Investing in Polish property not all plain sailing for Echo
Echo Polska Properties (EPP) invests solely in the Polish property sector and specifically in retail and office, in the ratio of 72% retail, 28% office. It dual-listed on the JSE in mid-2016 and has since been a laggard, falling significantly in line with many other offshore property counters.
Operating large shopping centres by global standards, its Galaxy centre in Szczecin has a gross lettable area of 57,000m², and the Galeria Echo in Kielce is 72,000m². For perspective, the Sandton City-Nelson Mandela Square combination measures 215,000m² of retail, hotel and office space, Eastgate is 144,000m² and Rosebank Mall is 62,000m².
There is much debate as to whether the Polish economy is a good place to be. Although it is booming, detractors argue that its strength is not sustainable.
The Poles are hard working and intelligent, reflected in the country’s rapid move up the scale of industrial and consumer development since throwing off the yoke of communism in the 1990s. In real terms, Poland’s per capita income rose from 36% of the Organisation for Economic Co-operation and Development average in 1990 to 66% in 2016.
Its 2017 GDP growth was 4.6%, with inflation at only 2%. Such growth emanated mostly from consumer spending, with consumption growth averaging 4.8%. Unemployment is 6.6%.
However, there are signs that the economy is being eroded by slow rates of productivity growth, low levels of investment and demographic changes, all exacerbated by government policies. The World Bank sees a reduction in Poland’s growth in 2018, as employers struggle to find employees.
This economic background paints a mixed outlook for EPP investors. On the one hand, the firm is enjoying the progressive economy, and turnover growth at its centres outperforms the national average, but the outlook is somewhat spoiled.
EPP CEO Hadley Dean paints a picture of continued retail space growth in Poland, but at a declining rate. Some of this growth will come from traditional mall shopping as the average shopper is fairly traditional and prefers going to stores that are physical rather than virtual.
But part of the growth in retail space will also be due to the particularity and peculiarity of online shopping in Poland. While growing numbers are taking to online shopping, they have a preference for the “click and collect” option, whereby the order is placed online but the customer still collects the merchandise from a store.
Sunday shopping will be outlawed in Poland by 2020. EPP management believes that Poles will stagger their shopping patterns to accommodate this change and the impact on retail activity should be limited.
Financially, EPP is growing its distributions and its December 2017 balance sheet appears sound. Dividend per share rose from 5.80 euro cents in financial 2016 to 10.87c in 2017. Average cost of debt is 2.14%, with an average debt maturity of 3.9 years. Although debt to equity is over 100%, low debt servicing costs make this comfortable.
EPP will continue disposing of office space to fund its shopping centre development programme. On a price to earnings ratio of about 15 times at the time of the results announcement, it is not cheap, though this is sweetened by the generous dividend yield of 9.2%. Strong earnings and dividend growth are forecast in 2018.
“Property firms in central and eastern Europe are overbought, do not offer enough clarity on real property values, are likely to see growth slow in the next two years, and the political risks of many of these countries are not being correctly accounted for by the broader market,” says real estate research specialist Golden Section Capital.