Age has its beauty

Is it better to live in an old stately home or a modern building with all the mod cons? The answer to this question depends entirely on who you ask. The same is true with firms. Not every company wants to have the top floor of the tallest skyscraper. Some seem content to settle for smaller premises in beautiful locations in older buildings. However, generally speaking, for core investors the more a building ages, the less attractive an investment it becomes - but there are exceptions to this rule. As James Chapman, the head of capital markets for the Czech Republic and Slovakia at Cushman & Wakefield, explains: "We are seeing that many core investors will not buy buildings that are older than ten or even five years in some cases. This clearly has an impact on the value of such a building on the open market. However, a well-refurbished historic building will be considered by such core investors." He defines an historic building as "one of historical importance - either architectural or otherwise - located in a prime location."

Storeys from the city
The CEE region has cities that abound in such historic buildings, such as Budapest and Prague, but lately investment activity seems to be limited to two countries: Poland and the Czech Republic. Unfortunately, Poland's capital contains few buildings of historic interest, having been devastated by the Second World War. One such building that is currently being developed by Mermaid Properties is at ul. Jasna 26. Radosław Sieroń, a partner of Mermaid Properties, explains the attraction of such buildings. "Old buildings age longer, so we have to be more conservative. Such buildings are safer - they will never look outdated," he says, and estimates that newer buildings require a full refurbishment both inside and outside around every 15 years. "It's much easier to only change the windows every 15 years than the whole façade," he claims. Yet clearly problems exist with older buildings. Although tenants may appreciate the extra character of such premises, this does not mean that they are prepared to forsake their creature comforts. Most often a viable project must still provide nothing less than class ?A' office space. This frequently means that a building must be gutted before being rebuilt, and this often requires the agreement of the historic building conservator. In the case of Jasna 26, the conservator gave permission for the demolition of most of the building, leaving some original features including the façade. According to Radosław Sieroń, rather than adding to the costs of such a project, the conservator's demands resulted in savings: "He wouldn't let us put nicer stone on. We are not allowed to make the building too decorative," he says. "Such older buildings give the city character. They don't stick out. They are what creates the downtown, so bringing life to them brings value to the city," he claims. One of the limitations for such projects is that they often provide far smaller floor areas per storey than newly-built developments. Radosław Sieroń goes on to explain that "big firms want 1,000 sqm to 5,000 sqm. They don't want to have four or five floors. Everybody wants to be on one floor and that's something that stops the market."

Maciej Zajdel, the managing director of IVG Poland, reveals that his company is investing mainly in Warsaw city centre and looking for "small cosy buildings of around a couple of thousand square metres." What he is really interested in are not necessarily historic buildings but "prestige buildings that will maintain their value over the next couple of years." For him, a building being sub-leased with nice tenants is a "top priority." As for the issue that many tenants do not like small floor areas per storey, Maciej Zajdel counters that: "The majority do not like such buildings, but that does not mean that there are no tenants. When refurbished to a high standard, some tenants would prefer them. The number of high quality buildings is much less than the number of possible tenants." He also stresses that many old buildings are unsuitable for conversion into class ?A' office space and that another critical factor for such projects is the availability of parking facilities, which having been built in an un-motorised age, many historical buildings cannot provide. He estimates that there are only 10 to 20 of such refurbished buildings in Warsaw. But despite this lack of product the market for historic buildings in Warsaw has been rather active. Avestus demolished most of the former Hala Koszyki market hall before changing the architects and then announcing in September that it had sold the project on to Griffin. JEMS Architekci is now designing a retail centre with surrounding offices in the remains of the building. Meanwhile, Warimpex is currently building its 6,200 sqm Le Palais project on ul. Próżna, refurbishing two buildings that date back to the 1880s and should be re-opened by the end of the year.

Another such building of interest in Warsaw is Lipiński Passage. Originally it was a residential block, but it has now undergone a complete refurbishment and is operating as a prestigious office and retail building with a leasable area of around 6,000 sqm. The building, which Reinhold Polska sold to Union investment in 2010 before the completion of the refurbishment in the same year, is currently over 50 pct leased. Due to its central position in Warsaw's central business district, the building's owner, Union Investment, believes that it will create stable cash flows and an attractive yield. "Union Investment is a long-term investor. The average holding period for our buildings is between five and eight years, or even longer. But exiting is always an option if we see a chance to create value for the investors of our real estate funds," says Volker Noack, member of the management board of Union Investment Real Estate. Lipiński Passage is typical of many historic building developments in regards to floor space. The building offers office areas of between 60 sqm and 560 sqm, while the retail space ranges between 60 sqm and 570 sqm. According the company, normally the minimum size of an office unit is around 250 sqm to 300 sqm, but Union Investment does not see the smaller sizes as a problem: "There are a lot of premium clients who need small office space and our building is the only one that can offer it," says Volker Noack. But as for whether such projects retain their value better than modern buildings, Union Investment believes that it is impossible to make such a generalisation.

Looking to Prague
When it comes to Prague, there are obviously many more such buildings on offer. Indeed: "You are not allowed to build a completely new building in the centre of Prague. You can only buy an old one and refurbish it," says Eduard?Zehetner, CEO of Immofinanz Group, and in this respect he believes that Prague is comparable to both Vienna and Budapest. At present the company is developing an historic town house at Jindřišská 16. The LEED ?Gold' pre-certified building is to offer 6,800 sqm of office space with some retail. Work began on the building in February and it is scheduled for delivery next August. The most outstanding feature of the building is, according to Eduard Zehetner, its location. Ralph Bezjak, the director of commercial development of Immofinanz Group, believes that it is untrue that historic buildings require less maintenance than newer buildings, because everything depends on the quality of the build. "If you refit an old building and compare it to a new-build, it is possible to reach the same standard," he claims, but he adds that "quality always has its costs." Immofinanz has already found a potential buyer for the building, who would take on the project as soon as it has been fully leased. "It is to be accompanied by a low yield, which means a high price for us," says Eduard Zehetner. Another similar project that the company is working on is Jungmannova 15, a steel-structured office building erected at the beginning of the 20th century. Unlike the Jindřišská 16 project, it already has parking facilities underneath the building, which "makes the refurbishment a little easier," according to Ralph Bezjak. Demolition work began over a month ago, but the company is to keep the historic façade. When the work is complete it should offer around 7,600 sqm of space.

Immofinanz is not the only company to stress the importance of location for historic buildings. Zdeněk Havelka, the CEO of Czech Property Investments Group, also emphasises this point. But do historic buildings maintain their value over the long term? "The answer depends on the kind of building, its construction, materials, location and use," he says. Older buildings outside the centre, he claims, have a very different value to a historic building with some unique historical value and beautiful architecture, such as the Živnostenska bank house. He also to complains that the Prague market is static and inflexible. "Generally, I think that it is the job of urban architects and the municipal authorities to find an appropriate balance between old, historic built-up areas and new developments. In the Czech Republic the public and the authorities tend to resist the demolition of ruined properties in city centres to preserve an area's character. But isn't it better to build modern mixed-use buildings which support daily life and create new quarters - of course, with the close supervision of municipal architects - than to maintain depopulating districts that very often attract the attention of vandals and anti-social individuals, and thus suffer from less investment in renovation and reduced development potential?"

But what else might attract investors to these kinds of buildings? According to Bożenna Sztyller, the president of Stanmark Asset Management Polska, tenants such as lawyers, consultants, and notary offices appreciate such buildings and these are the type of tenants that are attractive to investors. Indeed some investors do show enthusiasm for such product. "We like the idea of the refurbishment of historic buildings." says Joanna Kowalska-Szymczak, the acquisition director of Kulczyk Silverstein Properties. The company has recently bought the Edward Raczyński building, which was completed in 1910 on pl. Małachowskiego in Warsaw, from Hochtief Development Poland. "Małachowskiego is a nice mixture of a refurbished tenement house with a new extension, which offers around 2,000 sqm per floor," says Joanna Kowalska-Szymczak, though she does concede that most historic buildings within the CBD will offer only around 500-900 sqm. However, she stresses that the most important thing is the quality of the building as well as the beauty of the surrounding area. ?Overall, Joanna Kowalska-Szymczak believes that this kind of product is less vulnerable to the vagaries of fashion: "If you do a proper refurbishment of an old building's structure, such buildings age slower than new constructions, but it is extremely important to get the budget and the timing right."

Beyond the fringe
Looking elsewhere around the region, investment appears to have stalled. It is not that there is no product available in the region's historic cities and capitals. Codic is hoping to develop its Margit ?Corner office centre in Budapest, which is to involve the renovation of a 19th century school building offering 4,729 sqm gla. "We believe that the value of a listed building, such as Margit ?Corner, is higher in the longer term and will be a very good product for an investor who is interested in smaller sized buildings," says project manager Pál Szilvási. But at present the project still does not have the requisite financing. Meanwhile, Tőzsdepalota Ingatlanforgalmazó, which was planning to redevelop the 50,000 sqm Tőzsdepalota building in Budapest, has filed for bankruptcy.

Clearly historic interest does add value to a property, but no one that we talked with was prepared to put a price on prestige. "Providing a general guide to valuing prestige is virtually impossible. It is their uniqueness that creates the value, which means that each building needs to be looked at individually," says James Chapman of Cushman?& Wakefield. But do they retain their value better than new-builds? Opinion is divided, but Bożenna Sztyller claims they often do: "There are modern buildings of very good quality worth investing in, but unless they are of the highest standard, they are liable to become quickly degraded," she says.