CEE REGION GTC goes for greener financing

Your recent EUR 500 mln green bond issue, I believe, was three-times over-subscribed. GTC has stated that the issue forms part of a change in approach from structured to unstructured Eurobond financing. Could you tell us why you think it would be advantageous to do this at this time?

Yovav Carmi, the president of the GTC’s management board: The markets are liquid and money is looking for new and promising investments, and today, a year after the outbreak of the Covid-19 pandemic, investing in sustainable real estate is an attractive and worthy deal. We observe the market, and we see that such future-proof, environmentally friendly real estate is highly trusted by investors. They are increasingly willing to allocate money into properties, which fulfil the strictest environmental criteria and respond to industry-standard ESG indicators. Green bonds, in a way, are a promise that the money investors put in will be dedicated to environmentally responsible projects, which is why there has been such a high level of interest. Proof of this is our excellent EUR 500 mln green bonds debut. Indeed, as you mentioned, the issue received a strong reception from the broad European fixed-income investor universe and was several times oversubscribed with a peak order book over EUR 1.4bn.

Does this represent a big shift in your financing? How exactly do you see the structure of GTC’s financing going into the longer term?

Ariel Ferstman, the CFO and management board member of GTC: Yes, this is a significant change. Ultimately, we would like to change our financing structure from secured loans to a predominantly unsecured debt funding model. Our goal is to achieve up to 90–100 pct of that kind of financing. Therefore, we plan to carry out 1–2 more green bond issues to pay off all the real estate loans and switch to unsecured debt.

And you have also recently obtained investment grade from Fitch and sub-investment grade from Moody’s in preparation for the bond issue. So are we likely to see other similar bond issues in the near future?

AF: The investment rating of BBB-/ with a stable outlook from Fitch Ratings we recently obtained, as well as Ba1/ with a positive outlook from Moody’s Investors Service, confirm the solid performance of our group and demonstrate investors’ confidence in us as a trusted partner, which we are very pleased with. As I mentioned earlier, we intend to carry out several more similar issues as our goal is to increase GTC's financial flexibility by switching to unsecured financing. Thanks to that, we will strengthen company’s position on the CEE real estate market.

Why ‘green’ bonds? Do you see this as a moral obligation to fulfil sustainability ideals? And does it also make financial sense, in terms of tax breaks, subsidies etc.? What obligations does a green bond impose upon your activities? Do you see green bonds as the future of this kind of financing?

YC: Having a portfolio with 84 pct of the buildings holding green certificates at ‘Very Good’ or ‘Excellent’ levels, it was natural for us to issue green bonds. As mentioned in our first-ever ESG Report 2020, we plan to obtain 100 pct certification for all buildings under construction as well as for already completed projects. Admittedly, there are no tax breaks or subsidies for green bonds so far, but investors are increasingly interested in them. The cost of financing through a green bond is lower. Investors are more interested in this, and there are fewer issuers than when comparing with similar financing through unsecured bonds. We believe this is the direction the market will go in, because green trends and environmental concerns are key determinants for many investors.

How and where do you intend to employ the funds you have raised? How much will go to each sector and geographical market?

YC: First of all, we plan to refinance the current bank loans. We want to start in SEE countries, such as Serbia, Romania or Croatia, where the costs of debt are the highest. Ultimately, we intend to pay off all the loans related to our properties.

In H1 GTC acquired a few office buildings in Budapest – the Ericsson and Siemens Evosoft HQs and Váci Greens D. It seems that you particularly have a lot of confidence in the Budapest office market. Why so? And are you now looking at other investments in that city – or are you turning your attention elsewhere?

YC: The Hungarian market was in an economic recession for many years and recently started to recover. The country has a well-educated young workforce, in particular in IT and hi-tech sectors, which are attracting well-known, international companies to Hungary, creating demand for modern office space. Thus we see a lot of potential in this market. Recently, we invested EUR 160 mln in the acquisition of two unique A-class office buildings occupied by triple-A tenants in Budapest. In addition, we currently manage six office assets in Hungary and are developing a new project – Pillar, which is already fully leased to Exxon Mobil. As far as the company’s further steps are concerned, we will continue to expand in other markets. Our tier 1 comprises regional cities in Poland, but we also plan to build up further in Serbia and Bulgaria.

You also sold your office portfolio in Belgrade during this time. Are you planning to re-enter that country and the SEE region – or is your focus now firmly on Hungary, Poland and elsewhere?

YC: Hungary and Poland are very stable economies with high ratings, which makes them key markets for us. We will also invest in other countries, but more through organic growth than acquisitions. We decided to sell our Serbian office portfolio as it constituted a significant portion of our total portfolio, which was too large for a non-EU country. This deal confirms the liquidity in this country as well as the valuations of our assets. However, we still want to re-enter Serbia as we believe this is a market with prospects and the return on investment will be satisfying and decent. We plan to start an office project in Belgrade this year and have already acquired a plot with the building permit for the development of 70,000–75,000 sqm of office space.

What impact has the pandemic had on your operations? Valuations and revenues must have been impacted. How much of a hit was this, in each of the segments you work in? Are things getting back to normal now? Or is there still some way to go?

YC: Like many businesses around the world, GTC was affected by the Covid-19 pandemic. The retail sector was hit the most: our shopping malls, lost EUR 14.7 mln in revenue in 2020 and EUR 2.4 mln in Q1 2021. The end of the pandemic might be impossible to predict, but we are prepared for any future scenario. Offices have remained resilient – we have seen neither a decline in average occupancy nor in rents in the region where we operate. Moreover, we expect the demand for offices to increase in our region. We have noticed that post-pandemic multinational tenants want to save money and are more willing to move offices from Western to Eastern Europe. We are also seeing that many employees in the CEE region have limited conditions for working remotely, so they are more likely to return to their offices.

Haven’t the various markets you operate in been transformed by the pandemic? Is it fair to say that for offices the trend is for home working or some kind of hybrid, while retail has shifted online in a big way – all of which will have a major impact on demand and the valuations of your assets in both segments? Or is this an overstatement? What plans do you now have for both segments in response to these changes?

YC: We have not seen any drastic changes in office or mall operations. Of course, the pandemic has had a significant impact in terms of changing consumer behaviour, but e-commerce accounts only for about 7.7 pct of purchases, which is still a small percentage, especially compared to the UK, where it already accounts for one-fifth of retail. We have seen shoppers coming back post-lockdowns and restrictions, in May and June, and hopefully this trend will continue. We have also seen how confident retailers are in signing up for new entries to our malls and maintaining their high occupancy at 96 pct. We have seen the entertainment sector grow over the last few years and we believe that everything will return to normal after the pandemic as people need a place where they can meet and spend time together. Shopping centres, along with retail, fulfil this function. In terms of offices, we are seeing that people are slowly coming back to work in the office, as they still prefer the comfort and office work environment, which ensures a better work-life balance for them. We believe there won’t be any impact on office occupancy levels.

You are also active in the residential sector, which would seem to be one of the winners out of the pandemic. Are you considering focusing more on this and on formats such rentals, student accommodation or homes for the elderly? And are you also looking at completely different real estate sectors in this post-pandemic reality?

YC: We are mainly focusing on the office and retail segments. We have some residential plots and cannot rule out developing residential from time-to-time, but we don’t plan to make housing the main part of our development strategy.