Out of Africa: South African capital in CEE

Anyone following the real estate market and the flow of capital in this sector has most likely, in some way or another, come across a party with a South African origin or flavour. If you haven’t you surely will, soon! And here’s why.

South Africa has a substantial property sector, with 24 companies listed on the Johannesburg Stock Exchange (JSE) as real estate investment services (REIS), and 37 other companies listed as real estate investment trusts (REITs). Together these 61 companies form the real estate sector on the JSE and have a market cap totalling ZAR 770 billion, or approximately €49.8 billion.1 Currently, opinions are that a peak has been reached and that the market in South Africa is becoming saturated with a large amount of oversupply and little growth to fill the same, some even calling the status quo a property bubble.2,3

Although a saturated market or a potential bubble might in some circumstances be enough to force shareholders and managers to look abroad, for the case in point, it might be worth considering a bigger rationale.

What is driving South African real estate investment out of South Africa?

From my perspective the bigger rationale can be divided into a push and a pull.

The Push

The push being that in little more than a period of a year, South Africa has seen its third minister of finance and a credit rating downgrade to ‘junk status’ by Fitch Ratings and Standard and Poor’s. Consequently, the economy has been growing below 1% since mid-2015, experienced negative growth of 0.3% in Q4 of 2016 and -0.6% in Q1 of 2017 - resulting in a technical recession. Although the economy bounced back to the positive side in Q2 of 2017, the cost of debt is still relatively high.4

Along with the political turmoil and sluggish economic growth, South Africa has stringent exchange control legislation in place. It’s imposed with the idea to control outflow of local currency and preserve foreign currency reserves, but it results in regulatory barriers to cross-border cash flow, and a lack of liquidity.

A combination of all the above-mentioned factors is creating uncertainty and is, in my opinion, forcing South African corporates to look abroad for a) diversification and b) risk hedging.

South African capital in CEE: where and why?

The Pull

Some obvious attractions for South African capital to Central and Eastern Europe (CEE) are:

  • stable currencies and the opportunity to hedge the ZAR, one of the most volatile currencies.5
  • access to cheaper debt
  • yields north of 5%6
  • well-educated workforces and,
  • the safety of the EU regulatory structure.

However, apart from the very competitive yields, the above is true for the EU as whole and perhaps even for countries on other continents. Surely this alone did not justify the approximately €3 billion of South African investment in the Traditional Shopping Centre ‘TSC’ segment in CEE during 2016, so what is the real pull?7

From a macroeconomic perspective the CEE region is doing well. In general, with the exception of Slovenia, the public debt-to-GDP ratio for CEE countries is relatively low or declining. These countries have seen a sharp rise in minimum wages in recent years, which is set to continue in the remainder of 2017, ranging up to 10%.8  And unemployment is on the decline for the region. Since 2012, unemployment in Hungary has dropped from 10.9% to 4% in 2017, and in Bulgaria unemployment is down from 12.3% to 6.4%. In Slovakia, it’s down to 8.3% from 14% for the same period.9 In short, what this equates to is a region that is home to a growing number of consumers with more disposable income on a monthly basis.

Along with the abovementioned factors, the TSC segment in CEE is on the rise, as opposed to the reportedly saturated market in South Africa. An increase in rent prices of as much as €27 /sqm/month within three years, occupancy levels of 100% along with waiting lists being drawn up for some prime properties evidences this.

A final motivator for choosing CEE as opposed to the rest of the EU is the percentage of online transacting. In Western European countries, online transacting has become almost the new normal. Whereas in Eastern European countries, online transaction levels are growing, but remain relatively low.10

Conclusion

South African Capital entering CEE is backed by experienced shareholders and managed by world-class property companies. Together they have built the South African TSC segment to become the 6th largest in the world, with a floor area covering 23 million square meters.11 These eager to hedge risk and diversification-seeking shareholders and companies have identified and set their target on CEE. This is a trend likely to continue, and it might very well be that South African corporates in other sectors will follow suit.

Talk to us

When crossing borders, there is a clear need for local partners working with you to reduce risks. TMF Group has the global presence to act as your local partner in most CEE countries. We have a proven track-record in the real estate industry, including in fund administration, SPV management, structured finance transactions, accounting and compliance in accordance with local regulatory requirements.

Working with TMF Group can help to reduce risk by managing the information flow across multi-jurisdictional structures. We can control costs by taking care of your back-office administration, and providing you with a single point of contact to help you simplify your operations.

Need more information? Get in touch with us today.

Find out how our services can help you to reach your full investment potential.

 

 As at 31 July 2017. (www.jse.co.za) https://www.moneyweb.co.za/investing/property/is-sas-great-mall-building-boom-over/The Great African capital migration: exploring trends impacting real estate capital flows in Sub-Saharan Africa, Capital Markets Research by JLL, October 2016. Stats SA. https://www.poundsterlinglive.com/zar/7540-the-next-quarter-could-get-messy-for-the-rand-say-treasury-professionals http://www.globalpropertyguide.com/Europe/rent-yields Taking into account capital invested into countries not (yet) part of the European Union: Serbia, Macedonia. CEE Real Estate Investment Compass 2017, prepared by Colliers International and CMS. CEE Banking Sector Report, Raiffeisen Research, June 2017. 10 CEE Real Estate Investment Compass 2017, prepared by Colliers International and CMS. 11 https://sacsc.co.za/news/south-africa-has-the-sixth-largest-number-of-shopping-centres-globally 

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