Looking through investors eyes

Ewa Andrzejewska, Eurobuild CEE': The latest purchases of Hines in Poland were worth EUR 117.9 mln, when you bought 15 warehouse halls from Prologis. But your entry into the warehouse sector was a surprise for me. How much more is Hines planning to invest in Poland?

Mieczysław Godzisz, the president of the management board of Hines Polska: Hines is both a developer and a manager of funds of institutional investors from various countries, mostly the United States, as well as Europe, Asia and the Middle East. This is what we have been doing for dozens of years. Poland turned out to be the country where it was worth carrying out development projects first, and so we entered the market in 1997. Now the investment market, despite still being small, is mature and stable enough to have become attractive for us. Last year we came to the conclusion that it was time for Hines to consider the Polish market, in particular Warsaw, for the investment of our income funds - and not only for development. We decided that we needed to look at different products selectively. And that is how it started. We spotted the potential in the warehouse market. Now, in the post-crisis period, we are observing the market and finding the courage to do what others are not doing: following our expectations as to development of the market in 5-7 years' time. The idea is to be better at understanding the point of the business cycle the market is currently at and where it is going.

This is a good strategy, but every investor bases their plans on this idea.
But we have access to capital, while many others do not at the moment. In the past everyone had access to capital, the problem was how to invest the funds. Now we have access to capital for new development projects as well as purchases, which is rare these days. We try to find suitable facilities. We do not have a ready script to tell us how much capital we are supposed to invest in Poland. We have two kinds of funds, which we can use, as well as access to investors who are not involved in the funds. Our only limitation is the number of projects with the kind of potential that we believe in. However, if we find a suitable facility, we will certainly find the capital for its acquisition. I think we will be exceptionally active this year.

You mentioned that it is difficult to find a good project - from the investor's point of view - to buy.
There are some investment products on the market that have a difficult character. This is a complex topic. Development is usually an even more difficult topic, and to complicate matters we are looking for a development project in the centre of Warsaw. Property owners have not fully understood the real value of their land. Development projects are often at different planning stages. The owner usually has a site development conditions decision for a given area, but these are often not ideal conditions from our point of view. In other cases you have to wait for the adoption of a local zoning plan. Furthermore, you have to estimate the loan capital needed, which is related to lease agreements. Each developer knows these interdependences. However, we will take a risk and invest at some point. Our plan for 2013 involves starting at least one development project.

Will it be an office, residential... or perhaps a warehouse project, which the company's latest purchases would suggest?
We are interested in offices.

How can Hines Polska most accurately be described these days? Only a few years ago I would have said: as an office developer. What about today?
We are working as a partner for capital investors. Sometimes we act as a co-investor, sometimes, to simplify this, as a developer; and now we are starting to develop management services. Our team in Poland is mature enough to allow us to expand our operations. We are entering this market segment late, so firstly we have to build a portfolio of our own properties; and in the future, in about five years time, we would like to enter the market as a provider of management services to facilities not owned by our investors. Hines is a conservative company that develops by taking small steps. However, after 15 years of operating in Poland we have reached a certain critical mass and now we will start doing more and with a broader scope. And because we are a private company we do not have rigid budgeting. We look for good projects that we are able to get a good rate of return on. Globally Hines has also undergone a metamorphosis. We want to strengthen our fund management platform across the world, as well as in Poland. We will be, and actually are, guardians of capital and an advisor on how to invest this capital. This part of our operations will be developed further, and this is a direct decision made by Jeff Hines. Hines has both its own funds and a very experienced team, which was selected for this task at the central level. The success and remuneration of the team will depend on their work - the rate of return they generate for investors. I, on the other hand, will have to win my colleagues from the investment team over and prove to them that it is worth using the investment funds in Poland in one way or another. These days we look at the world through investors' eyes, not ours. We look for the best solutions for our investors, not for Hines.

Will you be convincing your colleagues to invest on the Polish residential market?
To be attractive for our institutional investors, residential projects in Poland have to have a certain scale in terms of absolute numbers, that is, the amounts that have been invested as opposed to the amount of sqm built. In Poland, if a project's value is in the region of PLN 200 mln, it is large scale, whereas for us it is the minimum. So we are considering the medium segment, which means that the development of a more sophisticated product is not advisable because unfortunately buyers are more focused on the price at the moment. So as long as the market is based on price competition, it will not be attractive according to our criteria. However, we will keep an eye on the market and if a segment - the medium or, in particular, the high-end - is strong enough to carry out projects with budgets of PLN 200-250 mln, we will be getting involved in residential projects as well. But at this stage I believe that the market is not mature enough and there is too much oversupply, so it will not be attractive for a year or two, except for really unique central locations, as is the case with our developments in the centre of Gdańsk and Kraków.

So what will be the fate of the Apartamenty Novum project on ul. Rakowiecka in Kraków?
We will carry out the projects we have in our portfolio and the one in Kraków is, so to speak, bound to be a success, as confirmed by the pre-sales currently in progress. In a nutshell, we are working at full steam in Kraków. But if you asked me whether, let's say, in two or three years' time residential projects would constitute half of our business, my answer would be no. It will not be the core of our operations. We will selectively get involved in such projects, when they are truly unique and in good locations.

Will you extend the warehouses that have been acquired from Prologis?
To a very small extent. This is an investment product. We bought them in order to manage them, extend lease contracts, etc. It is a finished investment product. You make money on such projects in two ways: by increasing the rents, i.e. increasing the financial liquidity, or by selling them, when the sale price is higher than the purchase price, depending on the general situation on the investment market. We are convinced that in this case we made our purchase at the right time and the value of these facilities will increase because of an improvement in market conditions and the continuing economic growth in Poland. We believe that Poland will carry on developing and the demand for consumer goods will increase - and these will have to go through warehouses before ending up on shop shelves.

Coming back to the Hines Russia & Poland Fund, a press release was issued including a sentence saying that the company will have an opportunistic strategy. What does this mean?
Well, ?opportunistic strategy' tends to mean one that is focused on investments with a higher rate of return. This is what this fund is about. And higher rates of return on the property market in Poland are mainly to be obtained by carrying out development projects. So the HR&PF is a fund that has been assigned to invest in development projects. In theory an investment purchase at a very low price should also provide a higher rate of return - for example, close to 20 pct, but in Poland such bargains do not really exist. Good facilities are not usually available at bargain prices, while poor ones are not worth buying, which some investors who were active during the years of the hyper-boom, found out to their cost.

What will be the fund's structure? Or how much do you want to invest in offices, retail...
This is a trade secret. I can say that we have three development projects secured in Russia, while in Poland we are in the process of negotiating two development projects. I think we will manage to close one of them by mid-2013. The fund will allocate around EUR 80 mln to Poland. We will acquire about twice as much from loans, so we have some serious capital to be used in this country.

We are talking about purchases, but is Hines Polska planning to sell any of its projects? The Sterlinga Business Center in Łódź, which was completed in 2010, is nearly 100 pct leased.
Now is a good time for shopping rather than selling. The SBC will be offered to buyers at the right time. We are keeping it in our portfolio for now and managing it.

This year will be...
a year of truth. The fact that we have started investment purchases means that the market is going through its cleansing phase, in our opinion. This might last a year or perhaps four years, but the fact is that it is starting... so we might be facing a few years of truth.

Who is at the helm of Hines Polska?
Mieczysław Godzisz has been building the position of Hines on the Polish market since 1997, virtually from the very beginning. Prior to that he worked as an advisor at Arthur Andersen for five years. He is a graduate of Arabic studies at the Jagiellonian University in Kraków and was awarded an MBA at the University of Chicago in 2001. Over the last fifteen years he has created a team of more than 40 people, who work in four offices across Poland. Over 400,000 sqm of useable space has been completed or is under construction in development projects under his personal supervision. He was also a key figure during the development of the first Hines' project in Poland - the Metropolitan office building in Warsaw, which has a total area of over 37,000 sqm. The building was completed in 2003 and sold in 2006 to the DEGI fund. Other office projects which Hines Polska has under its belt include the Sterlinga Business Center in Łódź, with an area of over 13,400 sqm, and Centrum Biurowe Neptun (15,300 sqm) in Gdańsk, which has been under development since last year. Hines Polska has also been involved in the residential sector: Arboretum in Łódź, Quattro Towers in Gdańsk, Apartamenty Novum in Kraków and Apartamenty Impresja in Warsaw's Wilanów district. In 2012 the firm extended its operations into the warehouse sector through the purchase of 15 warehouse halls from Prologis for EUR 117.9 mln.