Let's do business

Capital is forcing its way into the Polish real estate market everywhere that you look. New investors are continually emerging to join those who have operated here for several years such as Europolis Invest, Rodamco and Heitman. The Akron Group fund was almost unknown until March, when it purchased the Ghelamco portfolio in the Warsaw Służewiec district. Information about Irish investors, acquiring yet another property in Warsaw, appears every few weeks.

Enchanted circle

The demand for buildings in Warsaw is much greater than the supply, and when that happens prices always rise and returns decrease. Norbert Czypionka, vice-president of Deutsche Bank Real Estate Polska, which manages real estate funds, admits that the decrease has been more rapid in recent months than was expected. He adds that there are very few fully rented buildings in Warsaw, with almost all proprietors still negotiating with potential customers. On the other hand, Jacek Wachowicz, vice-president of Heitman Real Estate Investment Management responsible for purchasing properties in central and east Europe, thinks investors will not take up arms to fight over partially-leased properties, explaining, "Conservative and cautious funds just cannot afford to take the risk." And that closes the circle: many funds are battling over few very good properties. The question is, what methods should be used to win the race for a good building?

Let's do it together

Marcin Mędrzecki of the Europolis Invest funds shudders when remarking, "We are wading in shallow water since we already hold a substantial property portfolio whose value is steadily growing. But I do not envy investors who are only just entering Poland. I would advise them that the best thing would be to construct on their own account, the method we employed in constructing the office-hotel River City property in the Praga district of Warsaw. The investor in a joint investment is almost as totally committed in the developing process as in the case of an independent project. In such cooperation between investor and developer, the former enters the business when the site has been purchased and construction permits acquired. In that manner he agrees to participate in the risk related to renting space when the building is constructed. On the other hand, he will be able to purchase the property at a lower price, especially if he can obtain cheap finance. Brian Burgess, director for investment transactions and consultancy at DTZ highlights the importance of the latter point, "This is a highly important element, since financing costs will probably soon start rising". Heitman, which cooperates with Golub and Polimeni, operates in Poland in this manner and expects the result of cooperation with developers to be the construction of buildings valued at 135 million euros (160 million US dollars). This will be through the Heitman investment fund in Central Europe (Heitman Central Europe Property Partners II). The joint venture's capital will be designated to construct shopping centres in Poland, in Kalisz, Poznań, Głogów, Gniezno and Grudziądz among other locations. Thanks to making a joint investment, DB Real Estate has acquired shares in the Wrocław-based Galeria Dominikańska and the Galeria Łódzka, in which the developer was ECE Projektmanagement. Norbert Czypionka of DB Real Estate stresses however that "Such cooperation can only exist between companies which trust each other implicitly."

A year from now, at the same time

"Forward commitment" also termed "forward purchase" is a popular form of cooperation between developer and investor. Both parties agree to conclude a contract to purchase and sell the property as soon as the developer satisfies specific requirements, usually as to the number and quality of concluded tenancy contracts. Thus the developer is sure that he will sell his building as soon as it has been let, which ensures him sufficient cash flow for further operations. The investor bypasses the market, as it were, i.e. by guaranteeing the purchase of a building that has not yet been constructed. Such co-operation exists between ING Real Estate and Rodamco with Warsaw's "Złote Tarasy" and also between the Europolis Invest fund and AIG Lincoln with the Saski Crescent building (the sale of Saski Point and the Alliance Logistics Park to Europolis was post-construction).

The future is uncertain

Co-operation between these companies could also be of the "order book" method. In such transactions the investor purchases several properties from a developer - not as portfolio transactions but individually. The purchase by an investor of successive stages of a multi-phase property could also be called a kind of "order book" transaction. But Norbert Czypionka warns against rashly concluding such contracts, "After all, how can I commit myself to taking on extra phases of a building, when I don't know whether the initial phases will be fully let".

Hybrids

In other, more mature real estate markets investors are sometimes connected by capital bonds with developers, and even own stock in construction companies. Jacek Wachowicz of Heitman comments that such capital groups cope well in conditions of market competition. For his part, Brian Burgess of DTZ points to the appearance of so-called "property companies" on the market. They perform the functions of developer, property manager and investment fund at one and the same time. One such example in Poland is Apollo-Rida. It built and then sold the Renaissance office building in Warsaw, repaired PAR Tower and Renaissance Plaza, purchased Poland's tallest office building - the Warsaw Trade Tower - and a portfolio of 28 shopping centres located throughout the whole country.

If you can't do that ...

Apart from establishing closer co-operation with developers, can investors compete successfully for real estate by using less demanding or simpler methods of valuation? Jacek Wachowicz of Heitman said, "I feel that, due to the crowds that have suddenly appeared on the Polish investment market, investors will decide not to incur greater risk or substantially simplify their procedures to acquire properties." Norbert Czypionka of DB Real Estate, in turn admits that his company has started to consider whether it should purchase properties worth more than 15 million Euros. That limit had earlier been set at 30 million Euros. However, DB Real Estate is one of the few to have a permanent office in Poland. "That, I think, gives us an advantage over the competition since we know the market better than others," claims the vice-president of DB Real Estate in Poland. Marcin Mędrzecki of Europolis Invest prefers bold decisions. "I think investors, though not the more conservative, will have to go outside Warsaw in their search for interesting properties. I personally know of a multi-function property in Katowice which will soon be purchased by one of the investment funds".