Real estate investment trust Redefine Properties is significantly broadening its offshore footprint by exploring several opportunities – most notably, the company has signed of a significant offshore property deal in Poland.

“Given the attractive initial yield spread, and courtesy of low offshore borrowing costs, offshore investments remain attractive,” Redefine Properties CEO Andrew Konig said in a recent address ahead of the closing period meeting.

He highlighted that, for Redefine, “the offshore drive tailwinds are anticipated to offset domestic headwinds”.

Redefine executive chairperson Marc Wainer agreed, noting that, 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”.

Redefine’s most significant deal this month includes an initial 75% investment in a €1.2- billion high-yielding commercial platform comprising 18 properties in the “rapidly expanding and exciting” Polish market.

The portfolio comprises more than 400 000 m2 of office and retail space, with the latter making up 75% and including several shopping centres, and the balance comprising well-tenanted offices.

The deal is the largest real estate investment transaction in Poland, as well as the largest single transaction of income-generating real estate assets in the wider Central and Eastern Europe region, Konig says.

It will be financed through debt and equity at a proposed 60% gearing at property level. Redefine Properties is funding the transaction offshore in-country and will borrow €250- million at about 3%.

Redefine partnered on the project with Polish-listed development fund Echo Investment, also a recognised market leader in the Polish and wider Central and Eastern European region commercial and residential property development and investment space.

Wainer highlighted that the deal was “an exciting opportunity to develop a Central and Eastern Europe presence with highly credible partners and a big pipeline . . . which can grow into something as big as, or bigger than, Redefine in a much shorter space of time”.

“[Moreover], Poland is a fast-growing economy, with gross domestic product growth forecast at 4% for this year,” he added. The country is the largest in Central and Eastern Europe.

While the agreement was still subject to approval by the European Commission, its benefits were complemented by a right of first offer on more than €500-million in newly developed properties from Echo’s large retail and office development pipeline.

The deal was made possible after Echo had 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.

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 were sold to third parties.

Good Chemistry
Wainer noted that Redefine Properties would only venture offshore if it had good local partners, chemistry, 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.

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%,” 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 of office development space.

The shopping centres in the portfolio ranged in size from 5 000 m2 to 65 000 m2. Two centres would be expanded by an additional 23 000 m2 over the next 18 months, providing another growth area for the portfolio.

Wainer 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.

In addition to the Polish deal, Redefine was in the process of establishing an investment presence in Spain. The company was also exploring diversification into student accommodation in Melbourne, Australia, with a potential development valued at about AUS$130-million.

The opportunities being explored in Spain included two call centres, valued at about $22- million, which would include a blue-chip lease for a 15-year period with a 3% a year rental escalation. While only negotiations were under way, Wainer concluded that this opportunity would be Redefine’s “first toe in the water in Spain”.