South Africans take 75% stake in €1.2b CEE portfolio

South African REIT Redefine Properties has announced it is acquiring a 75% stake in Echo's €1.2 bn high-yielding commercial platform comprising 18 properties in Poland.

The deal - the single largest offshore property transaction by a South African property company - will be financed via debt and equity at a proposed 60% gearing at the property level.

Redefine is forking out €362 mln for the stake, net of debt, valuing the portfolio at €1.188 bn.

The deal is the largest-ever real estate investment transaction in Poland, as well as the largest-ever single transaction of income-generating real estate assets in Central Eastern Europe.

Redefine’s executive Chairman Marc Wainer said the transaction is 'a game-changer' for Redefine. 'It significantly advances our international strategy – it has the scale, the right partners and the ability for growth to take a major part of our business to the next level. The 18 properties tick all the boxes from an investment perspective and allows us to take advantage of what will be positive yield carry.

Moves the needle
'This deal moves the needle as economic growth is driving demand for office space in Poland and opportunities in retail are even more exciting as disposable incomes have improved in lock-step with economic growth,' Redefine's Wainer added.

The portfolio, with an occupancy rate of 95%, generates a net operating income of €71 mln and total distributable income (net of interest and withholding tax) of €46 mln. The property portfolio will be managed by Griffin Real Estate.

Under the transaction – which is still subject to approval by the European Commission - Redefine is also being given a right of first offer on over €500 mln worth of newly developed properties from Echo's retail and office development pipeline. Over 80% of the projects is expected to be delivered within the next two years.

Irrespective of whether its right of first offer to acquire the development properties is exercised or not, Redefine will be entitled to 25% of the profit derived from the sale of such development properties.

Redefine also said it intends to reduce its stake in the portfolio to 50% through the immediate sale of a portion of the shares to a consortium of selected co-investors. It did not disclose the name of these parties.

Strategic split
The deal follows developer Echo's strategic decision to split its high-yielding platform from its development and residential business and to find a buyer for the commercial real estate platform in which it will retain a 25% stake.

'Cooperation with the South African investor creates new possibilities of development and expansion. First of all, we have received a satisfying valuation for 75% of our commercial portfolio. Secondly, with Redefine’s interest, the company has a great potential to further increase its value. Furthermore, the acquisition of a partner and potential buyer of our further assets allows us to focus on planning and building new commercial projects,' noted Piotr Gromniak, CEO of Echo Investment.

The transactions is part of Redefine's strategy to take advantage of the low interest rate environment in certain overseas markets. It increases Redefine's offshore property assets to 25% of its total portfolio.

Apart from the Polish deal, the company said it is also in the process of establishing an investment presence in Spain.

The transaction is expected to close prior to 31 October 2016.

JLL and UBS Bank advised Echo Investment on the deal. Weil, Gotshal & Manges was responsible for legal advisory, EY for tax advisory, Linklaters, Gleeds, Hill and WSP advised on due diligence while CBRE carried out the valuation of the Echo Investment assets.