and its recent acquisition in Romania, with Nerina Visser of etfSA
BUSINESS DAY TV: Growthpoint has launched its expansion strategy into central and Eastern Europe and that’s by acquiring a 26.9% stake in Romanian-based Globalworth Real Estate Investments in a deal worth just over €186m. Growthpoint CEO Norbert Sasse joins us in the studio now, still with us as well Nerina Visser from etfSA.
Norbert, so you’ve acquired this stake, why? Is it purely a hard earnings incentive that’s directed you down this path and the need to offset some of the home pressure you now face?
NORBERT SASSE: Probably a combination of all of that absolutely, so no doubt that the domestic environment remains pretty challenging and just the simple basics of investing into property here where yields for the quality stuff that we want ... certainly if you compare the stuff that Globalworth owns in Bucharest, it is arguably comparable to anything we’ve got in Sandton and in the domestic market we’ve been having to buy that at 7%-7.5%-8% yields but your funding costs is 10% -10.5%. So you’ve got this negative yield spread dynamic so it’s not conducive to investment.
Now in that environment in Bucharest or in Romania at the moment you can get the same yields, you can get 7.5%-9% yield for the same product but you can fund it in euros at 3%-4%. And then we look at our own equity yield, we’re targeting sort of an initial equity yield of around 6% odd and we can fund that ourselves at probably around 3% odd. So you get 3%-4% positive yield spreads at an asset level and at the equity level. And I did emphasise initial yield of 6% because we’re certainly not investing for the 6% yield. We’re targeting much higher and we see that growth coming over the next three years.
BDTV: Okay, so that investment appeal clear, but I asked the question because you were sceptical about entering into the central eastern European market and you initially took a pretty cautious approach, so why the U-turn now?
NS: Yes correct we were very sceptical and I kept being asked at presentations and at conferences, what are my thoughts, what are my views, the reality is that I didn’t actually have one, so I thought I had better go and get one. So we went to the region, we met different parties, many investment banks, many property professionals, letting agents, sales agents and in fact one of the investment banks introduced us to Globalworth.
All along we went there for probably four visits and every time it started making more sense, I could start seeing the opportunity, I got a sense of why it could be a profitable investment and a good opportunity. And things came together, our view was always that we were never going to go and cherry-pick assets, we were looking for a platform, we were looking for a management team and for a vehicle that could essentially then be our platform for investment into the region. And we found this in Globalworth with a really entrepreneurial CEO in the form of Mr Ioannis Papalekas, he has surrounded himself with a team of over 70 professionals, people with a large component of professionals, and the expertise is there, but operating in that market for 15 years.
BDTV: Absolutely well Nerina let’s get your view here because you’re faced with companies like Growthpoint that are venturing into the offshore markets more aggressively so you’ve got then a player like Liberty Two Degrees that listed this week saying that its intent on sticking within South Africa’s borders because it has exposure to iconic assets. How are you stacking the two up in your books?
NERINA VISSER: You always have to look at property as really a two component returns if I can put it that way. Clearly the yield is a strong argument for property and I think it’s the yield underpin that probably makes it one of the core investments in many of the portfolios that we look at, because that property or that yield underpin typically is also linked to an inflation adjustment. So it’s not as volatile as many of the other yields that you might have in ordinary equity markets.
But then there’s the capital appreciation component or capital loss component that comes through in the other half of the total return equation. And that’s where it’s a lot more about what is the geographic diversification, what is the sector within the property market that you’re looking at, and that’s where a lot of specific focus on some of the smaller companies have got maybe only a retail focus or only an industrial focus. Whereas a company like Growthpoint of course not only has the diversification in terms of the sector exposure but also the geographic exposure. So it really is that sort of one-stop shop where you can get it all in one listed entity.
BDTV: Having said what you have Norbert, do you think that you’ve missed some of the potential opportunity here having lost some of the first mover advantage, because one assumes with a lot of the South African property players venturing into this territory now, price tags, valuations of those assets that are up for sale are going to be climbing in tandem?
NS: There’s probably an element of that absolutely, first mover advantage, those less of the NEPIs (New Europe Property Investments) of the world that went into the retail there seven or eight years ago, they would have had a really big advantage, they were the only buyers at the time etcetera. And the region, you’ve got to look at the region in its entirety. Certain countries within the region, in my personal view and our considered view is that Poland has had quite a hard run, so the yields have compressed to a level where they’re back at almost all-time record low yields that they experienced in pre the GFC, the global financial crisis.
Romania on the other hand and certainly in the office sector we think there’s still 100 -250 basis points of yield compression to come relative to where the peak was in the GFC. So yes and no ... hedging my bets.
BDTV: Absolutely and that’s what you have to do in a very volatile market...