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Optimism despite a slow start for Echo Polska Properties

Posted in News on April 19, 2017

The timing of Echo Polska Properties’ (EPP) listing in mid-September last year was unfortunate.

The JSE debut of the purely Polish property play — the vehicle through which sector heavyweight Redefine Properties has entered Poland — followed a strong rebound in the rand and came after Britain’s decision to exit the EU.

It also coincided with a new-listings fatigue that seems to have set in among fund managers due to the sheer number of new JSE real estate counters vying for investors’ capital in 2015/2016.

And the company came under further pressure after the unbundling of its shares by the recently delisted Pivotal Fund, which was taken over by Redefine earlier this year.

As a result, EPP’s share price has tumbled nearly 24% in the six months since listing.

However, analysts believe the company’s investment case remains compelling.

Metope Investment Managers CEO Liliane Barnard says if one is of the view that the rand won’t strengthen much further from current levels, EPP is attractively priced at a forward euro dividend yield of 8.4% (6.7% net of dividend withholding tax) and expected dividend growth of around 10%/year for the next two years.

At the current price of R18, EPP trades at an 11% premium to net asset value, which Barnard says offers value compared with the higher premiums of other property counters with exposure to Central and Eastern Europe (CEE).

The company owns a €1.6bn portfolio of 15 shopping centres and nine office parks in 17 cities across Poland, as well as interests in two major retail development projects in Warsaw.

EPP has strategic partnerships with two of Poland’s largest developers, Echo Investment and Griffin Real Estate. Barnard says the company is therefore well placed to execute its expansion strategy in underserved cities.

“EPP draws on a solid management team, which is highly experienced in the Polish property market. The single-country focus allows for depth of market knowledge, which will no doubt allow EPP to build scale given management’s strong networks and capabilities 
within Poland.”

Meago Asset Managers director Anas Madhi expresses a similar sentiment.

“Despite EPP having had a torrid time since its September listing, the company’s operational story remains strong,” he says

Notwithstanding the recent political upheaval around Poland’s right-wing nationalist party, he says, the country remains the most attractive foreign direct investment destination in the CEE region and is the biggest net recipient of EU funds on the continent.

The management team, led by CEO Hadley Dean, has already made impressive headway on delivering on its prelisting growth promises. The value of EPP’s assets has increased by €418m or 35% since September owing to the acquisition of five shopping centres.

However, Madhi says it is the two retail development projects in Warsaw that could prove to be the real game changers for the company over the next few years. EPP earlier this year acquired a 70% stake in the 110,000m² Towarowa mixed-use development now under construction on the last available retail site in Warsaw’s city centre.

Last week management closed another significant deal in the city — a 70% stake in Galeria Mlociny, an 81,900m² mixed-use development (of which 71,050m² is retail) next to a major public transport hub in the middle of a large residential district in north Warsaw. The centre is on track for completion mid-2019.

Madhi says Warsaw is a sought-after location for mall owners and developers as the city is undershopped, and it has typically been the entry point for foreign retail brands. Warsaw shopping centres attract the highest rentals in Poland (up to €130/m²/month) and boast vacancies below 1%.

Once the Towarowa and Galeria Mlociny developments are completed EPP will own two of the five largest shopping centres in Warsaw, which should place the company on the radar of more international investors wanting exposure to the CEE region.

The Polish retail property market is underpinned by still strong sales growth on the back of robust consumer spending and the local government’s social grants programme, which provides financial support to families with more than one child.

However, Madhi is less bullish on the outlook for Poland’s office sector.

“We believe the company should reduce exposure to offices significantly as concerns prevail regarding an oversupply in certain cities, stemming from a development boom over the past few years,” he says.

He believes EPP has plenty of potential to rerate, but says the company needs to find a wider pool of investors if it wants to raise 
the necessary capital to help fund its growth ambitions.

With Reit legislation being proposed in Poland, a listing on the more liquid Euronext exchange could be in the offing.

“If that happens, current EPP investors could benefit considerably,” says Madhi.