An institution around here

Poland is a country with much potential, as experts from BNP Paribas Real Estate and the Polish Information and Foreign Investment Agency are eager to point out to investors, adding at the same time that investing capital in the Polish real estate market is profitable. “Poland is the leader in Central and Eastern Europe in terms of the amount of capital invested, the liquidity and availability of investment loans. The investment volume in 2012 came to EUR 2.5 bln. In mid-2013 the volume reached EUR 907 mln and then went on to exceed EUR 3 bln at the end of the year. This was the best result since 2006. Yields in Poland are 2–3 basis points higher than in Central and Eastern Europe in the case of key properties,” emphasises Del Chandler, the director of the CEE capital markets department at BNP Paribas Real Estate. Investors have started to spend more, but if we take a closer look at the transactions, we can see that most of the capital comes from abroad. Funds from various countries (even from Asia) are investing in the Polish real estate market, but there is a shortage of businesses with Polish capital.

Conservative funds
Three types of institutions are traditionally involved in investment on the global commercial property market (in terms of retail, office, hotel and warehouse properties that are in operation and leased). These are: pension funds, insurance companies and real estate investment trusts – the Polish equivalent of which, with some qualifications, are those funds established as investment fund societies (TFI). According to the Top 100 Institutional Real Estate Investors ranking drawn up by Investment & Pensions Europe, in Europe properties constitute on average 9 pct of the portfolios of the hundred largest European pension funds. And what does the situation look like in Poland? Polish institutions, even though attracted by the idea of becoming the potential buyers of commercial facilities and profiting from them, are not doing so. Pension funds are not interested in such assets because they are not included in the benchmark (template portfolio) of pension funds in Poland (as opposed to e.g. German funds). The open pension funds act prohibits them from direct purchases of real estate. This state of affairs has remained unaltered by recent amendments to the law. Last September, the then minister of finance Jacek Rostowski announced an increase to the limits of the investment of open pension funds. “We want open pension funds to invest in the economy more actively. There will be a liberalisation of their policies, and we will abolish the benchmark,” declared Jacek Rostowski. However, this did not materialise. Bartosz Turek, the head of the analysis department at Lion’s Bank, draws a stark contrast with the situation in other EU states: “In as many as 18 of the 24 countries which the OECD [the Organisation for Economic Cooperation and Development] publishes statistical data for, pension funds invest directly in the real estate market. This is a relatively safe and profitable market, particularly in the case of the commercial property sector. However, the residential sector can also be attractive, as it is less prone to turbulence in the economy compared to the commercial market and its profitability amounts to app. 6–8 pct at the moment, which is 4–5 pct net. This has also been the expectation of Bank Gospodarstwa Krajowego, which has established a fund for apartments for rent. The revenue from leasing an office building in the centre of Warsaw corresponds to 6–7 pct of its value, while in the case of a retail outlet or shopping centre it is 8 pct per year,” he points out. So the situation in Poland could change if real estate was included in the first league of assets and thus Poles could learn from the Germans and the Austrians, who have allowed their pension funds to use the money they have made on investment in real estate. One way out of this situation is, theoretically, indirect investment. Open pension funds can invest in the shares or certificates of investment funds, including real estate bonds. “Open pension funds invest in the real estate market, but they do it indirectly, by purchasing certificates in the funds investing in real estate,” explains Michał Ćwikliński, the director of the investment department at Savills. An example of this could be provided by funds such as Arka and more recently Golub GetHouse Property Fund FIZ, which Amplico and Aviva were involved with in 2011. However, in practice these are small amounts of no significance in terms of the assets of open pension funds or the size of the investment market. Besides, the Financial Supervision Authority is reluctant to agree to the involvement of open pension funds in other investment funds. Thus in practice the involvement of Polish pension funds in the real estate market mostly boils down to the securities of real estate companies listed on the Warsaw Stock Exchange

Cautious insurers
The involvement of the majority of insurance companies in real estate investment is also thin on the ground. If insurers do own commercial properties, they are usually their own offices – and these fill the entire portfolio earmarked for property investment. This topic is quite a touchy one because insurers tend to be tight-lipped when it comes to making any statements about investment in real estate. Representatives of Ergo Hestia insist that the issues are a trade secret. Warta’s representatives also prefer to remain silent. However, PZU (Powszechny Zakład Ubezpieczeń) is an exception to this rule. The institution indeed invests in real estate, using its own money as opposed to money raised from the market. Such a modus operandi sets it apart from the others. The company does not raise funds from outside sources, but it takes a certain part of this from the policies in its funds. However, the group is mulling over deeper involvement in the real estate market for which it is planning to attract outside investors. “Since the beginning of the real estate fund’s history, our strategy has been based on using our own funds. We have gained the competence needed to manage funds from the real estate sector and we deal with all of this ourselves. Thanks to this we have full control over our portfolio and investments. We have not ruled out putting our offer on the market sometime in the future. When that time comes, we will also want to convince those who invested in real estate funds some time ago and were not completely happy with the results. On the other hand, we want to encourage those institutional investors and retail clients who are currently showing quite a lot of interest in such enterprises,” claims Jacek Koprowski, the director of the real estate department at TFI PZU. “Investing our own capital makes us more credible. Potential investors can be sure that the management will be top class because we also look after our own money. Besides, the results of our funds have been very good and we will be able to reveal just how good they are in due time. We want to invest in secure properties and develop a strategy directed towards a flexible exit from investments rather than based exclusively on the sale of assets,” adds Wojciech Pisz, the real estate investment director at TFI PZU. The company established its first fund in 2008, another was established three years later. “We currently have four funds: two rent funds, one development fund and one established in cooperation with an external company. Assets with a value in excess of PLN 1 bln are included in the funds. Properties are a very attractive form of capital investment. Our companies used to mostly invest in treasury bonds and stock exchange shares before this. Properties are the sort of asset that generate much higher rates of return than bonds, with a much lower risk than shares,” adds Jacek Koprowski. This reveals a new approach from PZU. “The Polish market has now reached a satisfactory level of liquidity, which is confirmed by such factors as the investment of foreign businesses in our market. We have some experience in terms of property valuation and we can see that the three main sectors – offices, retail and warehouses – look promising. So far we have not been interested in the hotel market; however, we are following the situation in this segment,” explains Wojciech Pisz. The representatives of the company declined to comment about the capital raised for new enterprises at this time. “Our group has paid PLN 500 mln into the second fund. This will be leveraged in order to optimise the rate of return. We want to invest additional money on top of that, but so far we cannot disclose any details. But it will be a substantial amount,” adds Jacek Koprowski.

In good company
Banks are now showing more initiative when it comes to investing in real estate. PKO TFI has established the Merkury fund, which has acquired properties worth PLN 250 mln from Polimex- Mostostal. According to preliminary estimates, the fund will sell the units to investors and hand the money over to the construction company. Apart from that, the market now features a number of funds that are affiliated with banks, such as Arka BZ WBK Fundusz Rynku Nieruchomości FIZ (BZ WBK), which was established in 2004, and BPH FIZ Sektora Nieruchomości (BPH), which started up in 2005. BZ WBK’s portfolio includes fifteen commercial properties and four residential developments across Poland. Among these are the Red Tower office building in Łódź, the Winogrady Business Center office building in Poznań and Galeria pod Dębami in Warsaw. Investors have bought shares in this worth a total of PLN 339.5 mln. The BPH portfolio includes the Viking House office building in Warsaw’s Ursynów district, Centrum Krakowska 61 (the company is planning to redevelop and extend the property together with TK Development) and an office complex on ul. Marynarska in Warsaw and three retail facilities in Silesia. At the end of 2013 the value of its real estate portfolio came to EUR 231.8 mln. In addition to this, there are other funds operating on the market as investment fund societies (TFIs): Skarbiec Rynku Nieruchomości FIZ, Sezam Dochodowych Nieruchomości FIZAN, City Living Polska FIZAN, ECI Skarbiec Real Estate FIZAN (all of which belong to Skarbiec TFI), Secus FIZ Sektora Nieruchomości (In Property) and Altus Subfundusz Real Estate (Altus TFI), FIZAN Deweloperski Nieruchomości Komercyjnych SATUS (BDM TFI), Investor Property FIZ (Investors TFI), Ipopema Rynku Mieszkaniowe,go FIZAN (Ipopema TFI) and MCI.CreditVentures FIZ (MCI Capital TFI). One that has been operating on the market for quite a short time, since 2013, is Arionn FIZ, owned by Trigon TFI. The fund has raised over PLN 16 mln from individual investors. “Our fund is managed by an investment fund society, which has its own real estate competence and maintains cooperation with experienced experts and consultants. They are involved in the investment process from the very beginning to the sale of the assets. Our aim is for the fund to operate for an indefinite period, which will create the suitable conditions for achieving higher rates of return. Our investors have the option of cancelling some of the certificates twice a year in accordance with the conditions included in the statute, which proves that it has the features of a fund that provides fixed revenue, like a dividend fund,” explains Robert Chybowski, the investment director of Trigon TFI. In the fund’s portfolio there is currently one industrial property, which the fund actively manages through revitalisation and conversion into a retail facility. However, it needs to be said that funds established under investment fund societies are not well perceived by investors for a number of reasons. Therefore those who are thinking about making their mark on the commercial real estate investment market need to be able to generate new quality.

Changes are afoot
The characteristics of Polish institutional investors would seem to give us few grounds for optimism. However, PZU’s activities and new initiatives could eventually help to change this picture. There has been increasing talk about investment funds established for affluent individual investors, clients of private banking institutions and wealth management services, but based on completely different models than the current closed real estate investment funds. “The emotions generated by the last crisis have now dissipated, but it was a big lesson for everyone. Investors understand that the residential development business is something completely different from owning a leased office building in a good location. You only need to give them a good product, a completely different quality,” insists Radosław Świątkowski, the co-owner and the president of the board of Reino Partners, a company that manages funds and investments on the real estate market, and which has closed purchase transactions for existing office properties with a total value of app. EUR 165 mln over the last two years. Now it is thinking about establishing its own investment funds for Polish individual investors. “The moment is a convenient one. Interest rates are at a record low. An investment in an existing, leased property could generate a return 2–3 times higher than the current interest on deposits. This is a significant advantage, whereas the alternatives are risky. The situation on the stock exchange is unstable and changes to the pension system have only increased the risk. The events of the last two years show that corporate bonds are not devoid of risk. Properties that generate steady revenue should be a natural target for investors who are withdrawing their funds from deposits,” explains Radosław Świątkowski. Individual investors’ interest in the real estate sector has been growing but it needs to offer more and do it better. What should the new quality involve? According to Reino Partners’ analysis, investors do not want to combine investments in finished facilities with the development risk. They do not want to invest on spec – first they want to get to know the real estate the fund wants to invest their money in. They also expect that a fund that generates regular income from the properties owned will share the proceeds with investors regularly and pay annual dividends, just as large stable companies do. The remuneration system for the manager is also extremely important. “Investors do not trust appraisal studies or achievements on paper. They expect the regular remuneration to be deducted from what they have invested, not from the book value. The remuneration for success must be provided at the time when the fund has real cash from the sale of a property and success cannot merely be understood as any growth of assets but a premium that is higher than a minimum rate of return. The motivation for the maximisation of profit must be clear,” adds Radosław Świątkowski.