Polish push pays off
Shareholders should soon participate in the dividend upside from Redefine’s newly acquired venture in Poland
At first glance, Redefine Properties’ takeover of Polish mall owner EPP couldn’t have come at a worse time.
The deal, which added about R20bn worth of assets to Redefine’s balance sheet and lifted the company’s offshore exposure from 16% to 41% in one fell swoop, was sealed at end-February just after Russia invaded Ukraine.
However, the war may in fact benefit Polish real estate companies.
Speaking after the release of Redefine’s interim results this week, CEO Andrew
König said that though the conflict came as a “shock to the system” just as management was finalising its offer for
EPP, it is unlikely to have a negative effect on Polish real estate valuations and returns.
“One could argue that the war is a grave risk for
Poland. But the Polish economy is far from dead, and could actually benefit from supply chain disruptions as a result of the conflict,” said König.
He said there’s likely to be more demand for industrial space as Ukraine businesses move their manufacturing and distribution operations to Poland. Given Poland’s highly skilled workforce and relatively low property rentals compared with those of its Western European neighbours, König said, the country is viewed as an attractive, low-cost base. “Germany, for instance, is expected to relocate more of its automotive operations to Poland.”
Nevertheless, inflation, which was already climbing before the war, coupled with building material and labour shortages, has created challenges for Polish property developers.
König said the labour shortage has been worsened by Ukrainian construction workers, who typically make up about 30% of Poland’s construction workforce, having returned to their homeland.
But he argued that increased spending in local shopping centres by the 2.7million Ukrainian refugees that have fled to Poland will offset higher inflation and rising interest rates.
König said the Polish are doing an “incredible job” to embrace Ukrainians. “Everyone has a roof over their heads. And they have the ability to spend.”
Referring to Google’s recent purchase of three office blocks in the capital, Warsaw, for a record €583m, König said the deal underscores ongoing investment appetite for Polish real estate assets.
Poland is also not as reliant on Russia for gas and coal as some of its Western European counterparts, so energy cost rises will be largely contained.
Economists are still forecasting economic growth to clock in at a decent 4% for Poland this year.
The EPP acquisition is expected to support earnings and NAV in the second half of the financial year to end-August. The deal has increased Redefine’s assets by about 40%, from R71bn to R99bn, and has transformed the company’s geographical exposure. The proportion of SA properties to offshore assets has changed from an 84:16 split to 59:41.
Redefine is now, for the first time in two years, in a position to provide earnings growth guidance, with distributable income likely to reach 50c-55c a share for the full year to August. That compares with 52.9c a share for the year to August 2021.
Redefine resumed dividend payouts last year after an 18-month pandemic-related hiatus, during which shareholders received no payouts. The company declared a dividend of 23.7c for the six months to end-February.
While the growth prospects for Polish real estate appears upbeat, the outlook for SA’s retail, office and industrial property sectors is less rosy. Foot count and trading densities (sales per square metre) in Redefine’s portfolio of SA shopping centres have bounced back and are now on par with pre-Covid levels, or slightly ahead, but rentals across its SA retail, office and industrial sectors continue to drop when leases come up for renewal.
That’s particularly true for Redefine’s office portfolio, where rental reversions came in at -17.4% for the six months to February. That compares with a drop of 8.4% and 10.5% respectively in retail and industrial renewals.
Vacancies also continue to climb, especially in the office market, where Redefine notched up an uncomfortable new record high of 16.4% in February, from 12.9% in August. Retail vacancies are also up slightly, from 5.2% to 5.9% over the same period, while industrial vacancies decreased marginally, from 4.6% to 4.4%.
König doesn’t expect any noticeable improvement in the uptake of SA office, retail or industrial space until there’s a real upturn in SA’s economy.
Despite initial concern about Redefine’s EPP takeover and delisting plans, which some believed will lead to less choice among the JSE’s pure rand hedge property stocks, analysts say the deal has no doubt boosted Redefine’s investment case.
Kelly Ward, head of research and portfolio manager at Metope Investment Managers, says that while Metope welcomes Redefine’s resumption of interim dividends, its results to February are still reflective of the weak SA macroenvironment. But, she says, “the inclusion of some offshore earnings in the next reporting period will strengthen Redefine’s investment case and help it diversify away from the weak SA economy”.
Ridwaan Loonat, senior property analyst at Nedbank CIB, shares a similar view. He says that though the February results held few surprises, with the SA business continuing to operate in a challenging environment, the EPP deal will help lift Redefine’s NAV by 13.6%. Loonat says this would suggest a discount to NAV of 37% at the current share price of about 430c. That’s despite Redefine’s share price already having recovered by close to 125% over the past two years.