Playing catch up

After an underwhelming first quarter in terms of real estate investment volume, the second quarter has seen something of a revival

A total of around EUR 1.29 bln was invested in Polish real estate in the first half, down from the EUR 1.47 bln for the same period last year, but still something of a recovery after a figure of EUR 380 mln in the first quarter – only 40 pct of what was invested in Q1 2006. Although that was a record year for investment with transactions totalling EUR 4.68 bln, the beginning of this year was still a poor showing and led market analysts to predict a similar trend for the rest of 2007.

According to Radosław Wawrzyniak, senior investment surveyor at the CB Richard Ellis agency: “In Q1 there was a big slowdown in the volume of investment transactions. This was very disappointing and was indicative that activity would also be considerably slower in the remainder of the year. In the CEE region, volume has been increasing by around 12 pct year-on-year.”

Pleasantly surprised

However, it was only in Q2 that investment volume picked up to growth levels being experienced elsewhere in the CEE, as Louise Hancock, a research analyst also with CB Richard Ellis, relates: “Investment has accelerated since the last quarter, recovering to the levels we are more or less used to experiencing. Last year was a record, and the first half of 2007 was still not as high as the same period in 2006. Nevertheless, it is still going to be strong year.”

The biggest transaction on the office market in Q2 was the sale of the Focus Filtrowa building in Warsaw by Sachsenfonds and LHI Leasing to DEGI Deutsche Gesellschaft für Immobilienfonds for EUR 100 mln. Immoeast was another investor snapping up Warsaw office properties – namely the Passat building for EUR 27 mln from Karimpol, as well as the Rondo building developed by Pirelli Pekao Real Estate for EUR 36 mln. In April Orco Endurance Fund acquired Centrum Biznesu Ożarów for an undisclosed sum. In retail the largest deal was that for the Simon Ivanhoe portfolio of supermarkets, which was acquired by the Macquarie CountryWide Trust fund for EUR 232 mln. And in the industrial sector, Europolis has entered into a joint-venture with Poland Central in an investment costing EUR 172 mln – the Poland Central Business Park near Piotrów Trybunalski. As for hotels, UBM and Warimpex bought out the remaining 16.67 pct of the shares in the InterContinental Hotel in Warsaw to give them a 100 pct stake in the property. The volume of investment per sector breaks down into EUR 676 mln for offices, EUR 585 mln for retail, with nearly all of the remainder was invested in industrial properties.

An analysis of the current situation on the investment market is to be found in CB Richard Ellis’s Accumulator – Investment Market in Poland (summer 2007) report published this month, which as well as containing an overview of the current state of the market also makes predictions for the rest of the year.

So what is it that has been holding down the level of investment volume so far this year? According to CBRE’s experts, one of the main factors is the lack of new properties coming on to the market, as Radosław Wawrzyniak explains: “At the moment there is a lack of new product. Someone who bought in 2002-3 has seen yields fall considerably, so there is an opportunity to re-sell for a high return.” Louise Hancock adds that: “This has led to a big investment churn. If we had much more high quality properties coming onto the market, we would have attracted more investment.”

Yielding the secret

Yields are clearly a major factor influencing the level of investment, and the question investors must be asking themselves is whether they have finally levelled off after the dramatic compression experienced in the last 5 years. The data so far this year strongly suggests this – office yields now seem to be steady at around 5.5 pct, and retail yields have also stabilized at below 6 pct. Radosław Wawrzyniak believes that: “Yields are now relatively stable, with only a very slow compression taking place. There is still some room for compression, as there is good quality prime real estate around with good tenants. We have noticed from investors starting to re-sell that the yield is around 5 pct.” CBRE is also predicting that retail yields in regional cities will fall under 6 pct by the end of the year.

In the industrial sector however, where yields have stabilized at around 7 pct, there seems to be bigger room for compression than for offices and retail, with CBRE predicting a fall to about 6.5 pct for prime warehouse properties by the end of 2007. However, Radosław Wawrzyniak does sound a cautious note: “In Q3 there will be some deals, but there is also a lack of new properties in the industrial sector. ProLogis now owns most of the market and they are not selling.”

Hotels on the horizon

The hotel sector is another one that has shown signs of developing, as investors – concerned with optimizing their portfolios through diversification – spread their risk. Although there have been no major hotel deals up until now in 2007, Louise Hancock remains optimistic: “We have to have some activity in the industrial and hotel sectors – because of investor diversification, the weight of capital chasing limited retail and office product, and improved infrastructure links.”

Louise Hancock also points out another reason for the fall in investment volumes: “The lack of new properties is one barrier, and another is higher interest rates. The gap between interest rates and yields is narrowing, so there is less scope for capitalization. New funds are still coming, but these are funds that are more interested in stability, rather than the riskier markets further east.”

Radosław Wawrzyniak feels that the level of investment may receive a boost from the number of sale-and-leasebacks taking place: “This potential line of product could push up the volume of transactions. Owner-occupiers are increasingly looking to re-invest rather than take credit,” says Mr Wawrzyniak. He adds that there is another factor that could encourage investors, that of the possibility of adding to the value of a property, for example, in the form of additional land, extensions of floors, refurbishment or changing the use of the property (communist era offices converted into apartments etc.) He poses the question: “Why buy here when you can buy in western European counties at similar yields? The answer is that we are expecting an increase in rents. We will be seeing a lot of value being added to properties.” Mr Wawrzyniak also predicts that “there are going to be more co-investors and forward purchase deals at the stage where the developer has building permission.”

Eastward bound

The growth in the real estate markets of regional cities is also continuing apace, with the level of investment now standing at 40 pct and rising. But a new trend that is emerging is that investors are not only looking at secondary cities such as Kraków, Wrocław, Gdańsk and Poznań, but are now becoming more interested in places like Białystok and Lublin, where the office sector is not so well-developed and existing properties are of a lower quality. In such cities there is always likely to be more retail than offices, but there are signs that the office market will eventually come. “Off-shoring firms are interested,” says Radosław Wawrzyniak, “and big companies are looking at setting up accounting centres in such places. Lublin is in the east, but has several universities and educated people, so it has an ideal labour market.” Louise Hancock feels that “yield compression will occur in the regional cities. They won’t necessarily fall to the same levels as in Warsaw, but there is more scope for falls.”

Despite the lack of new properties and the subdued investment market, CBRE’s experts are upbeat about the future: “The demand is there – because of Euro 2012 for instance. So we just have to wait for the product to come on to the market,” says Louise Hancock. How big a factor the decision to award the Euro 2012 football championships to Poland and Ukraine is remains to be seen. But Radosław Wawrzyniak claims that because of the expected boost to tourism that the championships will generate, since the decision was announced the number of hotel developments in the pipeline has reportedly increased two-fold. The building of stadia and the improvements to infrastructure needed for 2012 will also have a beneficial effect on the industrial sector, with more warehousing facilities needed. And as Mr Wawrzyniak maintains: “When more product comes on to the market, investors will come and buy it.”