When you look at the bid/offer spread logic of the South Africans entering eastern Europe, laid out so clearly by the Growthpoint MD on our site, the question is why are western Europeans being so cagey?
The fact is that the spread between borrowing costs in euro and potential returns in almost any CEE real estate asset is so wide that you would have to do a lot wrong in order not to make money. And since we assume that the majority of property investment managers out there are highly capable – if they weren’t, they wouldn’t still be there – the return seems extremely obvious. Returns, we have to note, in an ongoing quasi zero-interest rate environment. And if you think that is going to change anytime soon, think again. CEE yield, in other words, is good yield. Borrow in euro at 2.5%, allocate in CEE at 6-8%, and go to lunch.
Note also that the Johannesburg-based Growthpoint did not employ equity at all in the investment in Globalworth; there was no discussion of spending deeply-devalued Rand or diluting the equity base. No. Growthpoint transacted the entire deal by leveraging its credit rating to borrow euros in Europe and then spending them on the 27% participation in what looks like a well-run Bucharest-focused firm.
Growthpoint itself is an interesting company. In 2001 at foundation, it consisted of nine properties worth $15m. Its founder and still-CEO Norbert Sasse built it within a relatively short period of 16 years to a portfolio of around $8bn. One opportunity was a A$200m investment in 2009 into Australia’s Orchard Industrial Fund, facing foreclosure. Renamed Growthpoint Properties Australia, the firm has grown to a market cap of $2bn from, initially, A$250m.
But Growthpoint ‘suffers’ – and I use the word advisedly – from the Canadian or the Australian problem: based in an economy that is wealthy but relatively small, just 24th in global size. Its investable property stock is too limited to provide the assets to satisfy investment demand from the wealth and savings that the nation is creating. For South Africa has a very large savings pool with quite developed pension fund structures. Roughly 25% of all pension money is obliged to be invested into what regulators deem to be prudential assets: cash, government bonds or real estate. This produces a huge flow of savings into the sector, also including listed property and REITs.
Back to CEE. If South African firms can see the opportunity in the western European ‘backyard’, why do western companies hesitate – well, except for some of the more forward-thinking Americans like Heitman, Oaktree, Cerberus and Lone Star, or Brits such as Europa Capital?
I always wonder when I hear that well-located and tenanted logistics assets can be found in Bulgaria or Romania at entry yields north of 8%. What’s not to like? Not to play down the brutality of Russia in occupying the Crimea and eastern Ukraine, do we in western Europe really believe Vladimir Putin genuinely has designs on the prior Soviet Bloc, those CEE nations rushing to join the EU or to deepen existing membership? I don’t think so. Only the CIA is certain that precisely this will happen as I recall from an INREV conference four years ago. But I read their intelligence on the Soviet Union back in the early ’90s. Very amusing and entirely wrong. No. Follow the money, the South African money, that is.