In July of this year Tower Property Fund announced its decision to establish an offshore presence through the purchase of a newly built office tower, VMD Block B, in Zagreb, Croatia.
The acquisition was the first in Tower’s broader strategy of establishing an offshore portfolio and has proven to be highly successful, outperforming all expectations. In fact, Tower is now looking to increase the funds offshore exposure to a third of its total assets, with their partnership with VMD forming the bedrock of a substantial pipeline of properties within Croatia – predominantly in the retail sector.
Marc Edwards, CEO of Tower explains that Tower’s first acquisition has proved successful. “VMD Block B has performed considerably ahead of our expectations. The property has a 5 year head lease from the VMD Grupa and was predominantly vacant on purchase. The property is now fully let (on paper as tenants are currently fitting out their premises) with rentals achieving expectations.
The property has let faster and more successfully than competing properties, which is testament to its premium grade quality, high green rating and excellent location. A number of national and multi-national tenants have moved into the space.”
“On a recent shareholder tour of the property and country, shareholders were impressed by the building, particularly its world class finishes which have been installed. Tower’s partners have an excellent name in the region given their detailed quality control which results in satisfied customers.”
According to Edwards, Tower investigated offshore opportunities for a year prior to selecting Croatia as the first jurisdiction in its strategy, based on the significant opportunities identified for potential value creation.
Edwards highlights that this decision has been vindicated: “Croatia was coming off the back of an 8 year recession. We believed the economy was about to enter a growth phase and we are pleased that 2.5% growth for the next year looks set to be achieved. The recent tourism season was the best for a number of years, which is excellent given that this industry accounts for a large part of the economy. Croatia is in the Eurozone (from July 2013) and is expected to convert to the Euro in the near future. It is politically stable and is in the process of finalising its latest election.”
“Added to these macro benefits, the cost of debt in Croatia is significantly cheaper than here in SA with property yields being similar, resulting in earnings enhancement,” says Edwards. “Croatia is a small country, which means Tower can become a dominant player and our investment in the market has been well received by Croatian authorities, investors and professionals.”
Edwards adds that a large pipeline of compelling property opportunities have been identified in the retail sector in an investment climate that is pro foreign investment with a strong legal system and regard for property rights.
“Initial results prove that we made the right choice with VMD Block B. 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. We believe there is long term capital growth in this property given its quality and pricing in the market.”
Offshore diversification is in
Tower’s strategy is to seek out new markets that provide strong diversification opportunities through premium, high quality properties. Tower will however focus on Croatia and the Balkan region for the foreseeable future given its strong partnerships in the country and the greater area. Europe offers a hedge against Rand weakness and includes numerous smaller markets where Tower can position itself as the leading participant in the territory.
Other property funds are following suite, with Attacq Limited having recently announced their partnership with Atterbury Europe in the acquisition of a one-third stake in a €259-million gross asset value portfolio of seven Serbian shopping centres– including the country’s largest mall, Uš?e Shopping Centre, in its capital Belgrade. In addition, the parties seeded a 50/50 development fund to develop a pipeline of retail real estate assets in Serbia and neighbouring countries in the Balkans.
“The South African economy, we believe, has reached its short term potential and we see risks to the down side. We believe this view is shared by the majority of the market hence the number of South African companies, in all industries, looking offshore. Croatia, at an opposite end of the property cycle is naturally attractive to us with our partnerships in the country being of critical importance to Tower. Tower will continue to invest in South African properties and will remain a proudly South African investor with two thirds of our portfolio invested in the country, however we will be selective of our opportunities and will look at well located properties in popular nodes with growth potential through working the asset continuously,” concludes Edwards.