Investing in stability

The yield compression of recent years now seems to have come to an end, signalling that the country is no longer the perfect hunting ground for the more opportunistic kind of investor

The maturing Polish real estate market currently has yields and prices close to western European levels, and therefore poses less of an investment risk than in previous years, with lower returns to be expected. So what now for the original adventurous crowd of investors and developers, and who is coming to take their place as the main movers in Polish property?

Michael Atwell, a partner of the Cushman & Wakefield agency in Warsaw, believes that: “The early opportunistic investors looking for the higher returns that can be made from taking greater risks are now moving out of Poland and going to places such as the Ukraine, Bulgaria and Romania.”

Higher in the East

Damian Stężycki, associate director of the central Europe capital markets department of Jones Lang LaSalle, explains why this is case: “Investors acquired properties around 3-5 years ago – the previous owners took advantage of the yields which then stood at 9-10 pct, and then sold them on later at yields of 5.5-6 pct. Prime properties in Poland can now only be bought at yields under 6 pct – but these are definitely much higher in Russia and the Ukraine.” But he goes on to add that the same compression that occurred in Poland is now taking place in the EU’s two newest countries: “In Romania and Bulgaria, yields are already dropping.”

One of the reasons why the trail-blazing type of investor often moves on to pastures new, is that they can also employ the knowledge they have gained working in emerging markets in these other countries. Belgium-based Ghelamco is one of the companies now doing exactly this, building on their Polish experience to launch themselves into Russia and the Ukraine. Jeroen Van der Toolen, head of Ghelamco in Poland, has described the process this way: "Companies active on the Polish market for say ten years, have experienced its development from a purely emerging market, to one that\'s much more mature. This experience is very valuable when you enter another new emerging market."

A bear, not an eagle

According to Damian Stężycki of Jones Lang LaSalle: “The group of investors will change. Those looking for higher returns cannot find this in Poland. Opportunistic investors are still looking for deals, but with yields dropping, they are looking more at countries like Romania, where there are a lot of development projects”. Russia, on the other hand, he believes to be „a different animal” – for this market investors have to be very specialized. „In Russia there is an under-supply of office and retail properties and consequently rents are much higher than in Poland.”

Mr Stężycki believes that “these investors are being replaced by stabilized funds, pension funds” – for instance AXA – “who are interested in more stable returns.” Michael Atwell of Cushman & Wakefield identifies one kind of investor that is becoming increasingly active in Poland – German funds, such as DEGI (Deutsche Gesellschaft für Immobilienfonds), which last year entered the Polish market through the purchase of the Metropolitan building in Warsaw, and who in June bought the Focus Filtrowa building (also in the capital) for EUR 122 mln. “German funds continue to invest in high-quality assets with less risk, and still expect a little yield compression,” says Mr Atwell. Corporate investment deals leading to established Polish developers becoming holding companies for large foreign investors are another sign of the latter’s confidence in the maturity of the Polish market. A good example of this was Pirelli RE’s acquisition of a majority share-holding of Pekao Development last year. Morgan Stanley also made their first move into Polish real estate in May with the purchase of a 25 pct stake in the residential developer WAN.

Government plots

In terms of retail, the saturation in this sector in the larger cities is leading the newer investors to look increasingly to smaller cities and towns. Damian Stężycki feels that: “Some investors are thinking that it would be better to have 1 shopping centre in towns of less than 100,000 than 4 in a city with 400,000. The former can be tailored for the local tenant mix.” An added complication for larger retail investment is that the government is attempting to make it harder to bid for land zoned for developments of a more than 2,000 sqm sales area, with the result that cities are now trying to reduce the number of plots available for large-scale retail.

It is not just the bigger funds, however, that are making their presence felt, as Michael Atwell points out. Smaller UK funds are now coming to Poland, after a slow-down in British yields and pricing, often in smaller towns. Mr Atwell goes into more detail: “These funds are typically looking for forward-funding and forward-purchase deals in centrally located shopping centres. In Poland this is a new area of product.” Another new type of product seen as a good investment by these funds are high street properties, since, according to Michael Atwell, these have “much smaller lot prices, together with well-established and good quality tenants, such as banks or fashion boutiques.” As evidence for this, without naming names, he claims that Cushman & Wakefield is currently “working with several investors who are looking at such opportunities… But there has been very little of this type of activity so far. It will start to grow slowly as international retailers seek representation on the high street. Investors are on the look out for such opportunities, so this is an area of the market which is going to develop.”

Small is specialized

Yield compression has also run its course in retail, with yields having been around 2 to 3 pct higher 2 or 3 years ago, resulting in the figure for the best shopping centres now being below 6 pct. As Damian Stężycki makes clear: “This is quite a big gap. Many companies made money from the retail sector by investing when Poland was still out of the EU, when the risk was felt to be higher.” However, according to Michael Atwell, it is the smaller funds that are better equipped to invest in this area, as in his words they are often “asset management specialists, looking to create a portfolio of diversity and then find ways of improving the net income – and this can bring good returns in the short to medium term. Often these can be mixed portfolios, with industrial, office, retail and other types of property.”

Damian Stężycki agrees that the lower yields and returns are forcing developers to change their activities, through “improving the management of the properties, making improvements to the premises. If this works, then you can sell the property on at a prime yield.”

The increasing stability and maturity of the Polish real estate would seem to be the major factor in the make-up of the investors currently attracted to the country. Damian Stężycki concurs that “there is still some uncertainty about how the Polish market will react in the future. But most investors now regard it as one of the stabilized economies.”