You’ve listed “equity recycling” as a key part of your strategic shift to your focus to markets in Western Europe and Poland. What’s behind the decision?
When you deploy equity in assets and work with them to the point where you can’t generate more value, you need to unlock that capital. This becomes especially important when markets shift like they did two to three years ago when real estate took a major hit globally. With senior debt costs hitting nearly 5%, your return premium on relatively expensive assets in less liquid jurisdictions becomes poor. We’re recycling equity that’s locked in assets beyond their value creation lifecycle and relocating it to more liquid markets where we can enter at higher yields with better return profiles.
Investors with a buy and hold approach might not see the point in realizing a loss.
Yes, you make a loss now. But why would you hang out in a position that won’t give you additional value? If you had to reprice your portfolio because you’re listed or have institutional capital requiring mark-to-market valuation, then you can write off values. Once you’ve written down your value, the price you sell your assets at might look like a discount, but it’s actually the true market value. It means you can recycle that equity and jump into deals with far higher yields.
If your equity was locked up in a prime real estate asset in Poland, that would mean it was making it’s about a 5% yield. But after the market repriced, you could easily jump into deals at 6.5%. So you’d make 150 basis points improvement on your net cash profile for the next 10 years.
There are plenty of assets being sold on the Czech market, so why don’t you consider it a liquid market?
Liquidity means you can sell your portfolio at whatever pricing the market reflects. The Polish market, for example, is very liquid because when real estate repricing happened, it reflected changes within about six months. In Czech Republic and Slovakia, it took almost a year and still hasn’t fully adjusted. The Polish market comprises over 80% international capital, while the Czech market has 85% local capital – it’s ring-fenced and very difficult for outside asset managers to deploy capital because it’s so competitive with local funds.
The real estate market has been shaken up by the higher interest rates, and the fact that they’re not heading down anytime soon.
The banks increased lending costs drastically. You went from 0% on EURIBOR for euro lending to 4%. If you’re holding assets that you bought for a 3% yield and your loan is maturing, how can you afford it? Especially if the valuation of your collateral has gone down 20 or 25% in certain asset classes. You haven’t seen that here.
But in other countries, there were a lot of NAV financing instruments, and short-term private credit options being offered. European asset managers were willing to borrow at 8% to 12% from private sources just to bridge the short-term. That didn’t happen here. Either market prices here isn’t reflecting the real conditions or it’s the foreign markets that are off. But somewhere there’s a discrepency.
What’s your timeline for the current fund?
We have about three years left in our current fund, which began in 2021 as a five-plus-two structure. This creates pressure to find liquid markets where we can realize value and exit positions within our remaining timeframe. That’s why market liquidity is so crucial – we need markets where transactions happen regularly.
In other words, you need to reinvest in markets where you perceive that there’s institutional demand at prices that allow your equity to grow.
Yes. It means we can relocate that equity into a different deal, which is on a different market and continue to add value for the next three years.
Why hasn’t the Czech market reflected the same repricing as other European markets?
The market here is dominated by local entities raising funds from retail networks. Everywhere else, the market repriced by -1515%, some local funds still reported plus 12% returns. We only went down 6% because we completed some development projects that offset losses on our standing asset portfolio.
How do current industrial yields compare across regional markets?
Prime industrial yields now are about 6.5% in Poland, 5.2% in Czech Republic, 6.5% in Slovakia, and still around 4.2% in Germany. That’s only 100 basis points difference between German and Czech markets. If you’re a UK investor with institutional mandates, where are you putting capital? The risk-adjusted returns favor Germany.
Where are you looking to redeploy capital?
We’re examining Western Europe, Poland, and Germany. We’ve been mapping and analyzing different markets for over a year. From a portfolio risk perspective, you can’t be concentrated in only one or two countries – that’s geographical concentration risk. Also, why concentrate equity in countries that aren’t on institutional players’ radar? We’re looking at markets where institutional capital is more active and transactions reflect true market conditions rather than local retail capital dynamics.
Robert Ides is a Co-Founder and Managing Partner of ARETE Group
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