NEPI Rockcastle: dominant and discounted

NEPI Rockcastle (NEPI) has built an €8 billion portfolio of retail properties across Central and Eastern Europe (CEE). Despite solid underlying economic performance, the region carries heightened perceived risk stemming from its proximity to the Russia-Ukraine conflict.

This has led NEPI to trade at a fairly low share price relative to its cash flow potential and underlying property net asset value. We examine its dominant asset base, disciplined capital allocation record and resilient operating performance, and explore whether its portfolio and prospects are undervalued.

Europe’s growth postcode

The CEE region has undergone meaningful economic convergence with western Europe over the last 20 years, supported by capital inflows, export-led growth and a skilled, cost-competitive labour force. Integration into European trade and regulatory frameworks has underpinned structural development across the region.

Recent years have brought notable challenges, however. Russia’s war in Ukraine disrupted energy and food markets, pushing input costs higher, and VAT increases in Romania have added further pressure on households. Despite this, the longer-term CEE retail growth outlook remains supportive, positioning NEPI well to benefit from its exposure to the region. Consumer debt in Romania is among the lowest in Europe and consumption trends in Poland have shown great resilience.

What is in the basket?

NEPI Rockcastle was formed in 2017 through the merger of New European Property Investments and Rockcastle Global Real Estate. The company now operates 60 properties, including 57 retail centres concentrated in Romania and Poland, the CEE’s largest retail markets – charted below.

The portfolio comprises regionally-dominant, highly visible and modern regional shopping centres in prime locations. These properties are typically located in key cities with large catchment areas and excellent transport access. The centres host the most regionally present premium tenants such as Inditex brands*, LPP and Carrefour.

* These include Zara, Bershka, Massimo Dutti, Oysho, Pull and Bear, Stradivarius and Lefties

Clicks have not dented bricks

E-commerce penetration remains significantly lower across the CEE region than in Western Europe, reflecting different consumer preferences, logistics realities and shopping trends. Physical stores remain essential, often serving as the first point of contact between retailers and consumers. They play a key role in hosting new product launches, strengthening customer relationships, encouraging sales and generally enhancing overall product and brand engagement.

In many CEE cities, the limited availability of high-quality outdoor social spaces has positioned modern malls as primary social hubs and leisure destinations rather than merely retail venues. NEPI’s portfolio – characterised by a high concentration of dominant regional shopping centres (below left) – is therefore ideally positioned for this environment. This dynamic also shapes the tenant mix, with fashion retailers forming a core component of the portfolio (below right).

Redefining retail

Recognising the evolving needs of retailers and consumers, NEPI has invested in omnichannel initiatives and experiential concepts. These include loyalty programs across markets, such as the SPOT app in Romania – a mobile platform that rewards shopping visits with loyalty points redeemable for discounts, prizes and vouchers across all NEPI-owned malls. Click-and-collect services, cultural events with live-streams on social media, and strategic partnerships with online communities (eg their partnership with Influcenter by EKIPA, one of Poland’s largest Gen Z digital communities) demonstrate NEPI’s commitment to maintaining relevance across its retail assets.

Powering the malls

NEPI directly manages its shopping centres with local teams in each market reporting through to a centralised structure. While these functions have been brought in-house over recent years, administrative costs have remained low relative to competitors, reflecting sound operational discipline.

Almost all leases are denominated in euros, even in markets such as Poland and Romania that use local currencies, and rentals are adjusted annually in line with European inflation. NEPI’s portfolio benefits from staggered lease maturities, providing visibility of future cash flows. After adjusting for tenant break options that permit early termination, lease agreements provide an average of approximately 3.5 years of secured occupancy.

This approach has delivered consistently robust results. Vacancy rates have averaged around 3% over nine years, reflecting a successful data-driven strategy of continuous improvement and sustained retailer demand for space in NEPI’s malls. The company analyses footfall patterns and shopping trends to identify where refurbishments, tenant mix adjustments or space reconfigurations will have the greatest impact. These investments strengthen retailer performance, which in turn supports NEPI’s ability to achieve rental growth upon lease renewal. Importantly, tenant affordability has remained healthy, with rentals accounting for a relatively low proportion of retailer revenues.

Development prowess

Disciplined, effective capital allocation sets outstanding real estate operators apart from their competitors, and NEPI’s track record illustrates this clearly. A recent example is the €136 million investment in the 63 700m² Promenada Craiova regional shopping centre in Romania, completed in 2023 and including road infrastructure to improve access and connectivity. Just one year after completion, the centre is fully let and valued at €158 million, representing a 16% uplift.

In the same year, NEPI completed a 254-apartment residential development in Bucharest – Vulcan Residence. The project made efficient use of land adjacent to existing retail properties, with all units subsequently sold. Building on this success, NEPI has initiated two additional residential developments in the Romanian cities of Brasov and Craiova.

Retail property development activity in major CEE cities has shifted towards retail parks. These are smaller, open-air formats focused on convenience and value in contrast with shopping centres, which are large, enclosed, multi-tenant destinations serving regional catchments and offering fashion-led retail and multiple entertainment options.

Retail parks are quicker and less capital-intensive to develop than shopping centres and address a different consumer need. As a result, with limited new shopping centre supply entering the market, dominant centres in prime locations have faced low competitive pressure in recent years.

This dynamic shapes NEPI’s development strategy. The group has shifted away from greenfield developments toward extensions of existing flagship properties and is investing in solar power infrastructure. The pipeline is material relative to the current asset base and is set to deliver large incremental earnings on completion. Some examples are:

• The Promenada Bucharest extension: a €290 million mixed-use expansion expected to open in 2027 and currently NEPI’s largest project. The extension adds retail space, offices, a hotel, cinema, theatre, gym and six undeground parking levels, with improved access from major roads. Notably, 77% of the space is already leased, demonstrating strong tenant demand ahead of completion.

• Solar infrastructure: In addition to growing its rental revenue, NEPI is focusing on its cost base, particularly energy expenses, which have risen sharply across Europe and weighed on tenant affordability and consumer spending. Solar panels currently meet approximately 5% of the portfolio’s electricity needs, with plans in place to increase this to 50%. This expansion will significantly reduce operating costs. It will also meet growing decarbonisation expectations from lenders and investors, thereby strengthening the portfolio’s financing profile.

Proximity vs performance

While many of NEPI’s operating markets share borders with Russia or Ukraine, this geopolitical proximity has not disrupted operations to date. Property vacancy levels are low and rental growth continues. Supported by strong consumer and economic fundamentals across the region, NEPI offers exposure to a well-managed portfolio of leading shopping centres in structurally supportive markets at what we believe is an attractive, low entry price – especially if there is a near-term resolution to the war in Ukraine.

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