Nepi is Resilient's secret weapon

Posted On Friday, 18 December 2009 02:00 Published by eProp Commercial Property News
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While its listed peers Growthpoint, Redefine and unlisted Attfund have dived into the melting property markets in Western Europe and Australia, Resilient is making money.

Property-Housing-Residential“When we dug down into the UK funds, we found there were good reasons they were so cheap. Management was poor and out of touch”

— JEFF ZIDEL

SA’s biggest listed property group, Resilient, is in Europe doing what it did so successfully in SA. While its listed peers Growthpoint, Redefine and unlisted Attfund have dived into the melting property markets in Western Europe and Australia, Resilient is making money, working quietly under the radar in Romania, Eastern Europe.

Resilient built its skills and reputation developing retail properties in small towns and cities outside SA’s main metropolitan areas. By the time anybody noticed, Des de Beer, Jeff Zidel, Barry Stuhler and David Lewis had become big players in SA property. Today, the group includes Resilient, Pangbourne, Capital, Fortress and its latest, Romanian invested fund New European Property Investments (Nepi) Their combined listed market capitalisation probably just exceeds the largest single fund in SA, which is Growthpoint at more than R21bn.

“We started looking in London at the listed funds available. At fire-sale prices, they looked very inviting,” says Zidel. “But when we dug down into the funds, we discovered there were good reasons they were so cheap. Management was poor and out of touch with their properties, which in turn meant they were going to take a lot of work to get right.”

Then Resilient got lucky. Before he left for Romania, Martin Slabbert, who had been employed by Nedbank, had already worked with some of Resilient’s employees. Slabbert (38) resigned from Nedbank in 2005 and joined Deloitte’s corporate finance team in Romania.

Slabbert felt it was an ideal time to invest in property in that country and discussed this with Resilient.

They visited Romania and agreed. “It has a low-paid but highly educated population,” he says. “A tenant of ours who does racking couldn’t believe the number of engineers he could employ for the cost of messengers in Old Europe [Western Europe],” says Slabbert.

“Eastern Europe has fascinated me since the Berlin Wall came down in 1989,” he says. Romania felt a bit like home; emerging into democracy, a developing financial system, a large nonmetropolitan population, low incomes and GDP, as well as regular political drama and more than a little corruption. But, very importantly, it was a new member of the European Union.

Nepi was listed on London’s Alternative Investment Market (AIM) in late 2007 and set about doing business exactly as it did in SA in the 1980's and 1990's, building a portfolio of non metropolitan properties, initially offices. But as the financial meltdown hit consumption and retail turnover, they focused on shopping malls with strong national supermarkets — the thinking being food retailers would weather the recession more comfortably — as anchor tenants. Romania’s retail centres uniquely have hypermarkets — giant supermarkets the size of SA’s Pick n Pay hypermarket — almost exclusively as anchor tenants. Nepi has focused on centres with France’s Carrefour and Auchan hypers

The majority of Europe’s property investors have concentrated on buying properties in Romania’s capital city, Bucharest. With a population of 2,3m, it is the seventh-biggest city in the EU. This left the rest of Romania and its 22,7m population to a handful of retail developers, many of which were up to their eyes in borrowings, and Nepi.

“The financial crisis started almost the same time we launched Nepi. That and our parallel experience in SA have given us a big advantage in Romania,” says Zidel. “Shopping centres started running into trouble when they had to renegotiate their borrowings and found the banks unwilling to roll the debt over, or they had breached their loan-to-value covenants. That’s where we came in.”

Zidel says Nepi was able to persuade lenders that it had the right skills as well as some cash to sweeten refinancing of shopping centres. As a result they have become the buyer of choice for troubled Romanian malls. “We even have sellers eager to leave some of their money in the scheme as shareholders in Nepi,” says Slabbert.

Nepi’s allure to banks and sellers means it can negotiate aggressively for low prices and high yields. It is also able to negotiate low borrowing rates, between 3,75% and 5,25%.

The fund is currently paying out about à0,1438/share — 7,5% yield on its R27/share price on the JSE’s AltX. But the four malls Slabbert and Zidel are buying for about à218m (R2,4bn) will probably lift that yield to more than 9% at the current price. It will also raise the property portfolio value to about R3,4bn.

The dividend is paid after tax and in euros, though converted to rand for payout in SA to holders of AltX-listed shares. Zidel aims to transfer to the JSE’s main board soon, and list in Romania. “We’ll be in the top 20 on its bourse,” he says.

This rosy picture assumes that Romanians will keep their jobs and keep on shopping at the same rate they’re doing now. There is also the assumption that the banks will keep on lending to Nepi at the same low rate. The broad picture for Europe is bleak, with rising unemployment expected through next year and probably into 2011. It is expected that about à350bn of commercial property debt will be coming up for refinancing in the next five years — US3trillion in refinancing if you add the US.

Slabbert and Zidel are quick to point out that Romanians are the lowest-paid Europeans in the EU, though they have a much higher disposable income than South Africans. They also produce the lowest GDP per capita in Europe. The upside for Nepi based on these facts is that wages and production should go only one way, and that’s up. The full impact of the country’s membership of the EU has still to be felt.

But success in property doesn’t come only from the macro economy. Slabbert and Zidel have been tramping the streets of the large towns and small cities in Romania and picking up local opportunities — something all smart property investors do.

“For instance, one of the four malls we’re buying is over the river from Serbia,” says Zidel. “There are three small towns on the Serbian side and a small bridge between them and our mall. They’re allowed over the bridge once a day for a à30 fee. The bridge is about to be expanded, after which there will be no fee and no restriction on visits to our mall.”

All this makes Nepi a serious, if eccentric, investment choice among the SA funds moving offshore. For now, at least, the yields speak for themselves.

 

Last modified on Monday, 28 April 2014 18:43

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