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South African REITs turn focus to central, eastern Europe

Central and eastern Europe have attracted a sizable amount of South African capital earmarked for foreign investment, with at least €918 million spent in the region thus far in 2016.

While South Africa has a professional finance sector, it nevertheless struggles with a volatile credit rating, political instability and the perception of corruption, LaSalle Investment Management global co-head of client capital group Jon Zehner said at a recent seminar hosted by the Urban Land Institute UK and the South African Chamber of Commerce. "You put all that together and it's a tough place to put on the top of people’s priority list when they are looking at investing," he said.

In comparison, parts of CEE offered attractive GDP growth in the 3% to 3.5% range relative to South Africa's sub-1% growth, Mvula Seroto, investment analyst at Catalyst Fund Managers, said in an interview. He also noted that REITs can achieve positive carry on acquisitions and development yields on the low cost of funding. Growthpoint Properties Ltd., the largest South African primary listed REIT, has also pointed to "relatively high real estate yields and growing demand for quality, modern commercial property" in the region.

"The CEE region's growth is being driven by a young, skilled and cost-effective labour market, competitive industries, EU funded investment in infrastructure, greenfield foreign direct investment in manufacturing, and business process outsourcing from multinational corporations," Growthpoint said in a press release.

South African REITs also have experience navigating the volatility of emerging markets, said John O'Driscoll, JLL head of EMEA M&A, at the seminar. "They are very comfortable in this environment and very comfortable at seeing how the trajectory of those markets might go," he explained, adding that shareholders also were supportive of the overseas strategies.

A growing share of South African capital raised for real estate investment has gone abroad in recent years. Francois Viruly, a leading property economist at the University of Cape Town/Nedbank Urban Real Estate Research Unit, said 50% of South African capital raised for property-related transactions in 2016 had been allocated outside the country, compared to negligible levels in the past few years.

Seroto also said South African REITs have chosen to partner with local companies in CEE. Growthpoint announced Dec. 1 that it had acquired a €186.4 million stake in Romanian company Globalworth Real Estate Investment Ltd., while Redefine Properties Ltd. bought a majority stake in the Polish group Echo Investment S.A., parent company of Echo Prime Properties BV, for €362.0 million earlier this year.

In other moves, Johannesburg-listed companies New Europe Property Investments plc and Rockcastle Global Real Estate announced merger plans Dec. 14 that were expected to establish the largest listed real estate company in CEE.

In February, Hyprop Investments Ltd. purchased majority stakes in shopping centers in Serbia and Montenegro for €121.7 million, marking the company's first acquisitions in Europe but likely not its last. It said at the time that it aims to own a high-quality shopping center portfolio in central and eastern Europe worth €1 billion inside of five years.

Accelerate Property Fund Ltd. bought nine retail warehouses across Austria and Slovakia for €82.1 million in October, while NEPI purchased a Romanian shopping center in July for €100 million. In February, Tower Property Fund Ltd. announced the purchase of four Croatian properties for €66.4 million.