South African investment into Central and Eastern European real estate is a continuing trend. But competition is tough, and potential investors need to be smart, agile, and ready to hit the ground running.
The South African property sector is robust, thanks to experienced shareholders, a huge consumer base and space for development.
There are currently 27 real estate investment trusts (REITs) listed on the Johannesburg Stock Exchange (JSE), with the top ten accounting for 80% of the sector's market capitalisation. South Africa is estimated to be the eighth largest REIT market globally with about ZAR 233bn worth of real estate assets, according to the South African REIT Association.
Last year, the internationalisation of South Africa's listed REITs was the sector's dominant trend. Its Association says this trend seems likely to continue in 2018, if local market conditions remain difficult.
Since the sector's overseas expansion began over ten years ago with early investments in the UK, Western Europe, and Australia, it has gained increasing momentum and now has investments in more than 25 countries, mostly in Eastern and Western Europe. Some 40% of the listed property sector's assets are now offshore.
The 'drivers' away from South Africa continue to be domestic political uncertainty and sluggish economic growth. For retail property investors, there is an oversupply of shopping malls in South Africa, so the market looks swamped, and a struggling economy means that retail tenants are finding it increasingly difficult to pay rents. As a result, many shareholders and South African fund managers are eyeing up Central and Eastern Europe instead, with its vibrant economics and growing consumer spend. Due to the region's high pace of consumer demand, retail tenants are willing to pay high rents for prime retail space in a key location.
The public debt-to-GDP ratio in CEE remains relatively low and economies are continuing to grow. The minimum wage is rising, and unemployment rates are falling. In turn, this generates more disposable income in the region.
Recent South African investment
- NEPI Rockcastle Retail buying Shopping Malls in Poland for €249.4m in November 2017
- VUKILE Property Fund acquiring two further retail assets in Spain for €65.3m in December
- Redefine Properties acquiring a 25% stake in a €1bn retail portfolio in December, with all assets located across Poland, and Echo Polska Properties buying 12 retail properties in Poland for €692m in December.
But the lure of the CEE region presents its own challenges.
Poland is the region's biggest market and Europe's eighth largest economy, and the fast pace of new retail property developments – compared with established Western European markets – has been attractive. But recent developments in the Polish government's approach towards their judiciary, their view on the European Union and their changes in Value Added Tax (VAT) and Corporate Income Tax (CIT) legislation, has prompted the investment spotlight to turn to higher yielding economies such as Hungary and Romania.
For first-time investors, dipping a toe into a new CEE market can be an eye-opener. Local legislation and compliance regulations may be a big unknown, which is where a trusted partner such as TMF Group can provide a reputable point of entry.
We operate in more than 80 jurisdictions and offer on-the-ground local knowledge and language support across CEE.
Often, the retail property portfolios on offer contain assets in more than one CEE country. Whilst CEE is one region, it includes almost 20 individual countries - each a standalone jurisdiction, with its own language, compliance regulations, employment law, accounting, and taxation structures. The novice investor shouldn't think that experience in one CEE market is enough for them to venture elsewhere. Partnering with TMF Group across geographical boundaries provides local market expertise in every country of interest. Our intimate knowledge of the regulatory landscape in each country enables us to forewarn clients of legislative changes, allowing them to prepare well in advance, rather than reacting passively.
CEE is currently a hot-spot for many, so real estate funds and investors face increasing competition. TMF Group is well-placed to be your running partner. We can help you get your holding structure in place, assist in SPV management and structured finance transactions while complying with local regulatory requirements, so that you can move fast to close a deal in a competitive environment.
Good deals can help fund future deals
Not only is more South African investment being lured to CEE, but the buoyant situation is also influencing the strategy of funds already operating there. In the past, South African investment in CEE has been financed through a combination of equity from South Africa and cheaper debt in CEE. But with volatile movements on the JSE, there is a growing a trend for equity being funded by completed asset sales in CEE.
Want to learn more? Register for our 24 April 2018 webinar: South African capital flowing into CEE real estate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.