Could do better

After more than 2 years as a member of the EU, Poland’s real estate market has been transformed. But how transparent are the practices involved in transactions, and how does this influence investors?

Shopping centres, office buildings, warehousing parks and apartment blocks are springing up everywhere – and often changing hands – at an unprecedented rate, reflecting the growing confidence of international investors and occupiers in Polish properties. But one stumbling block for these companies can be a lack of transparency in transactions – something which can especially be a problem in emerging markets. The lack of information about how to proceed with a deal or about transactions which have already taken place, and the perception that transparency masks corruption, is likely to prove to be extremely discouraging for investment. How much of a problem is the lack of transparency in Poland and what can be done about it?

Preconceived but misconceived

Kevin Turpin is the head for Central and Eastern Europe research at Jones Lang LaSalle, which publishes a 2-yearly Real Estate Transparency Index (R.E.T.I.) report, including a ranking of 56 countries in terms of transparency. In the last of these in 2006, Poland’s ranking rose one place to 27th (a ‘2-star’ improvement, in the terminology of the report), just behind Hungary and the Czech Republic, with an average rating of 2.76 (1 = transparent, 5 = opaque). The motivation behind the report is, according to Mr Turpin, to essentially “provide investors and occupiers with a relative idea of what the conditions are like in countries they may not know about. You might have a pre-conceived idea which may be quite wrong, and in actual fact, there could turn out to be much less restrictions than you had thought.”

Respondents to the survey, who are professionals active in the real estate industry, are asked to rank the country they operate in according to several categories, including how clear tax and accountancy issues procedures are, how helpful government institutions are and how much information is available in foreign languages. Kevin Turpin describes the function of the report as providing “an idea of the general conditions for operating in a certain country, if you’re interested in knowing what is happening in a market, which companies are already active there or how to set up a business.”

Over-senstivity

So where does Polish real estate need to go to achieve the transparency enjoyed on more mature markets? Jones Lang LaSalle’s regional director for central Europe, Ben Bannatyne believes that local players in real estate need to become accustomed to the idea that information can be shared freely, and draws a comparison between the situation in Poland and that of the UK: “In the UK, which is probably the most mature and transparent real estate market in Europe, information on transactions is published and real estate agents and advisors regularly share information. This is an established practice and helps advisors to build a database of comparable transactions that can be used for valuations etc.” According to him, the situation in this part of the world is quite different: “In the CEE region, details of transactions are normally kept confidential and agents / advisors do not openly share this information – due to client confidentiality. In the UK you can easily find out what your next door neighbours’ house has just sold for – not here.”

Sink or swim

Another example of where the law remains opaque concerns the Large-Scale Shopping Facilities Act passed by the previous government, and which stipulates that the agreement of regional (gminas) or central government is now an extra requirement before a store with an area larger than 2,000 sqm can be opened.

Michael Hartley Davies, a partner of the Siemiątkowski & Davies law chambers which numbers amongst its clients several real estate companies and investors, details the problems that are likely to arise if the Act is ever enforced: “The law on retail development is quite obscure – no-one seems to understand the process. People have bought sites, but don’t know whether they are going to get the permits needed to proceed. This is an amazing hotch-potch of unclarity, with so many levels of analysis and opinions. Even if there is a masterplan, some opinion could theoretically still sink the project .

All this adds to a higher perception of risk from investors. But they will also perceive the risk to be higher if they believe that corruption is more prevalent in particular countries, something which is also related to transparency issues. Transparency International has just published its annual Corruption Perceptions Index, according to which Poland is ranked 61st least corrupt out of 163 countries – no change from last year, but with its score rising from 3.7 in 2006 to 4.2 out of a maximum of 10. The professed aim of Transparency International’s Polish branch is “to strengthen Polish civil society’s capacity to combat corruption,” – according to its website.

In the opinion of Michael Hartley Davies: “The more bureaucratic steps you introduce into any process, the more scope can arise for corruption. There’s a lot of state involvement in the real estate sector, for example, with privatizations that have yet to be completed.”

A few bad apples

A managing director of a real estate investment company in Poland – who wishes to remain anonymous – nevertheless feels that corruption is not endemic in Poland. He remarks that: “There are always a few bad apples, but our experience is that the vast majority of people are honest and are willing to help developers in all of the countries. Generally we understand from other developers that it becomes a bigger issue in markets like Russia and Ukraine than in the ‘New European’ countries. This does have an influence on how capital is invested in certain countries with a preference to purchase completed projects as opposed to encountering these problems during a development process.”

One of the main planks of the outgoing government’s policy was to stamp out corruption through high-profile arrests and prosecutions. Whether this approach worked or not is a moot point, but our anonymous investor at least feels that these “go a long way to stopping some people considering it as ‘normal’ business practice.” He also agrees that more transparency would help the situation: “If paperwork and bureaucracy were reduced it would make the situation easier and quicker. Everyone is more confident that with a new forward looking government the processes and inconsistency between laws will be clarified.”

Shut that door!

Ben Bannatyne of Jones Lang LaSalle also agrees that a lack of transparency “opens the door to more corruption. If on the other hand you have a clear and transparent legal, fiscal and planning framework then you know what the rules are and how to proceed.” In his personal professional experience, he has heard “stories of a planning permit being granted under strange circumstances or a tender being awarded to an inexperienced developer with the poorest bid. However, this happens everywhere – I do not see a major issue with corruption in the CEE region,” claims Mr Bannatyne.

How far Poland needs to go to improve its transparency is summed up by Kevin Turpin in the manner of a school report: “Good – but could do better! To reach the levels of transparency in western markets, where policies and standards have been in place for many years, is not too far away. There is still room for improvements in the availability of information and in foreign languages, as well as the legal aspects of purchases – but the CEE countries are catching up very quickly, having moved from a non-transparent status a few years ago, these markets have come a very long way.”            n

Nathan North