The wind of optimism

Meanwhile, Romania and Hungary have been slowly returning to the game. Transactions worth EUR 229 mln and EUR 225 mln respectively were registered in these countries. Last year also saw an influx of capital from Asia and North American markets, along with more of the increasingly fashionable portfolio purchases. The data clearly shows that investor activity has been increasing, the mood has been improving and a recovery is in the offing. But what are the views of the experts who were asked whether the trends would continue in 2014? And what else should we expect to happen? The answers can be found in our investment market survey

Walter Hampel
head of real estate CEE, Pbb Deutsche Pfandbriefbank

What scale of bank financing is likely to be available for property transactions in the CEE region this year?
The CEE region continues to be an attractive market for investors. Pbb Deutsche Pfandbriefbank has a long standing track-record in this market and we want at least to maintain the level of our activities. The property lending climate in 2013 was certainly more favourable to investors than in the previous years. At the moment we don’t expect to see this to change much in 2014, but of course it will also depend on the macroeconomic and political developments in Europe and globally.

What are the factors driving investment at the moment in the CEE region?
The CEE region, and in particular Poland and the Czech Republic, have shown economic resilience during the crisis. Prices of commercial property have started to return to levels close to pre-crisis levels. Having said this, they still provide a spread over assets in Europe’s most favoured locations, like London, Paris or Munich, and hence are attractive to investors who seek a good risk/return profile.

What kind of potential investment deals will you be looking more favourably upon this year? What do you expect to be popular and where?
We expect that the investor interest in prime office buildings in Warsaw and Prague will remain very strong, and we anticipate investor interest in strong regional shopping centres in Poland and the Czech Republic. Investors will also likely to continue to look at logistics portfolios. It will be interesting to see if investor interest returns to other CEE countries that have seen little investor interest until very recently.

Martin Sabelko
head of CEE, CBRE Global Investors

What kind of investment product is likely to be the most popular this year?
We believe retail and logistics will be the most popular among the various investors. In retail, investors will be mainly interested in acquiring dominant shopping centres in bigger cities, while large retail parks can be also considered as higher yielding alternative investments (often in portfolio packages). Some investors will also be continuing to look for high street investments, traditionally considered as very safe (which doesn’t mean cheap). German investors will be as usual looking for brand new and market-leased office properties. For these office investments a strong correlation between WALT (weighted average lease terms) and pricing will be visible. Secondary assets or secondary locations will only remain in the focus of local investors who have better local knowledge, which in their perception mitigates the higher risk.

Where are the best places to invest going to be? And how much of the action are regional cities going to see compared to the capitals?
In 2014 Poland and the Czech Republic will again benefit the most from the inflow of the new equity to the region. As usual, the office sector will be dominated by the capital cities – Warsaw and Prague. Small groups of investors will be considering office investment in Polish secondary cities – such as Wrocław, Kraków or Gdańsk. In the retail sector we expect more investment in secondary and tertiary cities. The conditions for such investment will be the strong position of the asset in the local market and the lack of the threat of potential competition coming in to the city, i.e. prime properties in secondary cities. Due to the overall market size, this type of deal is also more likely in Poland than in other countries. We still expect fewer deals in Romania and Hungary, although Hungary is increasingly becoming appealing to opportunistic investors who are seeing an improvement in the economic situation and higher yield levels than those in the Czech Republic or Poland. Due to the fact that Slovakia is part of the euro zone, some investors might be looking for good properties there, mainly in the retail sector, as there is no risk connected with the exchange rate fluctuation.

Agata Jurek-Zbrojska
senior associate, Hogan Lovells (Warsaw)

The value of transactions closed in Poland in 2013 exceeded EUR 3 bln. Clearly there is a lot of interest in Polish product. Where are the decisions being made to buy properties in Poland and, more generally, in the CEE region?
The actual decisions are being made where the true decision-making centres are located or where the real capital comes from. In particular this applies to capital from outside the EU, including the USA. If the question is addressed to which is the main physical location of these decision centres, my answer is London. I believe this should come as no surprise to anyone because it is a city where the investment funds that invest in Europe are traditionally based. This is where the strategic decisions, such as about the direction and volume of investment, are being made – and in the post-crisis period (I am not afraid to use this expression), is also where the final decisions for making acquisitions are taken. Poland is a specific market in this respect because this is where – in Warsaw to be precise – a lot of businesses that have considerable portfolios of products have their local headquarters responsible for investment in the CEE markets. Nevertheless, the key decisions come from the UK. There are exceptions, of course – such as the German funds, in which decisions are made in financial centres in Germany and Frankfurt.

What are investors who are investing their funds in our part of Europe mostly complaining about?
Fortunately, less and less complaining has been heard of late, while there is growing optimism and the will to invest in the CEE markets, in particular in Poland. Nevertheless, I would pick out two basic problems: the first is the lack of product or few products that match investors’ strict requirements and results in a lot of competition in terms of the products that do fulfil the requirements. The second is the unpredictability hanging over the further development of the leasing market, which is directly connected with the general growth in Poland and this part of Europe. It is important that Poland has no real concerns about the instability of the market – or of the political situation or the legal and tax environment, which means that we are finally being treated as a genuine and valid real estate investment market, evaluated according to the same criteria as Germany or France.

James Chapman
partner, head of capital Markets in Central Europe, Cushman & Wakefield

Which markets in the region are property investors going to be looking at this year?
This should be the fifth consecutive year of Polish investment volume growth, but it’s dominance of the CE markets has been shrinking. This was a trend last year and is going to continue in 2014. The Czech market enjoyed a big bounce back – almost trebling its investment volume in 2013. In 2012, the Polish volume accounted for 80 pct of the CE total, but last year this fell to 55 pct. Already in the first few weeks of this year a few investors have been telling us that the fundamentals on the Hungarian market are very attractive, so we are expecting a few major deals to be closed there by Q3. However, the diversity of interest has been growing in Poland – in the five big regional cities for offices and the largest 25 for retail.

How much is the political uncertainty in countries such as Hungary, the Czech Republic and Ukraine going to put off investors?
In the Czech Republic the political uncertainty is an issue, yes. But an overriding one? No. As we can see from the trebling of the investment volume last year, it has hardly been a barrier so far. In Hungary, however, such economical and political issues have been a barrier. The situation in Ukraine is a real concern for investors, who have been forced to adopt a wait-and-see policy, holding things back.

Who are these investors going to be? Will local investors be playing a larger role? And what will be the main trend?
In the Czech Republic there has been more and more local investment, but in Poland this is still at an embryonic stage. The potential for local investment to grow is there, but there is still a lot of international capital dominating the scene. But it will come – slowly but surely. Last year there was a trend for Asian capital to be invested in the UK, whereas this year we are expecting more of it in Continental Europe. This usually means Germany or Paris – but Poland is still highly visible on their radar. There is going to be greater activity from the type of investor between core and opportunistic, which will open up a new range of deals. For example, in secondary cities or for non-prime assets. Prime deals for offices, for example, will still take place, but overall the market will open more than at any time in the last seven years. So the outlook is very positive.

Stanislav Frnka
country CEO, HB Reavis Poland

It would seem that the banks who finance development projects have loosened their policies somewhat and are now more willing to lend to developers...
Since the crisis, when banks’ policies were extremely cautious and the local branches of financial institutions operated under the pressure of what the mother-company would say about their activities, a gradual recovery has slowly become evident. Banks have built up funds and now they want to grant loans because this is what their business entails and this is how they make money. The required pre-lease level has been maintained (app. 35–40 pct) and now there is more competition on the office market in Warsaw than just two or three years ago; besides, our activities and our projects are actually one reason for that. The situation on the office leasing market has a direct impact on the policies of financial institutions. However, we are seeing more trust from the banks, a result of the Polish market’s the greater familiarity with our company.

What sort of yields can a developer expect on the Warsaw office market?
Of course we would like the yields to be as low as possible, whereas the investor always buys the so-called cash flow, which needs to be at a suitable level. I expect that there will be a yield of as much as 6–6.25 pct in the centre of Warsaw. Meanwhile, in Mokotów an optimistic expectation would be around 7 pct. Apart from a secure cash flow, investors are also expecting specific construction guarantees, BREEAM or LEED certificates – but these are not of primary importance. Our company, like the majority of institutional investors, focuses on projects in Warsaw, which has been and will be the business centre of the country. In uncertain times the presence on regional markets involves quite a lot of risk, which we are not prepared to take.

Adrian Karczewicz
transaction director, CEE, Skanska Commercial Development Europ

Poland, Hungary, Romania and the Czech Republic – which of these are attracting the most interest from investors?
Skanska operates on the largest real estate markets in the CEE region – in Poland, the Czech Republic, Hungary and Romania. Of course we are most active in Poland, both in Warsaw and in regional cities. Poland is the key location in Europe for investments from the modern business services sector. That is why Skanska, as a leading developer of projects addressed to the needs of this very industry, is active in Kraków, Wrocław, Poznań, Katowice and Łódź, i.e. on the markets where the activity of the companies representing this sector is focused. We build wherever tenants are. Poland is an extraordinarily significant market due to the very high demand for office space and substantial investor interest in terms of the purchase of finished products. In the case of Hungary, we can see a growing demand for offices, a good example of which is our Green House project, which is 97 pct leased, as well as the number of negotiations which conduct with regard to pre-lease contracts in projects which we have not started yet. Opportunistic funds are the majority of companies which look for investment products in Hungary today, they expect IRR of 18–19 pct. As a developer we mostly sell certain capital flows, the so-called cash flow, and here the main buyers are e.g. German funds. However, we expect that as the economic situation improves, the investment market in Hungary will also change and buyers will be interested in opportunistic products as well as the so-called prime investments. In the capital of Romania – Bucharest the situation is similar to the one in Hungary. Within 3–4 months we will probably reach a lease level of over 90 pct in the first stage of Green Court, which is to be put into operation at the end of the year. In comparison, in Warsaw the cap rate for the best product has fallen below 6 pct. while in the Budapest it is app. 7.5 pct. Having analysed the risk it seems to me that the difference of app. 200 basis points between Warsaw and Budapest is not justified. We are currently observing an increase of funds’ interest in our project in Budapest, which means that there are active investors who are interested in projects on the commercial property market in Hungary. Meanwhile in the Czech Republic there is a lot of demand from investors but we have to face strong competition on the leasing market. There is also a growing interest in the Czech capital: there have been purchases for a dozen or even EUR 20–30 mln

Portfolio transactions – are there investors large enough to take over packages?
Today investors are looking for products valued at EUR 200–300 mln, which is a noticeable difference compared to the situation on the commercial property market 3–4 years ago, when projects with values of EUR 50 mln and a maximum of EUR 100 mln were targeted. In 2014 we are planning to sell six facilities, but although we are inclined to sell each separately, we have not ruled out a portfolio transaction provided the investor’s offer is attractive for both parties.

Eduard Zehetner
CEO, Immofinanz

Where are the best places to invest going to be this year?
In general, to some extent we are seeing an increase in opportunistic buyers in the CEE region. The good thing is that due to our large and diversified property portfolio, Immofinanz Group can serve a wide variety of interests.

Are Romania and Hungary back on the investment map?
Right now, not really. Some occasional deals are taking place, but the volume is far away from what can be seen in Poland or the Czech Republic. At the moment, Poland and the Czech Republic are the only really liquid investment markets in the CEE region. Therefore, it can be foreseen that large international core investors will continue to focus on them. And of course, the volatility is high.

And how much of the action are regional cities going to see compared to the capitals?
In Poland in 2013, only app. 40 pct of the investment volume was recorded in Warsaw as many portfolio and retail deals took place in secondary cities (as well as some office deals). Additionally, Poland was the only country in the CEE region where transactions could also be seen in tertiary cities. For 2014 a similar development can be expected. In the Czech Republic there is a larger investor focus on Prague, not least because of the shortage of suitable properties in secondary cities. But we can also see a slight shift to more opportunistic (and therefore also ‘non-Prague’) products.

Martin Erbe
head of international real estate finance Continental Europe, Helaba Landesbank Hessen-Thüringen

What scale of bank financing is likely to be available for property transactions in the CEE region this year?
Helaba is only active in Poland, the Czech Republic and Slovakia. Bank financing in these countries is available for all asset classes, in the capitals as well as in the regions. Core products will be favoured but core-plus and value-add will increasingly find lenders as well. For Helaba’s business strategy going forward, we assume the positive trend will continue. In other markets, like Hungary and Romania, I personally expect to see a light at the end of the tunnel in the course of 2014.

Are there still any possible factors and dangers that might lead to limiting the availability of property finance?
For most markets stability has been achieved and currently I do not see any dangers ahead. This is mainly based on the continuously strong economic development in the larger CE markets, especially compared to other EU countries.

What are the factors driving investment at the moment in the CEE region?
Low interest rates are forcing investors into more yielding but still safe investments and so real estate has become an interesting and important asset class. Many institutional investors are therefore planning to increase their real estate exposure. Besides that, Poland has established itself as an institutional market, while the Czech Republic and Slovakia are seen as good alternatives to Poland.

Robert Dobrzycki
managing partner Europe, Panattoni Europe

How much interest are you seeing in investment product at the moment?
We are observing an increase in investor interest, which has grown with regard to long-lease investments, but has also appeared and shifted towards shorter-leased product. The main reason for this is the general European economic recovery as well as Poland’s favourable position in Europe. Furthermore, industrial space has become a desired asset class due to the growing e-commerce sector.

Who are the investors that are looking for transactions in the Polish and CEE warehouse market?
These are mainly core investors, who are increasingly often seeking partners specialised in the field of asset management; but we can also see more value-add investors.

Are we likely to see any big deals this year in the warehouse market? Will any of them involve Panattoni?
Panattoni Europe might be involved in sale and/or purchase transactions in 2014 – this is part of our business strategy. Portfolio sale transactions create economically advantageous business situations allowing the developer to expand its business. Although the investment climate hasn’t regained its strength of before the crisis, for sure there is more room for such transactions than before.

Jolanta Kalecinska
partner, White & Case

Are opportunistic investors able to find good investment product in Poland?
I think that there will be more and more properties for opportunistic funds on the Polish market. Interestingly, they will not just be individual assets but also property packages. The trend is quite clear to see. This year we have already serviced and analysed sales transactions for real estate portfolios. While the sale of a few or a dozen or so properties is not a problem, the sale of large valuable packages requiring the involvement of large capital for a longer period of time is, for the time being, a challenge. We are waiting for large specialist funds to arrive from across the ocean. The first few are already here, such as Lone Star, which according to press reports is interested in the privatisation of PHN. The possible success of the transaction and its size would certainly result in increasing interest both on the sellers’ side, which there could be a lot of, and on the buyers’.

What products will investors be looking at in 2014?
They will traditionally look for well commercialised and well located properties. However, they are also on the lookout for smaller properties with interesting architecture and even history, which are part of the urban landscape and include respectable tenants that have been connected with the building for many years, such as e.g. law offices. These are the sort of products I’m hearing about most often from investors.

Mike Atwell
head of CEE capital markets, CBRE

Where is the investment interest coming from at the moment, in terms of type and origin of investor? How much are they looking to spend?
There has been a strong increase in interest in real estate acquisitions and this is both within the CEE region and elsewhere across Europe. It has been driven by increased allocations to real estate together with new sources of money from other markets, such as the US, the Middle East and Asia. This weight of capital is keeping prime prices at strong levels, primarily due to the lack of quality prime investment stock being available in the market. We are seeing new flows of capital into the region and this is both at the asset level with real estate transactions but also at the corporate level with deals such as Lone Star’s acquisition of shares in GTC and TPG/Ivanhoe Cambridge’s acquisition of P3. Large, well-established investment managers and private equity groups are present in Poland with groups such as Blackstone, Starwood, Tristan Capital Partners, Resolution, Meyer Bergman, Peakside, Heitman, Morgan Stanley, LaSalle and JP Morgan all actively seeking out opportunities in various sectors of the market. German funds also continue to be present in the market plus the Austrian players, such as CA Immo and Immofinanz. This combination of core, core-plus and opportunistic investors is certainly aiding liquidity and I expect this interest and demand to continue.

Is investment in this region likely to remain focused on the capitals, or is there now a genuine shift towards investing in secondary cities?
Traditionally over the last few years Warsaw has been the dominant office market and I foresee this to continue. However, we are seeing an increase in investor interest in the regional cities for prime office product in terms of location and build quality, but most importantly in the quality of covenant and length of lease. The main target cities outside of Warsaw are Kraków and Wrocław and we are more recently seeing transactions in the TriCity and Poznań.

Which way are yields likely to be heading this year for the various asset classes?
I do not foresee any significant change in the yield trend and pattern of the last couple of years. Prime yields have remained stable in offices and retail yet we have seen compression in the logistics sector over the last twelve months. Naturally with this weight of capital across the market we will most likely see new transactions through 2014 that may provide interesting evidence, but I have not seen anything significant so far. I am more intrigued and interested to see how the secondary yields will change. There is still a gap from prime to secondary and it is much larger than in previous years. In retail we see a gap of app. 200–250 basis points between prime deals such as Dominikańska and Silesia at app. 6 pct to more secondary transactions such as Charter Hall in excess of 8 pct. A similar spread exists in offices between transactions, such as Atrium 1 in the CBD and New City and Mokotów Nova in Mokotów.

Bożena Krawczyk
investment director, Segro, Central Europe

Over the last two years a clear recovery has been observed on the investment market in the warehouse sector. Segro and PSP Investment’s recent purchase of a EUR 742 mln portfolio of properties in Poland, Germany and France seems to be part of the trend. Is there a lot of capital on the market, which investors want to spend in the CEE warehouse sector?
Investment transactions concluded in 2013 on the real estate market reached a record value compared to the last seven years. The warehouse sector looked particularly interesting as it was dominated by portfolio transactions. In 2014 we expect the current positive trends to be maintained and the volume of warehouse transactions to stay at a similar level.

What yields can investors in warehouse facilities in the CEE region expect?
We have been observing a gradual compression of yields on the market and this is particularly visible in the warehouse sector. Investor interest in top quality warehouse space has been growing as this is typically characterised by long-term leases, the so-called blue-chip tenants and good locations. According to JLL, the best properties with long-term leases could reach the level of the low sevens.

Which of the countries in the CEE region is the most attractive for investors, and which for a developer such as Segro?
According to Segro’s strategy, development projects and acquisitions in the region are complementary elements in the growth of our business. Poland and the Czech Republic are clear leaders in terms of financing and investment activities – and they are currently our key markets.