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The pendulum has swung decidedly in favour of investment into Central and Eastern Europe (CEE) in recent years. One company aggressively targeting that region’s growth prospects is JSE-listed MAS Real Estate Inc.
MAS, also listed on the Luxembourg bourse, has a portfolio valued in excess of €500m made up of 53 properties spread across the UK, Germany, Switzerland and the CEE.
But an immense pipeline around twice the current asset value looks to grow that mostly retail portfolio value to one that exceeds €1bn in the next three to five years.
Historically focused on Western Europe, a little over a year ago MAS expanded its strategy and investment jurisdiction to include the CEE.
It entered into a joint venture (JV) with Prime Kapital, a company highly experienced in the development of successful retail assets in the CEE region.
Its founders, Martin Slabbert and Victor Semionov, previously headed up the highly successful Romanian-based New Europe Property Investments (Nepi).
The partnership also allows MAS to expand into Eastern Europe with a low cost business model.
The company has ventured into Poland, acquiring Nova Park, a dominant regional mall, and more recently has struck further into Eastern Europe into Bulgaria, Romania and Slovenia.
Its projects in the region with Prime Kapital now numbers 16.
The sortie into Eastern Europe has much to do with MAS’s goal to hit ambitious targets in earnings and distributions.
MAS has committed to 30% growth in distributions for three years and is targeting the same earnings growth figure.
“What’s important is that we make sure that we are not only growing our distributions by 30% per annum but that we are also growing our underlying earnings by 30% per annum,” says MAS Real Estate’s outgoing CEO, Lukas Nakos (see sidebar).
How the company aims to deliver on this essentially lies in its massive dual category €1.026bn pipeline and in particular an overweight €893m development and extension pipeline (82% of the pipeline) that dwarfs the €133m allocated towards income generating assets.
Extensive and ambitious pipeline
Unlike some of its competitors, MAS is expanding into Eastern Europe by largely developing its own assets from the ground up rather than buying established assets.
This protects the company from becoming exposed to poorly designed retail assets that tend to entice competitors over the longer term, analyst Wessel Badenhorst of 36ONE Asset Management tells finweek.
“With many other property counters investing into Eastern Europe, the general impression is of a focus on yield differentials, rather than on the underlying quality of the property assets or growth opportunities within these assets,” he adds.
MAS could easily have hit targets by placing 90% of its pipeline into high-yielding, easily leverageable opportunities.
But it has instead chosen opportunities where it can deliver assets that will grow net operating income significantly over time.
“This pipeline is an important part of our business for the next three to five years and is what differentiates MAS from any other company,” says Nakos.
Of that €1.026bn pipeline, €356m is channelled towards assets owned and where development has already begun, with €420m allocated for secured assets where the company has legal control of sites. €250m is directed towards further opportunities MAS is confident it can deliver on.
Significantly, the majority of the company’s development pipeline is focused towards the CEE, 68% of the total pipeline a development JV with Prime Kapital.
Prime Kapital says it only makes sense to build what can be rented. That could mean building a shopping mall that can be turned into a regional mall in the future.
“Focus on the development and extension pipeline is the driver of the company’s earnings growth over the medium term, the development yields sought in excess of 10% ungeared.
The return on equity will be significantly higher and will translate into strong earnings and distribution growth for the company,” says Liliane Barnard, CEO of Metope Investment Managers.
MAS’s development pipeline is a hefty one so some of those earnings that Nakos refers to may be “lumpy” as developments come to income, the use of capital profits in order to smooth distributions a likelihood over the next two years.
Among the company’s developments and extensions programme is a challenging €200m project in Slovenia, significant extensions on MAS’s Nova Park asset in Poland as well as a €700m development pipeline for six value centres in Romania.
MAS expects to complete some of the initial development pipeline before the end of the calendar year with completion of the remaining pipeline expected by December 2022.
Quality assets in Bulgaria
Galleria Stara Zagora and Galleria Burgas in Bulgaria “present very significant refurbishment, extension and asset management opportunities”, says Nakos.
The transaction increased the company’s income-generating property portfolio by 15.3%.
Acquired at a yield of 8.5%, Galleria Burgas – the dominant shopping centre in Burgas on the Black Sea – now boasts a yield approaching double digits after significant cost cuts.
“The portfolio of income-producing assets in CEE (including Nova Park in Poland, Galleria Burgas and Galleria Stara Zagora in Bulgaria) has been acquired at attractive yields.
These returns will be further enhanced with both asset management opportunities as well as extension or redevelopment potential, all serving to grow the rent roll,” says Barnard.
Focus on value centres in Romania
The bulk of projects will be undertaken in Romania, many of them value centres (GLA totalling 64 000sqm) for which a €700m development pipeline is planned.
The value centre portfolio consists of several community and neighbourhood centres (essentially retail parks) in multiple locations in Romania.
They include, or are adjacent to, big-name hypermarkets or supermarkets such as Carrefour, Kaufland and Lidl with 90% anchor tenants like Deichmann, Jysk, Noriel and Pepco.
“They are great assets and the returns are enormous,” says Prime Kapital’s Martin Slabbert. “We do not have a value centre in single digits.”
“Value centres are generally lower risk, with low overhead costs, and where anchor tenants can comprise 80% to 90% of GLA. Structurally simple, construction costs can be kept low and thus returns are elevated.
While shopping centres may come under pressure from the threat of online retail, value centres and retail parks generally target an under-served demographic market,” says Barnard.
Badenhorst says that retail parks have generally proven to be fairly defensive assets throughout Europe.
“Although growth in Western Europe is limited for these assets, Eastern Europe is still undergoing structural shifts in the underlying economies, which is likely to support rental growth over the medium term.”
Consumer demand has increased on the back of improved tenant mix, the “click and collect” offering and the inclusion of food and beverage tenants, says Amanda de Wet, listed property portfolio manager at Plexus Wealth.
“These [value centre] formats generally also allow for easy access and free parking. This is having a positive effect on footfall and driving vacancies in these centres lower.
“And unless traditional discount and warehouse retailers aggressively expand in a smaller format into shopping centres, they will continue to be a strong drawcard,” she says.
MAS’s most challenging project
Slovenia is the most developed of the three former communist countries with income per capita double that of Romania. Less impacted by communism and past conflicts and strongly influenced by neighbour Austria, Slovenia has retained much of its heritage, culture and architecture.
It is in Slovenia’s capital Ljubljana where MAS will be undertaking its most challenging project.
Emonika, an estimated €200m project targeted for opening in the last quarter of 2020, is a complicated mall, office and hotel project that entails constructing over a busy regional railway, the 80 000sqm mixed-used public-private partnership development integrated with the city’s new central train and bus terminal.
It will stretch construction from what would normally be a 12- to 18-month project to around 27 months, and requires innovative engineering including use of seismic base isolators – earthquake zone “shock absorbers”.
Located in the centre of Ljubljana, surrounded by dense office and residential areas and steps away from the capital’s old town, Emonika will be the first modern mall in the city.
Achievable growth targets?
MAS seeks to sell mature, stable Western Europe assets that offer them little further in the way of growth, and direct that capital towards their development pipeline.
It is an effective way of recycling capital and generating returns, says Barnard.
And, she adds, once the development and extensions of retail shopping centres and value parks in the CEE region completes, the additional income will be substantially accretive for the company and justifies the targeted growth in distributions.
Keillen Ndlovu, head of Listed Property Funds at Stanlib, says MAS is opening up new markets.
“We particularly like MAS’s dominant exposure in Bulgaria (Galleria Burgas which needs an extension already) and Slovenia (Emonika, when complete, will be the shopping destination for Ljubljana).
These are virtually untapped markets that most other players haven't looked at. But to be in such markets one has to be the dominant player, as MAS appears to be.”
Romania, he says, has already been penetrated.
“There are pockets of smaller opportunities or different formats that remain and we have to rely on Prime Kapital’s on-the-ground presence and previous experience with Nepi.”
Malcolm Levy, MAS's CFO, tells finweek that “Slovenia has been the beneficiary of much investment and is therefore more developed.
There is still room for growth, but more so in Romania and Bulgaria where there has been less development.”
Badenhorst says the company’s growth forecast is heavily dependent on the successful execution of this pipeline, most of it concentrated within its Eastern European portfolio.
As for risks, Ndlovu says that any development pipeline comes with implementation, letting and timing risk.
De Wet points to a lower percentage of income-generating assets.
“Only 13% of the pipeline is dedicated to income-generating assets and although development expenditure will be incurred over the five-year period and the assets will become income-producing in a staggered manner, it is clear that a development pipeline of this magnitude decreases the proportion of income-generating assets significantly and adds substantial risk to the business.”
CEO VOLUNTARILY STEPPING DOWN
CEO Lukas Nakos is stepping down as CEO of MAS, as a court case brought by the regulator in the Isle of Man relating to the collapsed Louis Group, a company from which he resigned in 2008, will take up a lot of his time.
“MAS needs a CEO that is 1 000% focused on delivering the targets and growth,” he said. Nakos will continue to head up MAS until a replacement is appointed.
TOP INVESTORS IN MAS
(at 23 June 2017)
Attacq: 30.5%
Argosy: 11.7%
Sanlam: 9.7%
Stanlib: 7.6%
Coronation: 1.9%
Investec: 2.2%
Prime Kapital: 1.5%
Sesfikile: 1.9%
PIC: 3.2%
Absa: 1.9%
Eskom Pension Fund: 1.8%
This is a shortened version of an article that originally appeared in the 27 July edition of finweek. Buy and download the magazine here.
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