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April 26, 2016

Political instability and the threat of a downgrade in sovereign bonds is plaguing the domestic investment market in South Africa and this has encouraged some real estate investors to explore opportunities offshore, most notably in Central and Eastern Europe.

Driven by the CEE regions’ attractive yields and low interest rates South African investors have made a beeline for assets in market such as Romania, Poland and even less well-trodden locations such as Serbia Montenegro over the last year. And JLL says more investors will follow suit.

“While we believe the property fundamentals are stable in South Africa, the cloud of political instability and the threat of a downgrade in sovereign bonds, is likely to result in this trend of offshore expansion continuing for the foreseeable future,” said Craig Smith, Associate Director, Sub-Saharan Africa Capital Markets, JLL.

“The attractive risk-reward profile, limited competition and lower funding costs offered by CEE markets are making it an enticing investment destination compared to markets like the UK, where competition is high for prime assets, and South Africa’s domestic market, where the cost of debt funding is currently higher than property yields for prime assets.”

South African REITs and property companies are leading the charge in this offshore expansion with their dominant focus being retail assets. This comes as no surprise given that retail is their primary focus at home but the CEE offer more room to make meaningful investments, unlike many of Europe’s larger cities, which are competitive and, in many cases, prohibitively expensive.

“South African investors ideally want to be meaningful players in the market in which they invest, so frontier markets and those which have less international capital competition are attracting their attention,” added Smith.

South African REIT, NEPI, has been active in Romania since 2008 having spotted potential in the market’s retail sector. In addition, Hyprop recently entered Serbia and Montenegro as part of a joint venture with Homestead to acquire two Delta City shopping centres for a total of €202.7 million, the largest single asset deal in South Eastern Europe for five years. And Atterbury Europe, Rockcastle, Redefine Properties and Tower are other names to have entered the CEE region over the last 6-24 months. Most recently, Redefine Properties made a record-breaking acquisition in Poland when it acquired a 75 percent stake in a retail-based portfolio – the largest real estate transaction in the history of the Polish market to date.

Craig Smith
Associate Director, Sub-Saharan Africa Capital Markets, JLL

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