MAGAZINE: The South African muscle behind CEE retail

NEPI Rockcastle has been operating in the CEE region for the past 10 years but it is only in the last 24 months that it has been making headlines because of large investments such as €275 mln for the Arena Plaza in Budapest, Hungary or €361 mln for Bonarka City Center in Krakow, Poland.
As a company increasingly in the news, it has almost become the poster child for South African capital headed to Europe. But what makes this Johannesburg-listed firm all the more remarkable is how it has become the leading owner-developer of shopping centres in CEE when prior to 2007 it had literally no track record or relationships with any European retailers. So, how has it become a dominant force in shopping centre investment, development and management in a swathe of eastern European markets?
To find out the secret sauce, PropertyEU caught up with its co-CEO Spiro Noussis in Kingston, a south west London suburb where NEPI Rockcastle maintains an office. Noussis, a South African real estate professional, greets us and stands in front of a wall map for publicity shots. Not that he wants to talk about himself, but the map provides a useful aide. He can point out the location of a multitude of cities NEPI Rockcastle has invested in that most people would struggle even to pronounce. A recent example would be Olsztyn in Poland (population 173,000) where a few weeks ago it announced the purchase of Aura Centrum for €64.9 mln from Rockspring NPS European Alfa. Olsztyn is the only major city in a 100 km radius and a magnet to an overall population of 1.4 million. It is important for administrative functions, but it also boasts a collection of automotive parts manufacturers, as well as some 3,500 students at the local university, and has undergone a major infrastructure modernisation programme with a new 11 km tram line and various road upgrades. It could also become a future hub for the high-tech industry.
Another place he can point to is Nitra in Slovakia where on 21 June it acquired the Galeria Mlyny for €121.8 mln. Nitra has a population of 79,000 in a region of 689,000 and is progressing: this year, an automotive assembly plant is set to open employing up to 2,800. These are just two examples of recent acquisitions, of course. Last year it completed a total of €900 mln of investments, plus it is working on a €350 mln development pipeline and has an acquisition pipeline of over €1 bn.

Nine CEE markets
Overall, the company owns and manage a portfolio of 49 shopping centres and has five under construction or with permits. ‘We are the leading retail investor and developer in CEE,’ says Noussis without any hint of arrogance. ‘We are in eight countries, and we just went into the ninth recently. Our largest portfolio is in Romania, and our second-largest is in Poland but we are also in Slovakia, Hungary, the Czech Republic, Bulgaria, Serbia, Croatia, and just recently, Lithuania.’
NEPI Rockcastle is a vertically integrated internally-managed operation with some 400 staff, many of whom are located in its Romanian centres. The company is actually the result of a merger in July 2017 between NEPI (standing for New Europe Property Investments) and Rockcastle Global Real Estate, and it is this merger that has been pivotal in helping the company make ever-larger acquisitions.
The back story is that NEPI Rockcastle’s founding shareholders and other investors already had extensive exposure to South African property when they decided to create NEPI and later Rockcastle.  ‘They were looking for other opportunities as it was becoming more difficult for them to find opportunities domestically,’ explains Noussis. ‘The shareholders were looking not only to diversify outside of South Africa but to invest in the CEE region because of its high growth rates.’ NEPI is the elder of the two companies, having been established in 2007. It started investing in Romania first where it has become the dominant owner of shopping centres. It subsequently fanned out across South Eastern Europe. Rockcastle was formed in 2012 and started out in Europe in 2014, first in Poland and later in the Czech Republic and Hungary.
The merger cured a nagging problem of potential cannibalisation. ‘Both companies were expanding outside their respective markets,’ says Noussis. ‘We were kind of bumping our heads together, and it made no sense because we were chasing the same shopping centres with the same people’s money effectively.’

Common shareholders
Noussis comes from the Rockcastle side of the business. In fact, Rockcastle was formed as a global real estate company to invest in listed securities around the world, which it did, in addition to appointing Noussis in the same year to start direct property investing in Europe. At the time, he was CEO of an unlisted property fund focused on retail and industrial properties in South Africa and became CEO of Rockcastle in 2014. Since the merger in July 2017, he has been joint CEO with Alex Morar from NEPI and on 12 June 2018 he was made executive director. He has kept responsibility for Poland, the Czech Republic and Hungary where he oversaw Rockcastle’s entry, while Morar holds responsibility for the other countries.
The two founding shareholders that NEPI and Rockcastle had in common are Fortress Income Fund and Resilient REIT Limited, which remain the two biggest stakeholders in NEPI Rockcastle with 24.2% and 13% respectively. Resilient and Fortress are quite dominant REITs in South Africa. The former is  focussed on retail property and the latter on retail and industrial. NEPI Rockcastle is seen as an investment run completely independently. 
‘The region did not have a mature retail market,’ recalls Noussis about entering the eastern region such as Romania. Many countries were characterised by informal food markets. ‘We were not scared. We saw the potential, not just the risks. South Africa itself is a developing country and we have a belief in, and an inherent understanding of, these markets.’
He further explains that many shopping centre owners in the region were not ‘strategic’. Instead they were financial investors, developers, private individuals and funds who at some point would look to sell. ‘There was scope for us to buy some of these assets. You won’t see that in France or Germany where these assets are typically held by REITs or funds that are long-term owners of property. A lot of South African competitors have followed us because they have seen our success. They have seen how we have been a big success story for our investors, who have continued investing in the South African property market. A lot have continued to grow their investments in South Africa even while supporting our growth as well.’
NEPI and Rockcastle started off as quite small businesses but the combined group now has €5 bn of assets. Early deals were in the €10 mln-€20 mln category,  Noussis says. ‘The big-ticket deals are not where we started. It took a long time to put together the portfolio we have now. The reason we have grown is because the strategy and message has been very clear. We are looking for dominant shopping centres. It’s a simple message that we have plugged away at for 10 years and now we can do these large acquisitions of €200-€300 mln especially since the merger. We think we acquired three out of our five best assets last year. This would not have been possible without the resources of the combined entity.’
He explains how the company doesn’t like auctions (at which it is rarely the highest bidder) and doesn’t do portfolio deals either. ‘We like to do our homework on the ground and see what exists. We decide what we like and plug away at people that own them. We don’t always buy the current dominant centre; sometimes we buy ones that we know we can make dominant. We have also worked very hard to establish a reputation for closing deals well,’ he adds.

Listed securities portfolio
The merger has certainly helped fund larger deals. NEPI Rockcastle has a better credit rating than the two companies when they were separate. This helped the firm on a €500 mln bond offering in November 2017 . And apart from the usual credit and debt facilities, the other way the company has been financing big-ticket deals is by cashing out of portions of its significant listed securities portfolio. It has shares in many of the largest and best retail companies such as Unbail-Rodamco and Simon Property Group. Noussis: ‘Our listed portfolio was over €1 bn in December, warehoused in various REITs. We are selling this down. We saw listed REITs as an attractive investment opportunity, but now it has become a way for redeploying capital into our direct property portfolio. We began selling three years ago and we are halfway through the process.’ With few concerns about acquisition financing and a deliberate strategy to consolidate its stronghold in CEE shopping centre markets, the company is positioned to carry on building. However, there is one blot on the copybook, its share price has slumped by over 40% since December. The blame is being put on short sellers and some allegations made about NEPI Rockcastle’s shareholders, which are resting unsubstantiated.
At the same time, one analyst recently suggested there are headwinds that could affect its continued growth trajectory, citing increasing competition in the company’s markets and the spectre of increased interest rates. In response, Noussis says: ‘We can only control what we can control. Our business has never been in better shape. We are still acquiring, still developing and we are probably going to have one of the best years we ever had this year. We are in one of the best performing retail sales growth areas in the world and we have the best retail portfolio in CEE. We also believe we are better than most, if not all the rest, at what we do. It means we should outperform everyone else. If we do that, then we have done our job. If the market moves against us in terms of interest rates, well these are things we cannot control.’ He adds the interest rates on its loans are 100% hedged and it has a hedging profile exceeding five years.
He continues: ‘Where I do not agree is that things have become more competitive. South African people say to me, “How does it feel to have all these South African investors out there?” But they are not our competitors. The French, German and English are. Where I do agree is we are going into a much more difficult part of the cycle. Interest rates are rising, but we are in markets with much higher growth than most of the EU and we think that will continue for the next 10 years.’

Buy it or build it and they will come
NEPI Rockcastle did not know one retailer when it began investing in the CEE region 10 years ago. But having since grown to become the largest retail property owner in the region, it is able to offer retailers a way to expand their footprint in multiple new territories. Examples would be Spain’s Inditex and Poland’s LPP. The majority of retailers represented in Romania got their first stores through the company, according to Noussis. ‘We are the largest, but we want to be top of mind for every retailer that wants representation in this region so that they come to us for space,’ he says. Making the company even more distinctive is the fact it manages the centres it owns, while the day-to-day management is outsourced to local agents. The company also employs its own development team which spends much of its time planning extensions and new developments.
He further explains that the onset of e-commerce is not something that fazes NEPI Rockcastle. It prefers to see growth in online sales as an opportunity to drive more consumers to its centres where they can collect goods ordered online. Beyond collection counters, NEPI Rockcastle has been able to help some retailers develop e-commerce strategies in the CEE region. It does this by affording some retailers small storage and distribution areas at shopping centres. ‘We may have some extra space more suitable for non-retail purposes which we can offer as storage space to assist with their click and collect strategies,’  says Noussis. ‘On the other hand, we also afford larger retailers superior retail space for their flagship stores to help their omnichannel strategies. You have to embrace e-commerce as an opportunity. The tenants themselves are trying to work out where it is all going.’

PERSONAL PROFILE
Spiros Noussis is the South African-born co-CEO of NEPI Rockcastle. He served as a founding shareholder and managing director of a listed South African REIT focussed on retail and industrial real estate before joining Rockcastle in 2012 and leading it into the first deal in 2014 in Poland. In 2017, Rockcastle merged with NEPI and Noussis was appointed co-chief of the enlarged company on 15 May 2017. In June this year he was appointed executive director.