Is Eastern Europe property still promising?
SA investors who took a bet on Eastern European real estate have been coining it, but growth appears to be slowing
The latest results from JSE-listed Central and Eastern European (CEE) property plays such as MAS Real Estate, Nepi Rockcastle and EPP justify SA investors’ fixation with the region, given the uninspiring earnings growth of their SA-focused counterparts.
MAS, Nepi Rockcastle and EPP notched up dividend growth of 40%, 9.5% and 6.7% for their respective December reporting periods — not too shabby considering these pure rand hedge companies pay dividends in euros.
That compares to negative, flat or barely positive dividend growth (in rand terms) reported by most SA property counters in recent weeks.
Over the past decade, several SA real estate players have entered one or more of the CEE countries in search of better growth opportunities and lower debt funding costs than those found in their own backyards.
The bulk of the money flow has gone into shopping centres, given the strong rise in consumption in many of these former communist countries.
Nepi Rockcastle, MAS and EPP — all co-founded by South Africans — today count among the largest shopping centre developers and owners in the CEE region.
A number of SA-focused property counters also offer partial exposure to the region, either via directly held portfolios or stakes in other listed vehicles.
These include Redefine Properties, Growthpoint Properties, Hyprop Investments, Attacq, Resilient Reit, Fortress Reit and Tower Property Fund.
The latest results from Nepi Rockcastle, EPP and MAS confirm that retail portfolios in CEE countries are typically still achieving higher footfall, rental income and sales/trading density growth numbers than those in SA. Industry players say the reasons are simple: GDP and wage growth still outpace consumer price inflation in the CEE region, while the opposite is true for SA.
And, unlike SA, most CEE countries haven’t yet been overdeveloped in terms of retail space.
In Poland, the CEE’s largest economy, with a population of 40-million, consumer spending has been boosted by its government’s Family 500+ social grant programme, which was introduced in 2016 and provides financial support (€115 per child per month) to families with more than one child.
Hadley Dean, CEO of EPP — Poland’s largest retail landlord in terms of gross lettable area (GLA) — says the Polish government has recently announced the extension of its monthly grant programme to single-child families, which he believes will provide more support for retail sales. Consumer spending could get another boost from the Polish government issuing a 13th cheque to all state pensioners this year — no doubt prompted by the 2019 parliamentary elections.
Dean cites other impressive economic indicators such as Poland’s falling unemployment rate, which at 3.5% is now half that of the EU average.
In addition, the country is still underserviced in terms of retail space, at around one-seventh of the GLA per capita of the US.
And the relatively recent introduction of the mall phenomenon to Poland means that shopping centres are seen as major leisure and entertainment destinations, especially during the country’s grim winter months, he says.
Poland also has a lower debt-to-GDP ratio than elsewhere in Europe, which means that it is well-placed to weather any potential economic storms, Dean says.
EPP has two major retail projects in the pipeline for the capital, Warsaw: the 230,000m² mixed-use Towarowa 22 in the city centre; and the 84,400m² Galeria Mlociny to the north of the city, due to open in May. "We believe Poland has 20 years of growth ahead of it," he says.
Romanian-born Alex Morar, CEO of Nepi Rockcastle, shares the sentiment. Morar, who joined the company in 2007 when it was co-founded by SA banker-turned-developer Martin Slabbert (now involved in MAS) and the Resilient group, says though retail acquisition and development opportunities in Poland and the rest of the CEE region may not be as plentiful as five to 10 years ago, the region still offers better growth opportunities than Western Europe.
"We can still buy and develop quality shopping centres in a number of CEE countries at yields of 6%-9%. In Western Europe you’re looking at sub-5%."
Morar says the CEE region doesn’t face the same structural problems as many other retail markets in the world, given the relatively low penetration of online shopping.
There are also still countries in the region that have had very little, if any, major new retail development in the past 10 to 15 years. He says the Baltic states are a case in point — Nepi Rockcastle last year entered Lithuania, bringing its CEE footprint to 51 shopping centres across nine countries.
"We think there are further opportunities in the Baltic states of Estonia and Latvia," says Morar.
MAS, which has grown its asset base threefold since 2016, to €900m, by selling some of its mature Western European properties and investing the proceeds in the CEE region, recently bulked up its Romanian portfolio by acquiring two malls — Militari Shopping Centre in Bucharest and Atrium Mall in Arad — and a stake in a portfolio of nine value centres.
However, Nepi Rockcastle, EPP and MAS have forecast slower dividend growth for 2019 — 6%, 2% and 15% respectively — which raises the question whether it’s still worth it for SA investors to be exposed to the CEE retail property market.
Despite lower growth expectations, local fund managers remain bullish on the region. Stanlib, Metope Investment Managers and Meago Asset Managers, among others, still single out Nepi Rockcastle and/or MAS as their top offshore property picks.
"Though slower GDP growth is forecast for the CEE economies over the next few years, growth in the region still easily surpasses that of Western Europe and SA," says Anas Madhi, director of Meago Asset Managers.
"This, coupled with accommodative EU monetary, expansionary fiscal and, in some instances, populist social policies, continue to drive consumer spend in many of the CEE markets."
Referring to the Polish ruling party’s recent decision to extend its child benefit, Madhi says these policies, coupled with tight labour supply, low unemployment, high wage growth and tax cuts in other CEE markets, will support retail sales and drive shopping centre developments in the region.
He says office supply is similarly supported by strong demand from Western European companies seeking cost-effective middle-and back-office outsourcing options.
But Madhi adds that SA investors should be highly selective in their stock selection and back companies that have an established record in the region.
"Individual CEE cities and countries offer different growth prospects," he says.
"There are several markets in the CEE region that remain relatively illiquid and would be difficult to exit if those economies were to turn."
These include Montenegro, Serbia and Macedonia, he says.
In addition, historically low funding costs (both debt and equity) are on the rise as the property cycle in the region starts to mature. Investec Asset Management portfolio manager Peter Clark says while there are still decent growth opportunities in CEE countries, they need to be priced appropriately.