Real estate investment trust (Reit) Redefine Properties is significantly broadening its offshore footprint through an initial 75% investment into a €1.2-billion (R21-billion) high-yielding commercial platform comprising 18 properties in the "rapidly expanding and exciting" Polish market.
The portfolio comprised more than 400 000 m2 of office and retail space, with the latter making up 75% and including more than ten shopping centres. The balance comprised well-tenanted offices.
The deal was the largest real estate investment transaction in Poland, as well as the largest single transaction of income generating real estate assets in Central and Eastern Europe.
The deal would be financed through debt and equity at a proposed 60% gearing at property level. Redefine Properties was funding the transaction offshore in-country and would borrow €250-million at about 3%.
Redefine partnered on the project with Polish-listed development fund Echo Investment, which was also a recognised market leader in the Polish and Central and Eastern Europe commercial and residential property development and investment space.
Speaking at a media briefing in Johannesburg on Tuesday, Redefine executive chairperson Marc Wainer highlighted that the deal was “an exciting opportunity to develop a Central and Eastern European presence with highly credible partners and a big pipeline . . . which can grow into something as big or bigger than Redefine in a much shorter space of time”.
“[Moreover], Poland is a fast growing economy, with gross domestic product (GDP) growth forecast at 4% for this year,” he added. The country is the largest in Central and Eastern Europe with a population of about 38-million and GDP growth of about 3.5% a year.
The country also has a large, stable and liquid real estate market, which has become increasingly attractive to foreign investors over the last few years owing to its high growth potential and scalability.
While the agreement was still subject to the approval of the European Commission, its benefits were further complemented by a right of first offer on more than €500-million worth of newly developed properties from the large retail and office development pipeline of Echo.
More than 80% of the projects were expected to be delivered within the next two years.
The deal was made possible after Echo made a strategic decision to split its high-yielding platform from its development and residential business and to find a buyer for the commercial real estate platform in which it would retain a 25% stake.
“This deal moves the needle, as economic growth is driving demand for office space in Poland, and opportunities in retail are even more exciting as disposable incomes have improved in lock-step with economic growth,” said Wainer.
Further, Redefine’s 25% participation right in these developments would provide it access to the exciting growth potential of a pipeline of properties through profit share, if these properties are sold to third parties.
“This provides us with a unique path to the leading pure-play Polish commercial real estate platform with significant further growth and value upside potential,” said Wainer.
He noted that Redefine Properties would only venture offshore if it had good local partners, good chemistry, good yields and returns.
He, therefore, referred to the deal as “a game changer” for Redefine.
“It significantly advances our international strategy – it has the scale, the right partners and the ability for growth to take a major part of our business to the next level,” he said, adding that the 18 properties ticked all the boxes from an investment perspective and allowed the company to take advantage of what would be positive yield carry.
The portfolio would generate total distributable income of €46-million. The total equity was about €500-million, putting the return on equity at 9.6% to 9.7%.
“These are all high-quality properties with an average portfolio occupancy rate of 95% and a large share of modern and sizeable properties,” said Wainer, noting his excitement at the near completion of the significant development Q22 in Warsaw, which would comprise 53 000 m2 to 55 000 m2 office development space.
He added that Redefine believed that, with the development profits that would be generated over the next three years, the group would achieve double-digit growth in this portfolio.
Wainer further suggested that the portfolio would actually grow at a better pace than Redefine itself.
Wainer reiterated that, with the rand weakness persisting and inflation on the rise in South Africa, the group believed that “offshore driven tailwinds will offset the domestic headwinds”. The low interest rate environment in certain overseas markets would be exploited by taking advantage of the positive yield spreads that are currently available.
In addition to the Polish deal, Redefine is also in the process of establishing an investment presence in Spain and diversification into student accommodation in Australia.
“Although 2016 is proving to be a tenant's market across all domestic sectors, it is not all doom and gloom for us at Redefine, as our geographic diversification now really begins to work for us,” Wainer reiterated.