Nepi is bucking the trend

The Resilient group’s Romanian property arm, New Europe Property Investments (Nepi), has emerged relatively unscathed from eurozone troubles.

The stock, which is listed on both the JSE and London’s AIM, last week reported an impressive 15% dividend growth (in euros) for the six months to June. That follows growth of 13% for the 2011 financial year.

Moreover, Nepi’s share price has rallied 30% over the past 12 months, placing it as a more lucrative randhedge property play than JSE-listed counterparts Capital Shopping Centres, Capital & Counties Properties and Redefine International

Nepi has over the past five years built up a portfolio of 31 properties worth à407m (R4bn), comprising mostly retail centres and offices in places like Bucharest, Ploiesti, Braila, Brasov and Pitesti.

Nepi CEO Martin Slabbert says Romania’s economy is still in good shape. That’s despite expectations of a slowdown in the country’s GDP growth from 2,5% in 2011 to 1% this year and political infighting among the ruling party. The country has an unemployment rate of just below 5% versus Europe’s 10%-11%.

He notes Romania remains one of the EU’s fastest-growing regions in terms of retail spend. Yet it is one of the least developed, as the Romanian economy had to be built virtually from scratch after the rule of communist leader Nicolae Ceausescu came to an end in 1989.

Nepi will continue to focus on new developments. The company has six new retail and office projects worth à220m in the pipeline. Slabbert says new developments will offer yields ranging between 9,6% and 12% — higher than the 7%-9% typically on offer for new developments in SA.

While Nepi has focused on Romania since it entered that country in 2007, Slabbert says the company is now looking to replicate its model in other European countries that offer similar growth potential.

Serbia, among others, is on Slabbert’s radar. “The capital, Belgrade, is home to 1,8m people yet the city has only two shopping centres. The extended war in Serbia has meant that the country has seen very little real estate development over the past 20 years. Serbia is also in the process of being accepted into the EU, which adds to its attractiveness.”

But Slabbert says Nepi won’t enter Serbia on its own. “We are talking to big local property players to possibly enter the country through a partnership.”

Have investors who don’t already own a stake in Nepi missed the boat? It seems not.

Macquarie First South Securities property analyst Leon Allison says Nepi remains his top property stock overall. He notes that it is one of very few companies that offer an income yield of more than 6% in year one and dividend growth of around 15%/year for at least the next two years.

Allison says growth will be driven primarily by extensions to the portfolio and new acquisitions.

Though the euro crisis will subdue economic growth in Romania, Allison says Nepi is benefiting from negative perceptions of Europe because the company faces limited competition from other property developers.

Moreover, it has a competitive advantage as it has access to debt and equity funding at attractive rates. “Nepi’s average cost of funding is just over 6% (50:50 debt to equity), which is attractive given initial returns on new investments of 9%-11%.’’

Allison says investors in Nepi can expect both a high yield and high growth in the next two to three years. “We believe the stock should outperform in both an uncertain global environment and one where financial markets normalise, as Nepi offers both defensive and growth characteristics.”

Given its current trading level of R42,70, Allison expects Nepi to deliver a total return of 20% over the next 12 months. That’s more than double his forecast 8% total return for SA-focused property stocks.