Europe of the east open for business
SA companies flock to nations once behind an iron curtain
TWO decades after the fall of communism, Eastern Europe is now a hot investment destination, even for South Africans.
The South African presence includes construction companies Group Five and Murray & Roberts; retailers Steinhoff and Pepkor; Naspers, through its classified website Avito; Barloworld, with a CAT dealership; Mondi’s fine-paper and containerboard mill; and about 10 property companies.
The attraction has been evident over the past 16 years, when many nations joined the EU in venturing across open borders.
Of the South African investors that have caught on, the real estate industry stands out.
There is no consensus on what constitutes Eastern Europe, but it usually includes Russia, the Czech Republic, Slovakia, Poland, Croatia, Hungary, Romania, Moldova, Serbia, Slovenia, Serbia, Bulgaria, Ukraine, Belarus, Montenegro, Bosnia and Herzegovina, Albania, Kosovo and Macedonia.
The CE4 refers to Poland, the Czech Republic, Hungary and Romania, all of which are near Western Europe and have tended to be among the most attractive and stable destinations in the region, along with Serbia.
Carsten Hesse, emerging Europe equity strategist at German investment bank Berenberg, said CE4 countries would continue to grow on average at more than twice the speed of EU economies in 2016.
Private consumption and rising trade balances would remain the key driver, he said.
Pepkor was one of the early South African entrants to Eastern Europe. Through Pepco Polska, the clothing retailer has opened about 500 stores in Poland since 2004 and recently invested in Slovakia.
Poland stands out because it is the largest economy in the region and has a population of 38 million. Most are educated and quickly becoming more affluent. Poland has been the largest beneficiary of EU development funds, with à105.8 billion (about R1.7-trillion) allocated for the years 2014-20.
Between 2007 and last year, Poland’s compound GDP growth was 28%, with exports growing 45%.
Poland was the only EU country to avoid a recession in the financial crisis. It is now the eighth-biggest EU country in terms of GDP. The World Bank in June forecast 3.7% growth for Poland this year.
Hesse said Poland was an attractive investment market for a company looking to gain exposure in Eastern Europe.
“The level of education in Poland is very high. There are many professional people and the quality of their work is as good as that of people in Western Europe, but the wages they earn are lower.
“Many Western companies outsource operations to Eastern Europe and many professionals in Poland work for German companies, for example,” he said.
Wages have been growing in Poland at 5% a year and the general unemployment rate is only about 7.9%, although the youth unemployment rate is high at 17.1%. Poland’s economy is strongly supported by neigh Group bour and main trading partner Germany.
Germany now sells more goods by value to Poles than it does to China, according to Marek Belka, a former governor of the Narodowy Bank Polski (the Polish central bank). As much as 27% of Polish exports are sold to Germany each year.
Belka recently joined Echo Polska Properties, the latest offshore real estate group to list in South Africa. Echo Polska Properties CEO Hadley Dean said it would take about 25 years for Polish wages to catch up with those in Germany. This meant the Polish outsourcing industry had strong growth potential.
Polish consumer spending was also growing. Commercial property and real estate services adviser CBRE ranks Polish retail the 19th most attractive market globally for retail brands.
Hungary and the Czech Republic are markets that are also attracting investment, but are not as big as Poland’s.
Five has been active in Hungary for a few years. It has a portfolio of transport concessions under the Intertoll brand, operating motorways in the country. Intertoll also operates in Poland.
Hungary’s economy has also been growing consistently, with real growth in GDP of 2.9% in 2015, 3.7% in 2014 and 1.9% in 2013.
Hesse said Hungary was set to grow at around 3.3% this year and 3% in 2017.
“Consumer confidence and private consumption have been boosted by the lowest unemployment rate in a decade —a 3% year-on-year increase in employment, 5% year-on-year average wage growth, low inflation and low interest rates.”
Hungary had a competitive and well-positioned manufacturing sector, which led to impressive industrial production growth, according to Hesse.
“GDP growth could accelerate even more if the standoff between Hungary and the EU regarding the construction of a nuclear power plant could be solved. Furthermore, the National Bank of Hungary is very much growth orientated. And due to the low inflation outlook, it could introduce further dovish measures to push up growth, such as funding for growth schemes, lower interest rates, or incentives for banks to buy more Hungarian bonds, to lower bond yields,” Hesse said.
He said Hungary was also due for a credit rating upgrade. S&P Global Ratings raised Hungary’s rating in March last year from BB to BB+, one notch below investment grade.
“Still, there is a good chance that at least one of the three rating agencies [S&P, Fitch and Moody’s] will raise the rating to investment grade this year,” said Hesse.
The other CE4 economy that offers opportunities for South African investors is Romania. While less developed than the other four economies, it has a population of close to 20 million. The country’s information technology sector is strong and, historically, Romania served as the IT hub of the former USSR, said Hesse.
Romania’s economy is set to grow at more than 4% this year and next year. Earlier this month, 6% second-quarter growth was reported.
South Africa-founded real estate group New Europe Property Investments has become the largest owner of shopping centres in Romania.
New Europe Property Investments is part of the Resilient group’s stable of JSE-listed property companies. It is one of the group’s European offshore rand hedges for investors as it pays out distributions in euros.
South African companies, however, have been wary of Russia.
Standard Bank pulled out five years ago, selling its 36.4% shareholding of Troika Dialog, an investment bank and asset management firm. The group said the sale was linked to a “refocused strategy” in the wake of the global financial crisis that led to withdrawals from other emerging markets Brazil and Turkey to focus on Africa.
Standard Bank joint CEO Ben Kruger said: “In Eastern Europe you are seeing pockets of growth and people are modernising their cities, economies are working and there are new buildings, manufacturing plants and factories. The yield for these is very attractive to investors. So property investments, particularly in Eastern Europe, have been very attractive with dollar yields that are quite high.”
With a stable regulatory and political landscape, people did not see any real risk associated with investing there, he said.
“So when you put all of that together, it’s understandable why people would see Eastern Europe as a great investment area,” said Kruger.
Jean Pierre Verster, portfolio manager at Fairtree Capital, said Russia was a difficult market to do business in — culturally, geographically and politically — and the companies investing in Eastern Europe have targeted either countries that have joined the EU or were seeking to join the EU, which gave some comfort regarding laws, regulations and free trade with the rest of Europe.
“But the likes of Naspers, Barloworld and Mondi have shown that there is money to be made in Russia,” Verster said. — Additional reporting by Dineo Tsamela
Polish retail is the 19th most attractive market globally There is money to be made in Russia