Central and Eastern Europe’s real estate markets have enjoyed the avid attention of South African capital over the past decade, but now that’s changing as investors search for yields closer to home.
Since 2008, more than €4.4 billion has been ploughed into CEE real estate by rand-denominated investors, including the likes of Redefine, NEPI Rockcastle and Prime Kapital, according to research by JLL. Retail assets in particular have proved popular.
Around half of South African investment in the CEE region has been in fast-maturing Poland, a country which avoided the global financial crisis.
South African capital has usually been involved when a CEE asset is brought to market, says Tom Mundy, Sub-Saharan African Advisory at JLL, with currency a major factor.
“The outflows have been due to both push and pull factors – the rand has been quite a volatile depreciating currency and having euro or dollar/denominated assets is a good hedge,” he says. “At the same time, the idea of growth and disposable income has been a big draw, along with the CEE region’s transitional economic story, which South African investors grasp.”
Parallels between CEE and Africa
The accession of CEE countries to the European Union has required some serious housekeeping by the region’s governments as countries move away from centrally-planned to market-led economies.
“The narrative of economic and political transition is one that links sub-Saharan Africa to Eastern Europe,” says Mundy. “Which is why South African capital by and large feels comfortable in the region, especially given that yields in CEE look very competitive compared to markets closer to home.”
The South African’s yield-driven approach marks them out from other emerging market investors such as Russians, who typically tend to be more focused on capital value growth.
This year, investment yields have tightened to as low as 4.75 percent for offices in central Warsaw and 4.9 percent for prime Polish shopping centers – not that far off the circa four percent yields recorded by JLL in neighboring Germany for similar assets.
“We don’t see any reason why South African capital outflows will slow down in the near term – but there’s an inflection point driven by CEE yield compression,” Mundy adds.
South African investors may consider investing closer to home – rather than venturing any further into peripheral CEE markets such as Bosnia and the Ukraine. Assets in African countries ranked lower in JLL’s 2018 global real estate transparency index could come into play.
“Outside of Russia and Ukraine, yields above seven percent are hard to achieve in European markets and to achieve these means heading further up the risk curve,” says Mundy.
Interest levels in African real estate may be rising but very little South African money has so far invested in sub-Saharan real estate. However, Grit Real Estate Income Group, which trades on the Johannesburg Stock Exchange and the Stock Exchange of Mauritius, recently raised over US$130 million through a London listing to invest in Ghana and Mozambique.
Meanwhile, Ghana’s growing supply of prime real estate assets make it one of Africa’s most interesting markets for investors. Thanks to a rise in oil production, Ghana’s annual GDP growth rose to a five year high last year at 8.3 percent, compared with 3.7 percent for 2016.
“There is capital out there for sub-Saharan African real estate, but the challenge is that there are not many vehicles to do it through,” says Mundy.
Investec Asset Management, Johannesburg-listed Growthpoint Properties and the International Finance Corporation (IFC) attracted US$212 million (€242.8 million) from institutional investors this year for a pan-African fund. The fund is targeting income-producing commercial real estate in select cities across the African continent.
For many South African investors, the search for high yields in coming years could be closer than they currently think.
Click to read more about the road to Africa’s real estate growth.