What is Argo’s stake in Romania’s real estate segment and what personal vision do you have for the company?
Argo is a hedge fund that invests in distressed assets and by converting debt into equity. There is a credit arm that focuses on sovereign and corporate bonds and loans across emerging markets from Sudan to Argentina, and a real estate arm, which is the one I am involved with. It all started with the acquisition shopping center’ debt across Eastern Europe, where we invested in six assets, one in Ukraine and five in Romania.
Over the course of the past few years, we have been in exit mode, and still managing for the time being the shopping centers in Odessa, Suceava and Oradea. We exited Sibiu to NEPI and Iasi to Prime Kapital and preparing to wind down the other two assets in Romania as soon as market conditions are favorable.
I believe that the retail market is getting somewhat satiated and increasingly competitive, so the current vision is to turn Argo’s attention to the residential and office segments for our next investments.
How do you define favorable market conditions for your exits?
It boils down to two main factors: on the one hand yields have compressed to a level that I think represents current risk. I do not expect much more compression as likely. On the other hand, there is the income side, where we might see some improvement with international tenants expanding fairly aggressively, despite the COVID-19 epidemic. That being said, much of this is on the back of favorable terms from landlords, so we do not expect a lot of growth from an income stance either.
I estimate 6-12 months before we can have Suceava and Oradea in exit ready positions, after some needed improvements and restructuring of our debt. In Oradea we were considering adding a cinema, which I think will still be in demand post COVID-19, with so many of us longing to go back to all that. We are also revamping the food courts and entertainment areas.
How has COVID-19 impacted operations in the two malls in Romania?
We had to operate somewhat differently, like everyone else, by imposing social distancing rules, sanitization and so forth. Overall, though, I am quite impressed at the resilience of both shopping centers – traffic in Oradea is down around 17% and in Suceava roughly 15% between March and September, compared to 2019. The tenants have also remained resilient, though the smaller local ones are more vulnerable depending on their scope of business. Animax for instance is doing well, whereas a local shoe retailer less so. Things will remain tough at least until May 2021, and like with every crisis stronger market participants will reinforce their positions, and weaker ones wither away.
Do you believe the financing climate in Romania is favorable to the real estate industry, is it easy to access capital?
Our latest loan was five years ago, but from what I am observing in the market nowadays, lending for development is far from strong. There are limits in terms of loan-to-value, say if a project is 100,000 banks are not going to offer over 60-65% of overall costs.
As for large scale projects there are no local banks that can offer loans at all. Additionally, banks are still behaving very prudently after the burn resulting from the 2008 crisis, despite good capitalization, so there are not as many loans going around in general. Many banks were taken over in Romania and the slack was picked up by Banca Transilvania, BCR and BRD. They are now in the privileged position where they can pick and choose, and they tend to select blue chip, safe investments. That being said there is a great deal of private funding, especially for bigger players, which compensates for banks’ risk aversion.
As an emerging market fund, how would you say Romania compares to the region overall, and what are your plans for further investments here?
We are indeed fairly opportunistic and invest on a case-by-case basis. For example, we are looking at a shopping center in Turkey that is being sold at a very attractive price due to its massive debt compared to cashflow generation in sharply depreciated TLY. In Romania, right now we see most opportunity in residential development. There is no coherent strategy yet, and it will depend greatly on what opportunities come our way.
Loosely speaking, the structure around Romania consists of residential and office in Bucharest, which there is still sufficient demand despite considerable new construction in the past years. For residential affordability went from 20 times the salary in 2008 to 8 times the salary in 2020, which opens the market up to a new wave of buyers.
As far as offices are concerned, I believe that the demand for the medium term (8-10 years) is set to continue unabated, given the advantageous labor and costs factors, coupled with growing industry. In the short run things are challenging of course, with many tenants giving up space. There will be fewer constructions now than there would have been in a non-pandemic environment, which means even more demand for the medium term.
Our fund’s opportunistic nature translates into high returns for our shareholders, which you simply do not get from mature markets – there has to be an angle to it, and that is what we are currently keeping an eye out for in Romania.
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