JSE-listed real estate investment trust EPP, which is focused on the Polish property market, has advised shareholders that the company expects to report distributable earnings a share for the year ended December 31, 2021, of at least €0.075 a share.
That is higher than the previous guidance of between €0.07 and €0.0725.
This is mainly attributable to lower taxes as a result of the suspension of gross annual value tax on investment property owing to the continued Covid-19 pandemic, as well as better-than-expected operating results.
The company highlights that 100% of its gross lettable area (GLA) has been continuously operational since June 26, 2021, with sanitary requirements in place, such as limitation on customer numbers, the wearing of face masks, disinfection and maintaining a physical distance distance. Current regulations in force until January 31, allow for one person per 15 m² in shops and gyms and for 30% of full occupancy in cinemas and restaurants.
"The second half of 2021 confirmed that the change in consumer behaviour resulting from the pandemic, which resulted in higher conversion rates, is a stable trend. From July to December 2021, when no lockdowns were in place, footfall stabilised at approximately 83% of 2019 levels, while turnover ranged between 92% and 109% of pre-pandemic levels, depending on the month," the company says.
"The turnover levels for the retail categories taking up the most space in shopping centres, such as fashion and accessories, household goods and appliances and electronics, have frequently exceeded 2019 turnover levels. These figures indicate more purposeful shopping, resulting in a larger basket size per visit. The relatively high level of footfall also confirms that, despite the ongoing pandemic, with the sanitary measures in place customers feel safer when visiting shopping centres."
Additionally, from July to December, when no lockdowns were in place, the e-commerce penetration rate in Poland decreased from above 10% and stabilised at about 8%, further evidencing that shopping centres remained the necessary and complementary place for Poles to shop, when allowed to operate without limitation.
The occupancy rate within EPP’s retail portfolio is at a stable 95.8% and the retail weighted average lease term by GLA was about 5.21 years as at September 30, 2021. Retail rental collection rates have been steadily improving during 2021, reaching 95% in November 2021.
"Retailers’ demand has been fluctuating over the last two years. Lease agreements signed by the EPP team for about 112 000 m² GLA in the last six months, of which 11 000 m² relates to new leases, is an encouraging sign. In recent months, EPP has welcomed a number of new tenants," the company says.
However, until and upon the loans due this year being extended, refinanced or repaid, with special attention on the corporate credit facility of €250-million due for repayment in October, EPP will continue with its strategy to retain cash that would ordinarily be distributed to shareholders. Accordingly, the Board of EPP does not expect to recommend paying a dividend for 2021, the company says.
"EPP continues to face significant loan maturities, with €879-million maturing by December 31, 2022. The company is engaging with its lenders on the terms of extension or repayment of the loans due this year.
"Loan maturities by December 31, 2022, include an unsecured corporate facility of €250-million which matures on October 31, in respect of which the relevant debt provider has informed EPP that it requires the full €250-million to be repaid by October 31."
Meanwhile, the Polish government has implemented Covid-19-related legislation that, in the case of lockdowns, provides rental relief to shopping centre tenants at the expense of landlords. The existing Coronavirus Act of 2020 amended in mid-2021, requires landlords to relieve tenants of 80% of their rental obligations during lockdowns, and of 50% of their lease liabilities for three months after each lockdown.
"EPP hopes that there will be no lockdowns in Poland this year, but the Omicron wave in Europe does pose a risk in this regard," the company adds.
"Importantly, the positive sentiment of Polish shoppers is expected to continue. Currently observed higher conversion rates, with turnover recovering faster than footfall, were previously anticipated, and in the longer term, as the epidemic situation stabilises, the number of customers is ultimately expected to return to pre-pandemic levels.
"Simultaneously, the growing importance of mixed-use spaces and omni-channel solutions for customers, including a similar shopping experience regardless of the shopping channel and personalisation of shopping, will force adjustments in the current retail infrastructure and determine the direction of the development in the years ahead. EPP aims to stay ahead of such changes, adjusting the company’s operating model as necessary," the company highlights.
The investment market in the Polish retail segment remains passive, with very little registered transaction activity and a further period of stabilisation likely being required. Investors remain cautious, primarily due to the uncertainty caused by the new Covid-19 variants and legislation regulating rental obligations in shopping centres. In Poland, investors are focused mainly on retail parks, convenience centres and single-anchored grocer or do-it-yourself properties.
EPP expects that it may take a further two to three years before investment demand for shopping centres returns to pre-pandemic levels.
In line with adapting to market trends, EPP is proud to be a socially and environmentally responsible business, with properties gradually being modernised to reduce their environmental impact by limiting pollution and the use of water and energy. EPP expects to issue its first environmental, social and governance report early this year.
"The Polish economy has quickly returned to pre-pandemic growth levels and continues to show a positive outlook. Oxford Economics anticipates gross domestic product growth to be 5.1% in 2021, 4.5% in 2022 and 4.0% in 2023, which places Poland in the top number of the Central Eastern European (CEE) states and continues to make it one of the fastest developing countries in the European Union (EU).
"Poland is often listed among the world’s most digital, innovative and entrepreneurial economies, and this is expected to continue. According to the Digital Poland Foundation’s Invest in Digital Poland 2021 report, Poland was the third most popular capital investment country in Europe in 2020."
Further, Poland had been recovering after the latest Covid-19 wave caused by the Delta variant. Since the beginning of January this year, the number of new daily infections has, however, been increasing, although this increase is anticipated to be temporary. The Omicron variant is soon expected to result in a materially higher number of infections.
"EPP continues to benefit from operating in Poland’s resilient and quickly developing economy, which is one of the largest among EU members and leading in CEE. The outlook and prospects for retail in Poland are cautiously optimistic, with caution related to the ongoing pandemic. In 2021, 2022 and 2023, retail sales growth is expected to reach 7.4%, 5.5% and 3.6%, respectively, exceeding the EU average.
"Despite an anticipation of an improved income environment, retail landlords are expected to suffer the consequences of significant electricity and cleaning or waste disposal costs, which cannot be recovered from tenants, driven principally by higher carbon emission taxes levied by the EU and the Polish government’s resolution to increase the minimum wage by 34%, respectively."
Poland has one of the lowest unemployment rates in the EU, at 3.5% in 2021. Demand for labour is expected to continue, with unemployment rates expected to drop to 2.9% and 2.4% in 2022 and 2023, respectively. Rising employment levels will place upward pressure on average monthly salaries which are forecast to increase by about 8% over the next two years.
The country also faces the global challenge of rising inflation, fuelled especially by rapidly rising energy prices. To ease this growing trend, the Monetary Policy Council of Poland has raised the reference interest rate from 0.1%, which is historically the lowest level, to 2.25%, with the most recent interest rate increase of 50 basis points taking implemented on January 4.
The Polish government has also launched the inflation shield programme, designed to protect families and households from the effect of rising prices. It includes, besides other measures, the temporary abolition of excise duty on electricity, the reduction of the value-added tax rate on electricity and natural gas, decreasing the price of fuel by reducing excise duties and providing financial support for families based on their income.