Redefine Properties' boss sees few M&A opportunities in the real estate market
Andrew König says Redefine is unlikely to replicate a large deal like its Polish venture.
It has been nearly three years since one of South Africa’s largest real estate company, Redefine Properties, went big in Poland with a €1.2 billion deal.
In 2016, Redefine Properties acquired a 75 percent stake in Echo Polska Properties, which is one of the biggest real estate developers in Poland that owns a portfolio of shopping centres and commercial properties.
At the time, the deal was considered to be a game-changer for Redefine Properties because it was described as the single largest offshore real estate deal concluded by a South African real estate company.
Since 2016, Redefine Properties has been investing more capital in fast-growing Poland through EPP (formerly known as Echo Polska Properties) as it believes the country’s strong consumer spending will bode well for its economic growth. This is the antithesis of its South African home market, where consumer spending remains in the doldrums and economic growth continues to flounder at below two percent levels.
EPP is now a standalone company that is listed on the JSE and is 44.4 percent held by Redefine Properties. EPP has a property investment worth €2.5 billion comprising of 19 retail properties, six office buildings and two development sites in Poland’s capital city of Warsaw. By 2020, EPP will own 28 shopping centres across 20 cities when its on-going developments are completed.
Redefine Properties’ investments in Poland have paid off, with the country providing the company with hard currency earnings, acting as a buffer against a struggling South African economy and real estate market.
However, the market wonders if Redefine Properties can replicate the success of its investment in EPP through another similar and large deal. After all, with property assets valued at R92 billion as at end of February 2019 – making Redefine one of the largest real estate companies in South Africa – can it get any bigger or build more scale to its investments?
Redefine Properties CEO Andrew König (pictured) says the company sees fewer deals that are of quality in the market place to acquire. Also, the company has also gotten so big, that it will be hard to acquire businesses that will make a difference to its size.
“Given our size, it’s hard to move the needle significantly. You can make tweaks to maintain good growth. But to double? It will be hard,” Andrew told M&A Africa.
He adds that it will be difficult for Redefine Properties to conclude significant transactions given constraints to its balance sheet. A metric to measure Redefine Properties’ balance sheet constraints is a loan to value ratio – the ratio of its debt to property related assets – which stands at 42.3 percent. At this rate, Redefine Properties financial director Leon Kok, says it is too high and limits the company’s ability to fund new transactions.
“We prefer the ratio to be below 40 percent. To get to this level, we will consider raising capital through issuing equity and the disposal of assets,” says Leon.
Even if Redefine Properties considers funding deals through equity, finding deals that will be a game changer for the company will be difficult,” says Andrew.
Redefine Properties is a diversified real estate company that owns retail, office and industrial properties (warehouses and distribution centres) that are mainly based in South Africa. It also has property investments in Poland, the UK, and Australia.
While the company is not intending to make big acquisitions anytime soon, Andrew says the focus will be on improving the quality of its existing properties and tenants it attracts.
“From an acquisition point of view, it is not about the asset itself but the quality of the tenant. In this market, it is absolutely vital to get a quality tenant. You can have the shiniest building but if it is empty, it is worthless. It’s about the ability of the property asset to generate cash. Tenant retention is important,” he says.