The €66m deal is Tower's largest acquisition to date and is in line with the fund's announced strategy of looking to increase its offshore exposure and to invest in properties that are predominantly in the retail sector.
The acquisition results in retail properties making up 50% of the fund’s total portfolio which the company has been working towards for some time.
Purchased from Agrokor d.d, which is the largest company in the Adria region - employing over 65,000 people and concentrating its interests in food retail and food production with an annual turnover of approximately €6.5bn - the portfolio comprises of four quality shopping centres all anchored by Agrokor’s affiliate, Konzum d.d.
Konzum, similar to South Africa’s Pick n Pay, is the largest retailer in the region and has the dominant market share in Croatia (where it has over 740 stores and employs more than 14,000 people), Serbia, Slovenia, Bosnia, Herzegovina and Montenegro. Two of the properties are known as Super Konzum’s, which are similar to the South African hypermarkets and the other two are convenience shopping centres with strong line shops including H&M, New Yorker, DM and Mueller.
Marc Edwards, CEO of Tower, explains that the retail centres have been purchased on a sale and lease back agreement under a head lease, meaning that Konzum (guaranteed by Agrokor) will be paying the full rentals for the properties, including line shop tenants, and covering all property related costs.
“These retail centres have been sold by Agrokor in a sale and lease back in order for them to utilise the cash more effectively in their business given they are a retailer and property is not their core strength,” says Edwards.
“Konzum has a 12 year head lease over the properties (guaranteed by Agrokor) which dramatically reduces Tower’s risks and aligns Tower with the strongest company in the region, which certainly has its benefits. The lease escalates with inflation and has a turnover clause built in, meaning that if Konzum grows its turnover, Tower grows its rental which is important in a country where low inflation prevails.”
Tower initially established their offshore presence in July of 2015 through the purchase of a newly built office tower, VMD Block B, in Zagreb, Croatia.
The acquisition was the first in Tower’s broader strategy of establishing an offshore portfolio and has proven to be highly successful, outperforming all expectations. This has led to Tower making the decision to increase the funds offshore exposure.
According to Edwards, Croatia offers significant opportunities for value creation. “Croatia was coming off the back of an eight year recession. We believed the economy was about to enter a growth phase and we are pleased with the 2.8% quarter on quarter growth achieved at the end of 2015. The recent tourism season was the best for a number of years, which is excellent given that this industry accounts for a large part of the economy."
Croatia is in the Eurozone (from July 2013) and is expected to convert to the euro in the near future. It is politically stable and has just finalised its latest elections where a new government has been elected. The government needs to focus on the economy to restore the country to growth after the long recession by reducing national debt, encouraging foreign investment and just implementing prudent fiscal policy.
“Added to these macro benefits, the cost of debt in Croatia is significantly cheaper than here in SA with property yields being similar, resulting in earnings enhancement,” says Edwards. “Croatia is a small country, which means Tower can be a dominant player and our investment in the market has been well received by Croatian authorities, investors and professionals.”
Edwards adds that a large pipeline of compelling property opportunities have been identified in the retail sector in an investment climate that is increasingly pro foreign investment with a strong legal system and regard for property rights. “Our relationship with Agrokor and Konzum offers us a significant potential pipeline of retail properties in the Balkan region.”
“Tower’s strategy is to seek out new markets that provide strong diversification opportunities through premium, high quality properties. Croatia, at an opposite end of the property cycle to SA is naturally attractive to us. Tower will continue to focus on Croatia and the Balkan region for the foreseeable future given our strong partnerships in the country and the greater area,” concludes Edwards.
