After a major merger between NEPI and Rockcastle two years ago, the future of the recently formed company, as well as that of the real estate investment market in Romania, is looking bright. The company merger formed the largest player in the real estate market in Central and Eastern Europe (CEE) with a portfolio of €5.9 billion at the end of 2018.  NEPI Rockcastle CEO Alex Morar discusses the company’s long-term approach to the market that allows it to develop a high-quality asset base by uniquely identifying high-potential locations that competitors seeking short-term profit miss. Morar also discusses the potential of the sector and the benefits of investing in the Romanian and CEE real estate markets

As CEO, what were the most crucial business decisions you have made to enable the impressive development of Rockcastle and the business after the merger? 

The biggest contributor to our success to date has been sticking to a strategy with quality assets at its core. We never compromised on yield versus long-term sustainability. We’ve never had the mindset of looking just to make a quick profit. Our mindset has been to generate value for our stakeholders, and, to date, we have sold very few assets. Our portfolio is diversified across nine countries, with assets we plan to hold for the long term. We have made significant large investments in locations which many other investors passed over because they didn’t see a quick profit in them. The property market yields imply needed investment horizons of over a decade to become net present value positive from operating cash flows. Through our merger, we’ve been able to diversify across more countries. NEPI was 72% focused on Romania before the merger. Right now, Romania is 36% of our portfolio. We haven’t divested from Romania; we’ve invested in other, additional places. All our value-creating activities, such as asset management, leasing, financial strategy and marketing, are done in house.  

What key steps have you seen the company take in the last several years?

The merger two years ago obviously stands out. Next to that, we entered a number of new countries, and we’ve continued the same strategy of quality investments, and stuck to our company principles despite markets being somewhat retail averse recently. We believe in our strategy and our assets, and we believe that the region we operate in, specifically Romania, is a fundamentally strong one. The macroeconomic fundamentals of the region are healthy for a business like ours. We have a solid economic growth rate, low unemployment, an educated population and a good labor market, so all of the elements are there to drive long-term retail growth.

NEPI Rockcastle has recently listed on the A2X in Johannesburg, in addition to the Johannesburg Stock Exchange (JSE) and Euronext Amsterdam. The company bonds are also listed on the Irish and Bucharest stock exchanges. Can you tell us about these listings and the advantages they bring to investors?

Our main listing is on the JSE, a regulated exchange where virtually all of our liquidity currently sits. When we merged, it was clear to us that part of our medium-term strategy had to be to broaden our shareholder base in Europe. We listed on Euronext in preparation for access to other European equity markets. We hope to make inroads with European investors in the next 12-24 months.

The A2X is a new platform, and it gives already listed companies the ability to trade at lower costs. It gives our shareholders an alternative of where to trade, which should lead to more liquidity; it is not meant to be a substitute for the regulated market of the JSE. As is best practice in our sector, our real estate bonds are listed on the Irish Stock Exchange. Our bonds on the Bucharest Stock Exchange are part of our efforts to boost the activity of Romanian capital markets. I think that we have a product which is of interest globally— a euro income stream from quality assets in a fairly economically and politically stable market that is growing. Western Europeans’ risk-averse nature has traditionally kept them away from this region. It was not long ago that the map of Europe stopped in Vienna as far as property markets went. Our market is slowly growing in the eyes of investors, and NEPI Rockcastle is doing its bit to make that happen.

What makes you an interesting stock for German and other European investors?

Our property company is one which delivers a euro income stream; all our lease agreements are in euro. The dividend yield at the moment is around 7%. We have a virtually 100% collection rate; there is not a systemic risk there. We have a very high-quality tenant base. Our underlying asset base is high-quality assets, 97% of which are in investment-grade rated countries. Over 50% of our properties are in capital cities plus Krakow, the second largest city in Poland, which we include in that category. On top of all of this, as a rapidly developing region, we have long-term growth prospects that are better than those of Western Europe. There are lots of misperceptions about inherent risk in this region. Slowly, our regional economic power is growing and at our company, we’ve consistently delivered good results for over a decade.

What is the company strategy specifically regarding Romania?

At the moment 36% of our total portfolio is in Romania. Although we’re happy with where we are, there are still opportunities for further investment in Romania. In terms of our overall portfolio across the region, in the medium to long term, we would like to move towards proportional investment in each country related to the size of their economies.

Dedeman recently signed a contract exceeding €100 million to take over The Office Cluj-Napoca property from NEPI Rockcastle and Ovidiu Sandor, reportedly the first in a series of transactions between Dedeman and NEPI Rockcastle. What is the significance of this deal?

The Cluj property is a microcosm of the level of activity that is happening across the region and highlights the attractive features of the local environment. Cluj is currently one of the most interesting cities in Romania, but the same potential exists in a number of other cities. Investment and government facilitation from Romanian authorities will allow the market to reach its potential.

The EBRD has, for the second time, invested €50 million in one of the group’s €500 million corporate bonds listed on the Bucharest Stock Exchange. What does this say about your business and Romania as an investment destination?

Garnering investment from the EBRD shows not only that Romania is attractive, but also that our company and its business strategy initially rooted in Romania is sound and attractive. They see the potential of investing in us as a developing market. In our line of work, we’re developing secondary Romanian cities where we’ve invested to raise standards. Over 50% of our buildings are green certified and that percentage will grow by the end of this year, so that is another transformation we’re heavily involved with, and one that increases the country’s overall appeal as an investment destination. Our strategy has favored a slow and steady approach, and we encourage investors to think similarly. Our investors should be cautious about overreacting to trends and news about the region.

What do you see as areas for improvement when it comes to Romania’s image and opportunities to attract investors in the region?

My personal opinion is that Romania will be able to achieve much more if a stronger priority is placed on infrastructure. Others may put healthcare and education ahead as the top priority areas, and I agree they are important, but I believe that infrastructure will drive the economy, and a strong economy will drive revenue to build those other areas. Recent political events in Romania have also shown that, as a country, we are headed in the right direction. As Romanians, we can debate whether the speed is adequate, but I think we can all agree that the direction is good.

As e-commerce and other technological innovations continue to disrupt the retail market, how are you preparing to tackle these challenges as the Romanian market continues to develop?

We have the advantage of being able to see how retail has already been impacted in more developed parts of the world. Our region differs, however, in that e-commerce market penetration is roughly one-third of what it is in Western Europe. Our region is undersupplied in terms of retail generally, when compared to western Europe. E-commerce and traditional retail will grow together; we haven’t reached supply saturation with either yet, so I envision the market will be an integration of the two in the long term. In the medium term, we’re investing time and money into systems that are a mix of the two concepts. We’re seeing the tenants in our real estate doing the same.