Echo Polska Properties to buy major retail portfolio in Poland

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The portfolio is known as the M1 portfolio and it forms part of a larger, 28-property portfolio based in Poland.

The assets will be acquired in three tranches over the next three years. EPP is buying the assets from a consortium, which is owned 25% by South African blue-chip property company, Redefine Properties, for €692m.

The M1 portfolio is made up of 12 retail properties with a total of 446,500m² gross lettable area.

It includes eight M1 regional shopping centres, ranging from 30,000m² to 55,000m² in leasable size, which attract more than 40-million annual visitors, and four retail power parks with a leasable area ranging from 20,000m² to 35,000m².

Upon completion of the transaction in mid-2020, EPP’s portfolio would comprise at least 27 modern shopping centres, including almost one-million square metres of gross lettable area, said CEO Hadley Dean.

It will be the largest owner of malls in Poland, according to Dean, and will help to support EPP’s dividend growth for the next few years.

"This deal is monumental for EPP. It sets up dividend growth for 5 to 10 years and basically gives us another launch-pad across Poland. We will be in a number of cities which will attract large tenants who want presence across the country. They can sign up with us and we will often be their sole landlord," said Dean.

Poland has become a very popular investment market for South African real estate investors.

Peter Clark, portfolio manager at Investec Asset Management said the deal fitted EPP’s strategy but came with costs.

"The properties are in line with EPP’s strategy of positioning the portfolio in the retail sector, however will create an overhang of equity which will need to be raised for the next three years," he said.

Garreth Elston of Golden Section Capital said the deal looked largely neutral initially.

"In our view the deal looks largely neutral initially. Most of the M1 centres as well as the Power Parks that have been acquired, despite being dominant, are in secondary cities, as well as being dated and in need of updating.

"The acquisition yield of 7.1% is largely in line with the quality of the assets, and slightly down from EPP’s earlier acquisition of three assets at around 7.5%. Prime Polish retail yields are closer to 5.5% in Warsaw, and prime power parks are typically in the 7% area. Yields on retail assets in secondary markets have been between 6% to 8% this year," he said.

He said the current rental levels indicated that EPP would have the ability to leverage rental increases in the future.

"This is currently limited as certain properties have a master lease from Metro which runs until 2024. That being said, under certain conditions, the master lease with Metro may be cancelled, which could allow EPP to unlock better value from the acquired properties. At the moment though this is not clear, but potential updating of the centres, as well as expansionary potential on certain of the centres, will make the acquisition more revenue enhancing going forward," he said.

Wynand Smit, research analyst at Anchor Stockbrokers said the transaction was in line with management’s stated objective of becoming a retail-focused fund by selling all their office properties over the next few years.

"Retail sales in Poland are very strong, at 8% year-on-year for the first ten months of 2017, which shows the healthy retail environment currently in Poland. This deal should improve their quality of their portfolio and we prefer the retail versus office in Poland in the medium term. EPP does not need to come to the market to raise new equity, as the first tranche will be financed by the recycling of office assets and issuing shares to Pimco and Oaktree," he said.

Poland, which is the largest market in the central and eastern Europe (CEE), has become a very popular investment destination for South Africans.

FTSE Russell, a British provider of stock market indices and associated data services, at the end of September announced the upgrade of Poland from emerging market to developed market status. The decision would be effective in conjunction with the FTSE Global Equity Index Series semi-annual review in September 2018.

Poland joined the 25 most developed economies of the world and is the first CEE economy to be upgraded to developed market status.

Source: Business Day