Tower Property Fund – Investments in Croatia

Tower Property Fund has purchased a newly built office tower in Zagreb, Croatia.

Marc Edwards, CEO of Tower explains that the acquisition is the first in Tower’s broader strategy of establishing an offshore operation.  “Our strategy is to seek out new markets that provide strong diversification opportunities through premium, high quality properties. Europe further offers a hedge against Rand weakness and includes numerous smaller markets where Tower can position itself as the leading participant in the territory.”

According to Edwards, Tower has been investigating offshore opportunities since last year June and through its existing in-country relationships, and following extensive research into the region, Tower selected Croatia as the first jurisdiction in its strategy based on the significant opportunities identified for potential value creation.

“While Croatia is currently recovering from the lows experienced following the global financial crisis of 2008, property prices and rentals have reduced considerably and are believed to have “bottomed out” from their previous highs pre-crisis. This shift presents a significant buying opportunity as rentals are anticipated to rise into the future as the economy grows and recent data has shown the country to be moving out of its recession into positive growth. Furthermore, Croatia has not yet seen notable economic benefit following its July 2013 inclusion in the Eurozone. This growth is expected to materialise as the country navigates towards joining the Euro currency union, possibly as early as 2020.”

“Compelling property opportunities have been identified in both the office and retail sectors in an investment climate that is pro foreign investment with a strong legal system and regard for property rights,” says Edwards.

The acquisition has been concluded through Tower’s 100% held subsidiary, Tower Europe, a newly-created company registered in Croatia.  As part of Tower’s offshore venture, the fund has partnered with Croatian specialist developer VMD Grupa, who has also acquired a 20% stake in Tower Europe.

The property purchased in Croatia is a newly built office tower – the tallest and newest office property in Zagreb – which is well situated adjacent to major bus and rail stations, and is one block away from a major highway linking Croatia to other Balkan countries.

Tower has purchased 15 floors of the 26 story property representing approximately 10 700m2 of lettable area.  280 parking bays and 250m2 of storage has also been acquired as part of the transaction.  Tower has the first option to purchase any other floors owned by the developer of the property.

The property is the newest office property in the city and is rated “A” from a greening perspective (energy efficiency).  There are no new office developments planned for Zagreb for the next 18 months and Tower expects the building to dominate the region as a result.  Already, a number of tenants from surrounding buildings have taken up space in the property as it presents world class finishes at competitive rentals.  A mix of multi-national tenants occupy the property and space has let extremely quickly.

Edwards explains, “As a first foreign acquisition, we believe we have made the right choice with the VMD KVART property.  Not only is the property “green” – in line with our overall fund strategy of energy reduction – it is market leading and is expected to be the property of choice for larger tenants for some time to come.  Tower negotiated a 5 year head lease from the seller (our new partner) as part of the sale which secures our cash flow.  We believe there is long term capital growth in this property given its quality and pricing in the market.  At an 8.5% yield the acquisition is accretive for Tower’s earnings and we believe the value will grow into the future.

What we are really pleased about is our partnership with the VMD Grupa.  VMD are an extremely well respected property owner and developer in the country which gives us a great source of comfort when operating in a foreign market.  Already, the partnership is paying dividends through our introduction to various banks and professional teams in the country.  A strong pipeline of high quality office and retail properties have been identified and we are confident that Tower can be a dominant participant in the country given its smaller size relative to larger European countries.”

Edwards emphasizes that South Africa is still the core focus for the fund and that the Croatian investment is complimentary to the portfolio. In South Africa over the last year Tower has made several office, industrial and retail acquisitions that total close to R1 billion.

The fund, which initially listed a portfolio worth R1.6 billion of retail and office properties, has grown its assets by 150% to R4 billion in the two years since listing.