When Redefine Properties was vying for a slice of a €1.2bn Polish portfolio of shopping centres and offices, it was up against 16 other bidders, at least five of which were believed to be fellow South Africans.
In what was the largest single real estate transaction ever to be concluded in Poland, Redefine on June 1 successfully acquired a 49.9% stake in Echo Polska Properties (EPP). The latter has since announced a primary dual listing on the JSE and Luxembourg Stock Exchange for September.
Last week, another Polish property developer and manager, Globe Trade Centre (GTC), made its debut on the JSE. GTC is a top 30 company on the Warsaw Stock Exchange and has a JSE market cap of R11.9bn.
While GTC is the first Poland-based company to inward list on the JSE, Rockcastle Global Real Estate Company entered Poland about 18 months ago. It has since assembled a portfolio of four completed shopping centres in the country, with another two under construction.
JSE investors also have indirect access to the Polish real estate market via Resilient Reit and Fortress Income Fund, which both own sizeable stakes in Rockcastle.
Some are understandably sceptical about the newfound infatuation with Polish real estate. But EPP CEO Hadley Dean, who led a high-profile delegation — including Marek Belka, former Polish prime minister and ex-president of the Polish central bank — on a pre-listing road show to SA earlier this month, makes a compelling investment case for Poland.
Dean says the country’s key attraction is that it is one of Europe’s most stable and fastest-growing economies. Between 2007 and 2015 it experienced 28% growth in GDP and 45% growth in exports. GDP growth of 3% and 3.5% is forecast for 2016 and 2017 respectively, which should spur further demand for retail and office space.
In fact, Poland is the only country in Europe that avoided a recession during the 2008 global financial crisis. Dean ascribes that to Poland having a conservative banking system and its own currency, as it is not part of the eurozone, though it is a member of the EU.
From a property investment perspective, Dean says Poland has a large, sophisticated and liquid real estate market, making it easy for international pension funds and other investors to get in and out.
National retail sales growth has averaged 7.2%/year since 2001, which is impressive in a no-inflation environment. There is a strong emphasis on wealth distribution, with the new government recently introducing a monthly social grant system to all households that have more than one child.
Says Dean: “That has significantly boosted disposable income levels. Polish consumers also tend to have relatively low debt levels compared to many of their European counterparts. So there’s no fear to spend.”
In addition, Poland is the largest beneficiary of EU development funding, with €105.8bn allocated for road and other infrastructure upgrades over the next few years.
Dean believes ongoing concerns about Brexit are likely to benefit Poland, as its highly skilled labour force and relatively low rentals may lure European companies looking to transfer their UK operations to a cheaper location.
Big international banks have in recent months already been seeking more space for their back offices in the Polish capital, Warsaw, where office space is almost 60% cheaper than in London or New York, says Dean. “Poland is really the little cousin of Germany. It behaves like a Western European economy but is still priced like a central European one.”
However, Des de Beer, MD of Resilient, one of the largest shareholders in Rockcastle, says Poland is by no means a one-way bet.
“We like Poland’s high-growth economy and the fact that it has a better credit rating and lower debt funding costs than SA. But one has to be careful not to fall on the minefields, of which there are a few.”
De Beer says not all regions in Poland are necessarily booming, with some areas in economic decline. “It’s not an easy market. With all the new money chasing real estate opportunities in Poland, some sellers are lumping together their poorer quality properties in parcels with the good assets. The risk with many of these deals is that you can inherit shopping centres or office blocks in weak, secondary locations that will be difficult to sell.”
De Beer’s strategy is to duplicate Resilient’s SA investment model in Poland, which is to own shopping centres that dominate their respective catchment areas. “There’s no point in owning the second, third or fourth-best centre,” he says.
But the problem, says De Beer, is that large German pension funds are also playing at the top end of the market, making it increasingly difficult for smaller players to compete on price. Nevertheless, he believes Resilient will make more money for shareholders in Poland over the next five years than in SA, where shopping centre returns are under pressure.
Meago Asset Management director Anas Madhi says SA investors should bear in mind that Poland poses some political risk: “Despite the country’s economic attractions, political risk remains a factor in Poland, given that the recent change in government was driven on a nationalistic platform, which is fairly out of sync with EU integrative policies.”
Comparing the different options for JSE investors looking for exposure to Polish real estate, Madhi says Rockcastle provides a pure retail play while EPP is a hybrid of retail and offices. EPP is expected to list at a dividend yield of about 7.5%, while Rockcastle trades at a more demanding 4%.
“Both counters have promising pipelines for expansion in their specific areas of interest. EPP’s first right of refusal on certain properties secured by development partner Griffin Real Estate, including a 70% stake in a planned 110,000m² Warsaw super-regional retail development, could prove to be [a] game changer for the future,” he says.
Madhi says Rockcastle, in turn, has gained an enviable track record in realising shareholder value by investing in undervalued property stocks globally and translating these gains into a defensive, direct property portfolio.
He notes that a potential merger with Eastern and Central European-focused sister company New Europe Property Investments will place the combined entity among Europe’s largest listed property companies.
“Either EPP or Rockcastle possibly prevails over GTC, which as a property developmental play seems a riskier option for investors, particularly while free float and liquidity appear low,” says Madhi.
This article was first published by Financial Mail.