Five to four

In the final reckoning, the country’s top four investors together spent
app. EUR 1,029 bln on Polish real estate between Expo Real 2006 and Expo Real 2007. They have agreed to take part in our survey, allowing us to gain an insight into their perceptions of the investment climate in Poland, possible new market niches, yield forecasts and much more

ING Real Estate Investment Management (EUR 329 mln)

Martin Sabelko, managing director investment management Central Europe

å It was a great period for our team in Poland. We have grown assets under management from EUR 149 mln to EUR 474 mln (218 pct). We are very lucky with our acquisitions. These are the crucial points of our activities. In addition, we represent the largest real estate company and have sufficient sources to react on investment opportunities.

ç Poland is a market we would like to invest in, with very good economic grooving conditions and has matured sufficiently for the investment. We find the Czech Republic also to be a very stabile market, however due to its size as well as the size of the economy in general, it currently has less products on offer for investors. Due to some economic problems, such as inflation and a budgetary deficit, Hungary is temporarily less attractive for investors. Since last year we have also been active in Austria, Slovakia and Romania and already made first acquisitions on those markets. However, we are still not active in Russia, Ukraine and Bulgaria.

é a. yields in office: 5.6 pct – 5.9 pct, retail: 5.75 pct – 6 pct, warehouse & hotel sectors: 6.75 pct – 7.25 pct

b. Unfortunately, fewer transactions

c. Macro-economic, the situation of the world economy, the loan market crunch, interest rates.

è We think that this trend will continue as the retail sector is very attractive. It is very difficult to compare retail with offices and the logistic market.

ê There are several factors that can have an influence on that. One is that further interest rate growth would eliminate some of the aggressive investors and as a result of we could expect a further stop of the yield shift.

Akron Group, Austria (EUR 237 mln)

Stefan Ausch, member of the Executive Board and partner of Akron Group

å a. Our greatest deal definitely was the acquisiton of one of Warsaw’s prime office buildings Warsaw Trade Tower. It was one of the biggest single asset transactions ever closed in Poland and it was a milestone as well for the Akron Group. When Akron signed the purchase agreement nearly 30 pct of the building was empty and Akron bought it without any rental guarantee. Now 9 months after closing the building is full.

b. Certainly in last quarter of 2006 there was still the chance to acquire buildings with significant vacancy and a modest rental level. Now most of these buildings are fully leased at significantly higher rents showing a high return for investors even on already very low yields.

c. The leasing market was moving at an incredible speed in the first quarter of 2007 with office rents rising month by month. This tendency will – at least in CBD – go on for probably another 12–18 months. At the same time, after the first quarter of 2007 the development of the investment market really slowed down, due to extremely low yields andd high interest rates, among other reasons.

ç Out of these Poland is – probably together with the Czech Republic – the most expensive market for real estate investments. On the other hand, it’s a market of nearly 40 mln inhabitants with large possibilities also outside Warsaw and the economy is still booming. What could have been observed in the last 12 months was a rush into Russia and the increasing of importance of Ukraine. Of course both Russia and Ukraine can not yet offer the same standards as Poland in terms of legal frameworks, reliable land registers, reliable authorities, etc.

é a. Yields have already started to increase and will most probably to a certain extent increase further. This increase should – of course as long as interest rates are not significantly increasing – be modest (app. 0.5 pct – 0.75 pct on average).

b. Due to the high occupancy level, the Polish investment market currently shows few chances for “opportunistic” investment in high quality buildings with significant vacancy, bringing with it the with the chance to profit from the booming leasing market. In the very near future, the market will provide mostly for pure cash flow investments.

c. The investment market will definitely be influenced by the ongoing situation in the US subprime market. Even though this has nothing to do with Eastern Europe, some big investors may be reluctant for some time to shift their funds back to real estate investments. The second important factor will of course be interest rates. Further rising rates may also lead to withdrawal from funds from real estate investments and thus accelerating yield increase.

è The question is if retail investment really still is so attractive? Yields for retail investments are almost lower than for office and Poland currently – compared to Ukraine or Russia – does definitely not suffer from significant lack of retail space. With retail rents being also quite high the ratio of retail investments compared to overall investment will most probably come down again.

ê I think apart from overall economic factors like interest rates, like the sub-prime crisis in the US a significant slowdown in Polish economic growth may be a hurdle for investors. The same applies to some strange legislation, such as the new ‘Large-Scale Shopping Facilities Act’, which will simply scare some developers away from the Polish market. Anyway I would consider the Polish investment market as strong enough to stay vital over the coming years.

Macquarie Global Property Advisors, Australia (Eur 232 mln)

Daniel Harris, head of acquisitions CEE

å We have had a very successful year in Poland building upon our portfolio with a strong focus on the residential sector. During the last 12 months we have invested in 2 residential developments comprising a total of 3,300 units in Warsaw and Wroclaw. We are actively pursing further opportunities in this sector.

a. I am very excited by the Warsaw residential development that we are undertaking in Warsaw: Wilanow 1. In this development we are bringing a degree of scale (2,100 units plus a shopping centre) combined with a focus upon the living environment, quality product and sophisticated marketing, which I believe makes it one of the leading developments in the country.

b. The economic development cycle that Poland is enjoying makes the residential sector very appealing and we hope that our product will change the landscape and living environment for many Warsaw residents.

c. We joint ventured with an experienced developer in the market and together created our plans for the development. To date the project is performing ahead of expectations with over 55 pct of phase 1 units sold with completion still over a year away.

ç Poland is fundamentally a more mature real estate market and in this respect is similar to but larger than the Czech Republic and Hungary. While these markets have each had their ups and downs as they emerged and developed, they are now more mature and relatively stable. By contrast, Bulgaria, Ukraine and Russia are still in their infancy and while they have significant potential they also suffer from the potential cyclicality of emerging markets and therefore exhibit a greater level of risk that need to be recognized and priced appropriately.

é a. In the current environment it is apparent that investors are taking a more cautious approach to risk and that as a result yields in all sectors in all countries can be expected to move out. In this environment the best located quality assets will outperform more secondary properties. This is as true in Poland as anywhere else.

b. As a result of the economic expansion and development of the Polish market that has occurred over the last five years the Polish market has more opportunities today than it did five years ago. However, as yield compression will no longer deliver returns investors must look to more fundamental growth to meet their return hurdles. In Poland this will require a focus on development in some of the secondary cities and capturing rental growth that is occurring.

è While the retail sector will continue to be a focus of investment and development in the next two years as third tier cities are increasingly developed, we believe there will be a greater number of quality opportunities in the residential and office sectors.

ê It is apparent that the uncertainty of the current planning process makes the evaluation of development opportunities difficult. In a comparatively young market such as Poland where there is a relatively limited supply of quality existing product in all sectors an unpredictable planning process could hinder the balanced development of the market and therefore the investment process.

IXIS AEW Europe (Eur 231 mln)

Artur Mokrzycki, managing director of Central Europe

å a. Our acquisition of the Wola Park shopping centre for about EUR 140 mln must be considered our largest deal in Poland over the past 12 months. It has been hard work, to bring all the details together on this large shopping centre, but we have been greatly impressed by, and have appreciated, the cooperation and assistance that the vendors Ivanhoe of Canada and their retained advisors CBRE have afforded us. We are now looking forward to working the asset and integrating it into our portfolio.

b. There have been a number of very interesting properties coming to the market over the past 12 months, and our (difficult) task has been to select those properties which correspond most closely to our investment strategy.

c. In the office market at the beginning of the year we were still seeing some yield compression, although this has now slowed and yields have stabilized. Office rents, particularly in Warsaw, have risen very signficantly over the last few months. Retail yields are likely to stabilise shortly.

ç We are only active in those central European countries which are members of the European Union, and therefore I can not comment on market conditions in either Russia or Ukraine.

The Czech Republic and Hungary have similar market conditions to Poland and all are moving very quickly to become mature markets.

Romania has emerged as a very dynamic market since joining the European Union and has attracted a great deal of investor interest. There is however a lack of suitable investment product and yields have been falling rapidly over the past two years to now reach levels comparable to the more mature markets of the three core countries.

Bulgaria has been moving more slowly than Romania, and there is still a severe lack of investment product. Nevertheless, the country is attracting investor interest with many investors joining forces with experienced developers in order to create product (office and retail) for long term investment.

é a. I believe that yields in all sectors will stabalize over the next 12 months. However, in view of the high rental levels currently pertaining in the office sector in Warsaw, which, in my view, are probably not sustainable in the medium to long term, I would not be surprised to see an upward shift in yields for offices to take the higher rentals into account.

b. There are still a number of investment opportunities, however most of the more obvious deals have now been done. Indeed some properties are now being returned to the market to take advantage of the yield compression which has occurred over the past couple of years. For the medium term, developers are continuing to produce new excellent opportunities.

However, I believe that many of the best opportunities occur where the investor is able to add value to the property by improving the rental income either by physical improvements to the building or by improvements to the tenancy pattern.

c. The outcome of the national debate regarding the new law regarding retail development, is very important. If the current provisions of the law are confirmed, there will be a significant slow down in new retail development. I believe that this, in turn, will lead to further yield compression for those shopping centres which exist as there will be very little new competition coming into the sector.

A further factor which will influence the property investment markets (not just in Poland) over the next 12 months is the situation in the banking sector worldwide and particularly the US. If the situation worsens, ultimately this will affect the ability of investors to finance their acquisitions especially those perceived as riskier, eg with high leverage or high development risk.

è Retail investment will continue to be attractive. However, I believe that it will become increasingly difficult to identify good product at a reasonable price. Different formats of retail assets like factory outlets, which require specialized management techniques to be successful, are now attracting investors’ interest.

The logistics sector is offering good opportunities and several new investors are entering this market. In addition, investors are looking at new market sectors. For example, several investors who traditionally have only invested in the commercial property sector are entering the residential and hotel sectors.

ê Obviously, economic growth in Poland remains for the moment very impressive leading to continuing strong tenant demand and good prospects for rental trends in many property investment sectors.

At the same time we have to notice that the downturn in the world economy (if confirmed) may have a negative impact on all European economies including the Polish economy and indirectly affect the real estate market.

The lessons from the current sub-prime crisis market in the US should also warn the banking regulation authorities and financial institutions involved in the property sector – especially in residential in. Poland. Housing financing in exotic currencies, using ‘interest only’ non amortized loans, with un-hedged interest rates and covering more than 100 pct of the investment costs can make a very explosive mixture for the lender, the borrowers and the market as such.          n

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