Growthpoint, the largest primary listed REIT in South Africa, has its eye on other eastern Europe markets after taking a stake in Romania’s Globalworth, says Managing Director Estienne de Klerk. It has a clear strategy to do this.
Growthpoint manages a large R122bn (€7.85bn) in assets located mostly in its native South Africa but about 30% of which now in Australia and Romania. It made the €186m investment into Globalworth in December 2016 to take a 27% minority stake. Globalworth invests solely in Romania and is the largest office owner and developer in the capital Bucharest. Incorporated in Guernsey in February 2013 and admitted to the London AIM in July 2013, it was founded and continues to be run by Greece-born investors Ioannis Papalekas and Dimitris Raptis.
The reason for the Growthpoint investment was relatively straightforward, de Klerk says. “The play really is around the yield spread because we funded that fully in euro debt for around 2.6% and the investment will be yielding us initially about 6% and very quickly growing to 9%,” he told BIE. “We will get a yield spread therefore of 3-6%. And that kind of spread isn’t really available around the globe, and certainly not in South Africa or Australia.”
Growthpoint is far from being the first South Africa real estate company to enter eastern Europe. It was preceded some years ago by New Europe Property Investments (NEPI), and Rockcastle, which this year closed a merger into one large group. Another South Africa firm Redefine has made investments in Poland recently, buying a large retail portfolio.
Why then are South African firms so interested in CEE, while many western Europeans stay on the sidelines? “I think the problem is that if I am sitting in London or Germany and look across to eastern Europe, yes there is a yield spread and that obviously reflects an additional risk,” de Klerk says. “But the risk is that if I am Hammerson or British Land it would have quite a negative impact on my rating. And that, in turn, would impact my share price and my cost of capital.
“The second factor is that in developed Europe there is a lot of pension money, money that is structured in funds and various ways. But in eastern Europe that kind of formalised structure doesn’t really exist. And to the extent it does, managers haven’t had a mandate to invest into real estate.
“So what South African investors have identified is that they, effectively, see a bit of South Africa 10 to 15 years ago where there were no real listed real estate companies. Plus, there is the added opportunity that there aren’t many institutional investors in CEE supporting the real estate industry. And they see economies growing way in excess of developed Europe and South Africa.”
The move by the firms into CEE and other overseas markets is not directly related to political volatility at home but more to the domestic market’s small size, he says. “If you analyse the top 40 on the Johannesberg Stock Exchange, 60-70% of their exposure is offshore. They have very sophisticated management teams who know their businesses and can lever their skills globally. These guys can play in any jurisdiction and are not beholden to a small economy.
“It’s not a slant on the country at all, it’s the natural growth of things. McDonalds has grown out of America; it doesn’t mean they are anti-American. The reality is that our business has grown and because we have quite a dominant business in the South African context, these moves mean we are just growing our business to the next level.”
One real advantage that Growthpoint is definitely exploiting is its access to low cost of capital in Europe. “In the Globalworth business, the yield is about 6% – and more if we can let the 20% of vacancy – because they have a a whole bunch of developments looking for tenants right now. The second point is that with Growthpoint as a cornerstone investor, we invited Moody’s and S&P to give Globalworth a rating. That opened up the capital markets and took its cost of debt from 5% to 3% for a €550m bond that it issued into the European market in May.
“The next step is acquisition; if you are buying at an initial yield of 5% to 7%, developing at 8% to 10% and funding at 3% we think that strategy is a sound strategy. The trick is to buy quality. So now we think that the next step is to roll it out of Bucharest and into the rest of the metropolitan areas in the eastern European bloc. So that is our play, and we are reasonably confident we will be successful. We believe it is a good calculated risk.”