Tower investigated offshore opportunities for a year before choosing Croatia as the first leg of its offshore strategy. Picture: THINKSTOCK

TOWER Property Fund has plans to expand its offshore portfolio in Croatia, saying the country’s real estate market has surpassed its expectations.

The South African-based fund, which has a market capitalisation of R1.9bn, wants at least one-third of its portfolio to be offshore.

Offshore earnings make up more than 30% of the South African listed property index.

Stanlib’s head of listed property funds Keillen Ndlovu said yesterday he expected offshore exposure to boost the sector’s growth this year.

"We are forecasting income growth of 9%-10% this year. This growth has been boosted by increased offshore exposure and a weaker rand. Stripping out offshore exposure, the income growth slows down to 6%-7%," Mr Ndlovu said.

In July last year, Tower announced it would establish an offshore presence when it bought part of a newly built office tower, VMD Block B, in Croatia’s capital Zagreb.

CEO Marc Edwards said yesterday the company’s first acquisition had proved more successful than expected.

"VMD Block B has performed considerably ahead of our expectations. The property has a five-year head lease from the VMD Grupa and was predominantly vacant on purchase. The property is now fully let on paper as tenants are currently fitting out their premises, with rentals achieving expectations."

Mr Edwards said Tower owned 15 of the 26 floors in the building and he was considering acquiring seven more.

Tower investigated offshore opportunities for a year before choosing Croatia as the first leg of its offshore strategy.

"Croatia was coming off the back of an eight-year recession. We believed the economy was about to enter a growth phase and we are pleased that 2.5% growth for the next year looks set to be achieved.

"The recent tourism season was the best for a number of years, which is excellent given that this industry accounts for a large part of the economy," Mr Edwards said.

"Added to these macro benefits, the cost of debt in Croatia is significantly cheaper than in SA, with property yields being similar, resulting in earnings enhancement," he said.

Evan Robins, the listed property manager of Old Mutual Investment Group’s MacroSolutions boutique, said it remained to be seen if Tower’s first Croatian acquisition would deliver sustainable returns.

"The Croatian transaction may prove to be a good one, but investors will be wary when management teams invest into areas where they have no obvious expertise or advantage, especially in lesser known markets such as Croatia.

"Tower is a small fund with acknowledged expertise in niches of the South African market, which made the move more surprising. They are … looking in more adventurous geographies than most of their peers."