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edition 11 (225)
November 2017
Investment & finance

Being in the people business

The wave of South African capital that is transforming the Polish real estate market

Alex Hayes

Being in the people business
Andrew Joseph König, CEO, Redefine Properties

South African REIT Redefine Properties has flown over looking for a piece of the Polish real estate market. To this end it has taken a 40.12 pct stake in Echo Polska Properties. We asked Redefine Properties CEO Joseph König what he finds so alluring about the Polish climate

Alex Hayes, Eurobuild CEE: So how are you today?

Andrew Joseph König, CEO, Redefine Properties: Very good; we’ve had a busy week.

Tell me about it.

Well, we’ve been to a number of cities. We went down to Kraków, Katowice, Szczecin and Wroclaw. Well we’ve been all over the shop. And even here in Warsaw we’ve spent a bit of time too. Poland’s a fabulous place to visit. I think the people here are wonderful. The positive enthusiasm and the energy of Polish people is fantastic. You know, back home people are quite tough on the country from a political point of view – and from an economic point of view things there are difficult. But here it’s the exact opposite. Everything’s looking positive and people are looking forwards not backwards. It’s a very different mindset.

What is it that makes you want to invest here in Poland?

A number of factors. Firstly, we’ve got very good partners – with interests aligned with ours.

Youre talking about EPP?

EPP and Griffin Real Estate. We’ve got lots in common from a personal point of view, too. But I think for us it’s a market that’s attractive from a fundamental point of view. It’s solid. There’s a growth story here: You’re getting emerging market growth, but it’s in euros; so for us, it ticks all the right boxes from the investment point of view, but very importantly it comes back to the people and the alignment of interests, and with that comes all the other good things, such as the opportunity to grow.

I know that theres a lot of investment right now, but isnt much of this just being driven by the fact that money is so cheap?

Sure, there is that. In this market there is still some yield compression, so there’s still value to be had from investing now with the possibility of capital appreciation. But money is very, very cheap relative to the yields that you’re achieving. Given that it’s a competitive market from an investment point of view, pricing is under pressure. There are no bargains to be had. Assets are well valued – fully valued in certain instances. But we invest in opportunities where we can actively manage the property to its best potential.

So youd very much call yourself an opportunistic investor?

Yes, very much. We like to invest where we can see value to be had from doing the basics right and getting the assets managed to the best of their potential.

Well, what about the rest of the CEE region?

We’re concentrating on Poland. We like Poland not only because of the relationships we have, which are very important when you invest in these markets. You need to have a local presence. But we would rather be invested well in one market where we have scale, where we have the partners – we don’t have partners outside of Poland in this region and also, more crucially, we’re not entirely convinced that the real estate markets are as liquid outside Poland.

So could I sum this up by saying that at present youre not interested in other CEE markets, although that could change in the future?

It could, but we’d be talking about quite some time in the future. There are substantial opportunities still here in Poland for us.

What do you see as the main risks on this market?

The main risk is, I would guess, the very high dependency on the EU for trade. For us that would be like a very big macro-risk. I suppose in every country there are political challenges, but the uncertainty around taxation could also be a potential risk.

How do people from South Africa view this market?

There’s a good appetite for this market from a South African investor point of view. Because we’re operating in an environment where we’ve got a number of uncertainties: one being the political uncertainty, the other is that economic growth at the moment is subdued and that is why there’s an attraction to this market. Because we’re seeing the rise of emerging market growth from a GDP point of view, but in hard currency. So suddenly we’ve got a currency that over the long-term is devaluing against the developed markets, so once again this provides an added attraction as well as that whole diversification of risk outside of your own borders.

What tempted you to take such a large chunk of EPP?

For us the issue is that when we invest into entities, we like to have a significant influence. Below 25 pct you become a passive investor; you’re at the mercy of the board of the company in terms of the distribution of income and so forth, so we like to be invested at a level where we exert influence strategically and also provide financial support. So that’s why we invested in EPP to the extent of more than 40 pct. To be honest this is far larger than we’re able to handle on our own and that’s why we brought in other investors and why we IPO’ed the company.

Lately Ive been seeing a lot of South African capital flowing into this region. Could you give me a basic idea of what the reason is for this trend?

Once again, as I think as I said to you earlier, things back home aren’t as rosy as they could be. People are looking to diversify by moving offshore to markets where there are growth opportunities and that’s really why people are coming into this market in particular.

How long do you see the era of cheap money lasting?

Well it all rides on QE I suppose. As long as there’s quantitative easing going on, there will be this ongoing search for yields – and while that chase is on, money will remain well priced. It’s anybody’s guess how long it’s going to continue for. What we try to do is secure our funding for as long as possible. For the next five years, we’re quite relaxed in expecting interest rates to remain where they are, given that we’ve got assets in places that are fixed at these levels.

Ive noticed that your company has invested in Australia. Isnt that closer to your actual region? How does Europe fit into the general strategy of the company?

We have a global diversification strategy. Australia, by the way, is further away from South Africa than Poland, that is, in flying times. To fly up to Poland takes around eleven or so hours, but to fly to Sydney you’re looking at about 13 hours. So, for sure, for us the UK was the first overseas market that we invested in. The UK guys then moved into Germany, so we then had a presence there. Then we also saw an opportunity in Australia. There are many South Africans who live in Australia, so we have a lot in common. Not only are we southern hemisphere countries who play rugby, but our interest in that market is because of friends and family that live there. That’s how we came to expand into that market and then Poland came along afterwards. You know, we’ve only been investing in this market for eighteen or so months.

Youre invested in this market now because of your partners, but do you foresee a time when you might leave your partners behind and invest in your own name?

We prefer not to. Property is a local game. You need local representation. You need people who speak the language and were born into this market. At the end of the day, to be relevant you have to be able to see it through the eyes of a local person. We are unable to do that. So to go it alone is not for us. It’s not part of our philosophy of how we invest in and manage our properties. There are times when you need to invest outside of your structure, but the local partner has always been involved in some way in that picture. So we can’t own, for example, a property with Cromwell in Australia, although we have invested in Cromwell.

How long do you think youll be invested in this market?

For as long as possible. We’re long term investors. Real estate is a long term asset. It’s a long term game. We’re not in it to make a quick buck.

So would you say that youd still be investing in this country if the economic climate was not so favourable?

The thing with properties is that it’s cyclical. And it’s a long term game. So one structures your business in such a way that your leasing profile should carry you through the difficult cycles and you invest for that upturn, so active asset management is absolutely critical. Unfortunately, cycles do have their downs as well as their ups. We’re long term investors because once you invest in real estate you’re stuck with it.

Whats the specific advantage that Redefine has?

Our specific advantage would be, I think, our approach to how we do business. It is different – we believe – to others in that we focus on people. Relationships are extremely important to us and that’s where it all starts. If we have the chemistry and the confidence of the people we transact with and an alignment with them, then we know we’re going to go forward from there. So bricks and mortar are a commodity; but people are our business.

So you mean that sooner or later youll be coming back here to meet up with everybody...

Absolutely. We’re in constant touch with the guys on the ground here. We’re very close to them; we work very closely with them; we provide them with strategic and financial support. At the end of the day we are backing them to manage the portfolio to its best and highest potential.

The man who bought into EPP

Andrew Joseph König was appointed as financial director and to the board of Redefine Properties in 2011. He was elected chief executive officer in August 2014. He is a chartered accountant with around 25 years of commercial and financial experience, Prior to joining Redefine Properties He spent ten years as financial director of Independent News and Media. He is responsible for the management and running of Redefine’s business in terms of the strategies and objectives approved by the board, as well as all aspects of corporate activity and communications.

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