Early in June, Echo Polska Properties ("EPP") hosted a site visit to its shopping centres in Poland: the tour included 11 of EPP’s retail assets (85% of portfolio income) as well as presentations by economic and local property experts.
Given divergent opinions on SA REITs’ foray into Central and Eastern Europe, the tour provided me with valuable "on-the-ground" insights into the merits of Poland as a property investment opportunity.
Key takeaways from the tour:
- The Polish retail market is supported by strong macroeconomic trends. After the fall of communism, the country succeeded in liberalising its economy which has led to 16 years of uninterrupted GDP growth. Importantly, Polish GDP per capita is still well below that of the European Union. This provides room for sustained growth over the next decade as it gains on its Western neighbours.
- Polish consumer confidence is very high due to falling unemployment and rising wages. All of the shopping centres were abuzz with activity and it is visible that consumers are spending at shopping centres. This is a stark contrast to what is transpiring in South African malls.
Source: EPP investor presentation - June
- In terms of occupancy trends, our overall assessment points to strong demand for space from retailers, especially in EPP’s prime assets. It is evident that most retailers are trading well, as reflected in the 4.6% increase in footfall and 7% increase in sales in EPP’s portfolio during 2017.
- Visiting a shopping centre is increasingly regarded as a leisure activity in Poland, with landlords focused on transforming its shopping centres into social centres. Food and entertainment used to account for 5% to 7% of shopping space, but this has increased to 10% to 15% in recent years.
- One of the main discussion points during the tour was the effect of online retailing on physical store sales in Poland. So far there is a negligible impact on physical sales from e-commerce, although it is unclear if this will change in the future.
If EPP continues to be successful in positioning its centres as leisure destinations, it seems likely that their centres will achieve sustained sales growth.
- The political environment was another talking point. This due to the ruling party passing a law that partially bans trading on Sundays (effective from March 2018). Preliminary data has revealed an increase in footfall on Fridays and Mondays, but a more in-depth analysis will only be possible in four to six months.
I returned from Poland impressed: The economic landscape is healthy, EPP has a quality portfolio, and its management team showed drive and energy. Driven by high demand and moderate supply, it’s clear that retail property fundamentals are much better in Poland than in SA. Those SA REITs that entered the country a few years ago have to be applauded for their initiative.
While EPP hasn’t had a good run since its listing on the JSE in September 2017, I believe that the market will warm-up to its potential after a few sets of strong financial results. At a dividend yield of 9% (in euros, nogal) and a 15% discount to Net Asset Value, the stock appears undervalued.
Wim Prinsloo, CFA
Portfolio Manager at True North Capital Management
Wim Prinsloo serves as portfolio manager at True North Capital Management. He holds an honours degree in investment management from the University of Pretoria and is a CFA charter holder.
Wim’s work at True North includes the management of the firm’s equity and property unit trusts, development of its investment processes and ensuring best-in-class service to clients. He benefits from 7 years of experience in the investment industry and is a member of the Investment Analyst Society of South Africa.