The real estate community was abuzz in March 2016 when South Africa's Redefine Properties acquired a 75 per cent stake in Poland's Echo Prime Properties' 18-asset portfolio, a deal valued at EUR 1.2 billion.
This marked the largest offshore purchase to date by a South African property company and moreover, the largest transaction in the history of the Polish real estate market.
That was just the beginning. This year has seen a breathtaking volume of property acquisitions and investments in Central and Eastern Europe (CEE) and South Eastern Europe (SEE) by South African investors.
South Africa's New Europe Property Investments (NEPI) has been active in Romania since 2008, but this year expanded to Slovakia and the Czech Republic with several retail property acquisitions. As well, South Africa's Pivotal Property Fund and Rockcastle Global Real Estate have invested in Poland; Tower Property Fund has invested in both Poland and Croatia; Atterbury Europe has invested in Serbia; and JSE-listed REIT, Hyprop Investments has co-invested in shopping malls in Serbia and Montenegro, which investment at EUR 202 million is the largest single asset deal in SEE in the last five years. In July 2016, Greenbay Properties acquired the Planet Tus Shopping Centre in Slovenia and in October 2016, Accelerate Property Fund announced its intended November 2016 acquisition of the OBI “DIY” retailer's real estate portfolio in Austria and Slovakia. As we approach the end of 2016, it is clear that South Africa has become a meaningful player in CEE and SEE.
CEE and SEE property markets have long been supported by foreign investment. In the years 2011–15, Western Europe and the United States invested EUR 16.4 billion into the CEE and SEE region. Investment in CEE and SEE from Western Europe was predictable, given their respective geographies and economies (during this period annual growth in Poland averaged 3.9 per cent as opposed to an average of 0.9 per cent in the Eurozone). In addition, given their respective histories, CEE and SEE regional investment was predictable from Russia. Even Israel and China have shown interest in CEE and SEE investment, although on a more selective basis and to some extent, as a gateway to Western European investment.
But South Africa's investors have traditionally preferfred domestic property markets. Only this year, Vukile Property Fund ventured out of South Africa with its investment in the British Atlantic Leaf Properties which focuses on the United Kingdom.
So what is it that is enticing South African investors to hunt for deals in the CEE and SEE property markets?
There appears to be a confluence of two integrated economic factors. South Africa is experiencing a rising interest rate cycle. The cost of five-year debt in South Africa exceeds 9 per cent. Simultaneously, South Africa is experiencing a softening real estate market. Average yields on prime properties in South Africa are below 7 per cent. Thus, South Africa is beset by expensive capital/ lack of liquidity and low yield.
In contrast, aggressive post-financial crisis quantitative easing schemes in the United Kingdom and the Eurozone have reduced the average debt cost to 3 per cent and under, while average prime property yields have exceeded 6 per cent. CEE and SEE investment offers South African investors low cost capital/liquidity and yield.
Added to these two economic factors is a particularly significant risk/reward factor that makes CEE and SEE particularly attractive to South African investors. They have a decidedly different perspective to that of other investors on CEE and SEE political and legal risk. From South Africa, CEE and SEE may be viewed as a political and legal, as well as economic, investment safe haven.
To conclude, South Africa is a welcome source of foreign investment in CEE and SEE as we enter 2017. DLA Piper will continue to update you on legal and commercial developments in CEE and SEE.