Anyone for Szczecin? Promise in Polish property
A closer look at JSE-listed Echo Polska Properties
Echo Polska Properties (EPP) invests solely in the Poland property sector and specifically in retail and office, in the ratio of 72% retail, 28% office. It dual-listed on the JSE in mid-2016 and has since been a laggard, falling significantly in line with many other offshore property counters.
Operating large shopping centres by global standards, its Galaxy centre in Szczecin has a gross lettable area of 57,000m², and the Galeria Echo in Kielce is 72,000m².
For perspective, the Sandton City/Nelson Mandela Square combination measures 215,000m² of retail, hotel and office space, Eastgate is 144,000m², and Rosebank Mall is 62,000m².There is much debate as to whether the Polish economy is a good place to be. Currently booming, detractors argue that its current strength is not sustainable.Poland has rapidly moved up the scale of industrial and consumer development since throwing off the yoke of communism in the 1990s. In real terms, its per capita income jumped from 36% of the OECD average in 1990 to 66% in 2016. Its 2017 GDP growth was 4.6%, with inflation at only 2%. Such growth emanated mostly from consumer spending, with consumption growth averaging 4.8%. Unemployment is a remarkably low 6.6%.
However. there are signs that the economy is being eroded by slow rates of productivity growth, low levels of investment and demographic changes, all exacerbated by policies of the current government. The World Bank sees a reduction in Poland’s economic growth in 2018, as employers struggle to find employees, aggravated by the retirement age reduction from 67 to 65 years.This economic background paints a mixed outlook for EPP investors. On the one hand, the company is enjoying the progressive Polish economy, and turnover growth at its centres outperforms the national average, but the outlook is somewhat spoiled.
EPP CEO Hadley Dean paints a picture of continued retail space growth in Poland – but at a declining rate. Some of this growth will come from traditional mall shopping as the average Polish shopper is fairly traditional and prefers physically going to the stores.But part of the growth in retail space will also be due to the particularity and peculiarity of online shopping in Poland. While growing numbers are taking to online shopping, they have a distinct preference for the “click and collect” option, whereby the order is placed online but the customer still personally collects the merchandise in-store.
Sunday shopping will be outlawed in Poland by 2020, though centres will be allowed to open for foods and beverages, entertainment and fitness. EPP management believes that Poles will stagger their shopping patterns to accommodate this change and the impact on retail activity should be limited.
EPP will continue disposing of office space to fund its shopping centre development programme as the Polish nation remains in love with shopping. On a price to earnings ratio of around 15 times at time of results announcement, it isn’t cheap, though this is sweetened by the generous dividend yield of 9.2%. Strong earnings and dividend growth are forecast in 2018 but investors need to keep an eye on the Polish economy.
Final caution comes from real estate research specialist, Golden Section Capital: “Property companies in Central and Eastern Europe are overbought, do not offer enough clarity on real property values, are likely to see economic growth slow in the next two years, and the political risks of many of these countries are not being correctly accounted for by the broader market.”
Chris Gilmour is an investment analyst.