From public to private

Rafał Ostrowski, ‘Eurobuild CEE’: You have been at the helm of PHN since September 2013. Is your vision of the group any different from your predecessor’s concept? Are you planning to take a more revolutionary approach?

Artur Lebiedziński, the president of the board of PHN:
I would call my vision a continuation of my predecessor’s activities enriched with some new elements. The general strategy is the same: we want to be one of the largest – and most effective – investors on the commercial property market in Poland.

And what are these new elements?
This actually involves a shift in focus. Our experience and assets change and this allows us to adapt appropriately. For example, we previously assumed that we would carry projects out mostly in joint ventures. Today, now that we have more experience, we can see that we can successfully develop some of them ourselves. Secondly, we are also more inclined to buy finished projects.

This is, as I understand it, the ‘closing’ element in transforming the property portfolio. Something you describe as ‘capital recycling’. It involves selling properties that do not generate satisfactory revenue and purchasing or building more profitable properties to replace them. Are you happy with the current progress of the process?
Last year we sold nine properties for a total of around PLN 70 mln. This year we would like to have at least the same result. To replace these assets we are delivering new projects such as office buildings on ul. Foksal and ul. Rakowiecka in Warsaw.Furthermore, we plan to purchase a finished office facility, which will generate some revenues from the outset.

What will this facility be?
I can say that we are planning to purchase a class ‘A’ office building with an area of 8,000–15,000 sqm gla in Warsaw. We have a shortlist of such properties and are currently conducting due diligence. Why are we interested in this size? Because these are properties that can easily be sold if we decided to take such a step. Such properties enjoy a lot of interest among investors.

I understand that the purchase will constitute the completion of a certain cycle of transformation for just a small part of your portfolio – PLN 70 mln is more or less 3 pct of its value. When are you planning to complete the entire transformation process?
We have around 90 properties for sale, which corresponds to half of our portfolio, currently estimated at over PLN 2.2 bln. The properties have been ranked, from the most to the least profitable, and every quarter we review this list carefully. We have to take into account that our portfolio is a living organism. If there happens to be a recovery in the residential segment we can promote our residential offer more. If there are infrastructural or road investments planned near our facilities, it encourages us to verify our sales plans. But we are not under any time pressure to do so. So far we have always sold our properties above their book value and this is a reasonable strategy we want to keep to.

When will this transformation finish?
We would like the return on the portfolio of properties to reach a satisfactory rate above the market level within 3–4 years.

Satisfactory, what does that mean exactly?
If there are transactions concluded in Warsaw – our main market – with a return of around 6–7 pct, I think this should be the minimum satisfactory level that it is possible for us to reach, and also because we have a developer’s margin on new projects. So far, however, there is no point denying the fact that some of our assets are not operating at the optimum level. And we are planning to sell them.

One of your earlier declared objectives was to exit the residential sector within a few years, but some of your planned developments, such as your subsidiary Dalmor’s project in Gdynia, are mostly residential.
Residential assets do indeed have a question mark hanging over them for us. So far we have been limiting our activity in this segment. Still, sometimes, for example as a result of a change to the surroundings of a given project, introducing a residential element can be tempting. As far as the development of the Molo Rybackie project in Gdynia is concerned, it will indeed mostly be a residential project. According to the local zoning plan, a gross leasable commercial area of app. 70,000 sqm can be built on the site, as well as app. 120,000 sqm of residential space. On February 12th Dalmor signed a letter of intent for the construction of the complex with a developer. The contract stipulates the preliminary cooperation conditions and principles between Dalmor and the developer. We expect the construction work to begin next year.

Who is this partner – a Polish or foreign developer?
This is a Polish partner that has some experience in the construction of development projects and can guarantee a high quality project. As far as real estate is concerned, if you have a class ‘A’ area at your disposal, the building which is to be developed there should also be class ‘A’. Similarly, class ‘B’ buildings should be built on class ‘B’ land. In Gdynia we have a class ‘A’ plot, or even A+, one of the best on the Polish coast and this is why we want to develop a unique project. We are cooperating with the town authorities in terms of obtaining the best overall concept for the area. The development of the Gdynia seafront is an important element in building modern urban space. Thanks to our project we have an unrepeatable chance of changing the area and turning it into something very special. Besides, this is also an approach we are applying to our other projects: we are completing the construction of the Foksal City and Rakowiecka City office buildings and they also stand out impressively among their surroundings.

When will yu start the construction of one of your flagship Warsaw projects – the office building on ul. Domaniewska, which will have a gross leasable area of around 28,000 sqm?
We expect the first stage involving the construction of diaphragm walls will be completed in the next few months and in Q2 2014 the general contractor, which we are in the process of signing a contract with, will enter the building site. This is when we will start intensively commercialising the space available. The building should be completed at the beginning of H2 next year.

Do you expect to have another tenant as large as Poczta Polska who will occupy the other half of the project?
A large tenant provides a foretaste of success, especially at the beginning. But there is no point denying the fact that the profitability of leasing one floor after another is higher than leasing the entire building. So it is not the case that we are necessarily looking for another large tenant. The situation is similar to that of Foksal City, where we have had some enquiries about the possible lease of the entire building. We are happy with such strong interest but, being a long-term investor, we are determined to negotiate the highest possible rates and as favourable lease contract terms as possible.

And what is the progress of the project at ul. Świętokrzyska 36? You have signed a contract with Hochtief Development and you are now looking at the financing possibilities. When will you apply for a building permit?
We are at the stage of developing the optimum shape for our ‘tower’ and this takes some time. We need to finish this process first. There is the question of the best schedule for the project. You also need to consider what’s happening around the property. Our operational cooperation with Hochtief is successful. Looking at it realistically the building could be constructed within three to five years. A plot that is empty does not generate any revenue. This is why we are interested in constructing a commercial building on it as fast as possible, as well as with its rapid commercialisation. This is a project in Warsaw's Central Business District. We can see tenant interest and are already receiving enquiries about the possibility of leasing several thousand square metres.

What about the area around the Intraco building in Warsaw? Your prospectus, which was approved by the Polish Financial Supervision Authority in January last year, detailed the construction of a 6–8 storey building with around 10,000 sqm gla on the site of the car park in front of Intraco, as well as the subsequent demolition of Intraco and the construction of another skyscraper in the second stage. What do these plans look like at this point?
The project is being prepared. We are currently completing the selection of the architect for the project, but you also need to take a broader look at the situation. Intraco is our showpiece and a landmark of the city. It is also a well leased building. The surrounding area, mostly around the Dworzec Gdański railway station, is developing dynamically. There is a lot of office space being built there. We can see that and we want to support this as a further development of Warsaw’s Central Business District. Now we have to make a decision on whether we divide the project into stages. If we started the process now, I expect that we could receive a building permit within 12 to 18 months. After Foksal City, Rakowiecka City and Domaniewska Office Hub it will be our next office project in Warsaw.

Will you develop the project yourselves or together with a partner?
One and a half years ago we wrote in our prospectus that we would develop the first building at ul. Stawki 2 in a joint venture partnership. Today I would say that we will certainly be taking into consideration all the options, but we are more likely to build and commercialise the project ourselves.

Why is that?
Because it is not a skyscraper. If we carry out the project on ul. Domaniewska ourselves, why should we share our profits with someone on ul. Stawki? This is a definite change of direction. The organisation is learning and not everything we assumed we would carry out in a joint venture will now be done with a partner. In the case of enterprises where we lack some competences, such as in the logistics sector, I expect that we will always be supported with the experience of our partners. We simply do not know enough about the management of logistics parks. However, when it comes to offices, we have the required competence.

Talking about logistics, as well as the logistics park development you are carrying out with Segro in Wrocław, you are planning to build two parks near Warsaw and Łódź. Do you have a partner for these projects?
As far as the facility near Warsaw is concerned, in Parzniew to be precise, we already have a partner. We have just signed a letter of intent. Our new business partner is a development company with an international reputation. The company specialises in the construction of warehouse and industrial facilities and is considered to be an expert in this field. Near Łódź, in Lućmierz, we have 13 ha of land in a good location. If we manage to improve the road infrastructure, we will have parties willing to participate in the construction of a logistics park on this site. There are also potential tenants interested in the construction of a large BTS warehouse there.

Will you also need a partner for the construction of such a BTS project? I mean, a developer experienced in the warehouse sector?
Not necessarily. We already have some experience with this format. We are currently building a few smaller BTS projects ourselves. In Warsaw’s Lewandów district we have app. 6 ha, which is divided into smaller parts and each is being commercialised as a BTS scheme. We already have tenants for the majority of them.

Are you planning to sell or keep the warehouse projects planned or under construction?
Our strategy includes holding logistics assets in our portfolio. However, I would say that these could also be the subject of ‘capital recycling’.

Can you see any locations for expansion in terms of logistics apart from Warsaw, Łódź and Wrocław?
We have several thousand square metres of plots in good locations in the TriCity. We know that the competition is strong there, however we are interested in gradual development. Firstly, we will try to improve the availability of our land. We will prepare it and it could be another location for a logistics project.

How is PHN’s privatisation progressing? The press reports that the largest players such as Ghelamco and the Lone Star fund are interested in its purchase.
The privatisation is progressing according to schedule. I expect the process may finish in Q2, in line with what the state treasury is saying. This means that we have a lot of work to do involving the management of the due diligence process at the moment, but everything is going according to plan.

How many companies are interested? And are they mostly from Poland or from abroad?
I would say this: there is considerable interest from a significant class of investors. And that’s all I can say at this point.

As we are speaking, we are virtually on the eve of the publishing of PHN’s financial results for 2013. The publication will take place on February 26th, after our magazine goes to press. However, I would like to ask you at least to comment on the current forecasts. According to the projections of Dom Maklerski PKO BP, this will be another year when the company has an operating loss (-PLN 35 mln); its revenue will also decrease from PLN 188 mln (2012) to PLN 177 in 2013. Will the results really be close to these estimates?
I will not comment on our operating results, but it is true that our revenue from leasing is under pressure. This results from two factors. Firstly, there is some pressure on rent levels due to the competition on the market. Secondly, we are also continuing to sell properties that generate certain revenues from leasing. These have not been satisfactory for us but still, they generated some revenues and their sale lowers our sale results. Because we are actually in the process of handing new premises over to tenants and are preparing property purchase transactions, the results could improve. I hope that 2013 will be the last year in which we struggle with a decrease in revenue from leasing. Please bear in mind that we are not a developer. It is not our aim to build something and sell it. We would like to provide our shareholders with a satisfactory dividend every year, exceeding what is possible with bank deposits. We want to be a stable vehicle, a significant real estate investor and we care about the growing value of PHN’s portfolio. In order for it to grow, it has to be a portfolio made up of good properties.

From banking to real estate
Artur Lebiedziński – the president of Polski Holding Nieruchomości. After the resignation of his predecessor, Wojciech Papierak (in August 2013), he was made temporary president for a period of three months (starting from September 7th 2013) and later (November 28th) was appointed president for the current term of the board. Prior to this (from June 26th 2013) he was a member of PHN’s supervisory board. Between 2006 and 2007 he was a director of Société Générale, where he was responsible for the acquisition and execution of structural and debt financing for Société Générale’s main business lines in Poland. In the 2004–2006 period he was a deputy director of CA IB Investment Bank, where he was in charge of financial consultancy projects carried out in the field of investment banking by CA IB. In 2001–2002 he was a manager of Bank of America in London, where he worked in the investment banking team. He is a graduate of the Warsaw School of Economics. In 2003 he was awarded an MBA by the International Institute for Management Development in Lausanne, Switzerland.

Now in private hands
Polski Holding Nieruchomości is a state-owned, Warsaw-based real estate company. It was established on March 25th 2011 as a result of the consolidation of a number of state-owned companies operating in the real estate sector in Poland or that had facilities with investment potential in their portfolio. Since February 13th 2013 it has been listed on the Warsaw Stock Exchange. The group’s portfolio includes app. 150 properties with a combined gross leasable area close to 320,000 sqm. It also holds a land bank of 1180 ha (as of Decenber 31st 2013).