Restructured and re-focused

Ewa Andrzejewska, ‘Eurobuild Central & Eastern Europe’: The last few months have not been easy for the IVG group, which is being restructured after entering bankruptcy. However, the next few months are set to be a time of restructuring and re-emergence.

Maciej Zajdel, managing director, IVG Poland: The main idea behind the process is the restructuring of our finances. EUR 2 bln of the debt will be converted into shares for creditors. All the financial arrangements with the creditors were agreed in March, and as a stock exchange listed company many steps have since been taken to ensure the group emerges from the bankruptcy process we have been in since August last year. Despite all this, the group incorporates many subsidiaries, none of which is in bankruptcy. Each have a positive cash flow and healthy results – including our Polish company. We are not part of the debt or debt conversion.

When will your mother company finally come out of bankruptcy?

By the end of June we should have received the consent of the German court for the arrangement reached in March. There are still a number of formal steps ahead of us, but the conversion of the debt into shares should take place in August. This means that this month we will come out of the protective period after the bankruptcy in Germany, and after the restructuring the group’s structure will be much more simplified. The structure is currently rather complicated, because we have over 350 subsidiaries that provide a variety of services and are property owners. It will be simplified and divided into three business lines, which will function independently under independent management boards. The structure will be less regional than it is now but it will be more functional. The three business lines are to be: funds, our own real estate portfolios, and our underground oil and gas container business.

And which line will the Polish branch be part of?

We will become part of the funds line, because app. 95 pct of our revenue comes from the management of real estate owned by funds. Today we are a subsidiary of an asset management company in Germany, which will most probably be folded and the majority of the staff will be re-employed in the fund structure as well as the real estate structure.

When will the changes take place?

I hope that it will be this July, even though due to the various tax formalities it could be postponed in Poland by two or three months.

However, you have not been standing idly by. IVG in Poland has purchased four properties in the last few months.

Investors understand that the restructuring is one thing and our investment in safe products is another. We are currently looking for properties with values that even exceed EUR 100 mln and long term lease contracts for the active investors who have been cooperating with us. For others we are looking for even larger properties, for which the transactions will have values ranging from EUR 100 mln to EUR 400 mln (in club deals). Our investors are very satisfied with the investment by IVG Warsaw Fund, which is focused on the centre of one city – Warsaw. This is a unique fund in Europe and its activity is based on the strict assumption of investing in real estate with a value of app. EUR 30 mln. We have secured and bought seven properties, so the funds have practically been used up already. The final transaction closing the fund was for Chmielna 25 – this is the first such transaction in Poland involving a high-street retail facility with an office component. For the fund we proposed the concept of dividing the centre of the capital city into seven business parts. The strategy is based on spreading and diversifying the risk by purchasing properties with a similar volume in each of the seven commercial districts in the centre of Warsaw. In such a case the risk is much lower than investing in a single building, even a very good one, in the centre of the city with a value in excess of EUR 200 mln. We are quite an active investor on the commercial property market in Warsaw, where we have carried out eleven transactions with a combined value of EUR 350 mln in the last three years.

How many years is the fund set to run for?

There is no fixed date for exiting the fund. The investment strategy is for 5–7 years with a possibility of extending the period to a dozen or so years. Our investors are quite flexible with regard to the investment mechanism. If they want to extend it, we will do so; if we have to sell one property or the entire portfolio – we are also prepared for such a scenario.

And are there any investors who have not been active in Poland before and would like to start cooperation now?

As IVG we control 30 pct of the German institutional investors market, which means that over the last five years out of 100 pct of the capital of German pension funds, insurance companies and governmental institutions, app. 30 pct of the capital invested on the commercial property market was handled by us. On the other hand, we have a group of app. 140 institutional investors we cooperate with, some of whom are active at a particular time while others are not. These investors have established app. 40 various funds with us, such as the Warsaw Fund, which was set up for three investors: two German investors and an Austrian one. These are a pension fund, an insurance company and a governmental institution. In the last three years we have invited over 30 new investors to Warsaw, the majority of whom were in Warsaw for the first time. It is not easy to convince representatives of an industry pension fund or an insurer to come over to Poland. They prefer their own, familiar markets and the popular ones such as London or Paris. For many Poland is still rather exotic. However, we have made a good impression and a large number of them expressed an interest in our market. Many of our current and potential investors already treat the property market in Poland and Warsaw as a ‘core’ market, i.e. liquid, stable, transparent and safe. At the end of this year and the beginning of the next, when the situation in Germany stabilises, we will be able to establish more funds. One will be dedicated to Warsaw and core, top-shelf buildings. We are also thinking about the largest regional cities in Poland, as well as Prague and Vienna.

A few years ago you were planning a development project – the Vector office building in Warsaw’s Wola district. Will this be seeing the light of day?

The plot is earmarked for sale. We have no approval for carrying out a development project.

Does this mean that IVG will not be involved in any development activities?

In a short- and medium-term – it will not. Every day we are engaged in increasing the value of existing buildings in our portfolio, which we already have 17 of in terms of asset management services. We are also busy looking at the regional markets – Łódź, Gdańsk, Katowice, Kraków, Wrocław and Poznań – carefully monitoring both the office and retail markets. From the perspective of the entire group we have seen that some investors would like to invest much more in the retail sector, which currently constitutes app. 5–7 pct of our portfolio. Another few per cent is taken up by logistics facilities and hotels, but the majority – 85 pct – are offices. Thus we are actively looking for high street facilities or shopping centres, mainly in Western Europe but not exclusively. Recently we were very close to buying such a property for app. EUR 400 mln in Munich, but finally it was bought by somebody else. We also take into consideration, with our more opportunistic investors in mind, retail parks and smaller shopping centres. However, the majority of our investors are institutions interested in safe products, which in fact are core products.

Should we expect a transaction to be closed in the near future?

We are just concluding the final agreement for the purchase of Chmielna 25, which will close the IVG Warsaw Fund. Apart from that we are selling a few of the older buildings from our portfolio. For this year and the next we are planning a few transactions involving the sale of office and retail facilities. We are also concentrating on leasing – last year we signed app. 80 contracts and our portfolio is 95 pct leased, that is, considerably above the market average.

Which buildings have been put up for sale?

These are four office buildings located on Al. Jerozolimskie – Jerozolimskie Business Park. Some are being sold as part of the European portfolio and I hope that the transactions will be closed by the end of the year. Other products are also being prepared for sale. However, there has still been no decision to market them, but I hope that it will be made soon and we will be able to offer them by the end of the year. I will add that we are currently working intensively on the decommercialisation of a class ‘A’ office building – Nowa Victoria on ul. Giełdowa in Warsaw’s Wola district. From a building that used to be occupied by a single tenant, leasing its entire area of 12,500 sqm, we are now adapting the property into an office building for multiple users and plan for the new tenants to move in at the end of 2014 or early 2015. The building was designed by the JEMS Architekci architectural studio and was constructed of the best materials, as is every class ‘A+’ building. It has a double façade and rooms of more than 3m in height, as well as a narrow bay with good access to light. It is aging really well. We recently obtained a LEED ‘Gold’ certificate for an existing building –our second certificate of this kind, following Rondo 1 in Warsaw. We have also received a BREEAM ‘Gold’ certificate for the Feniks building, the anchor tenant of which will be BOŚ Bank. We are also close to securing a green certificate for the building which includes our offices – Le Palais on ul. Próżna, which is not easy to obtain for a historic tenement due to requirements of the conservation authorities. We have also carried out the modernisation of the Metron building (formerly, the BTC Office Center) and the hall of the R34 office building – this year we be working on its façade and the entrance. We will also be renovating the façade of the beautiful and historic Royal Trakt Offices. In addition, we plan to extend a shopping centre in Zabrze by 10,000 sqm and are at the stage of preparing the concept. Negotiations with the town are taking place regarding the shape and the possibility of extension, as well as with Auchan concerning the possibility of prolonging the contract they took over from Real.

Coming back to the topic of trends on Warsaw office market, how much longer is it going to remain a tenant’s market?

It is true that we have a tenant’s market and I think this and the next year will be similar. Things should start changing at the end of 2015. There is a lot of competition for tenants, both among developers of new facilities and existing ones. The market is already diversifying and the process will deepen, which is certainly a good indicator of the development of an increasingly mature market. Large projects are being developed for large tenants. Rents are going down, but we are focusing on smaller buildings that have stable rates in the long term and values that should increase over time. Tenants feel at home in buildings with a ‘soul’ and when their address perfectly integrates with the urban fabric. Thanks to the small scale of such projects, anchor tenants have an influence on the management and image of a given building. For Le Palais we are discussing the extension of contracts three to four years before the expiry of the leases. Having moved ourselves to the building from Saski Crescent, we have experienced the unique atmosphere of the place – the charm of ul. Próżna and pl. Grzybowski. Only as a tenant can you appreciate how much additional and economically immeasurable value is obtained from such premises. This is a completely different category of building – totally unlike the large office complexes where a tenant feels anonymous. And yet it is still located in the very heart of a dynamically developing Warsaw.

A man with funds

Maciej Zajdel is the head of the Polish branch of German investor IVG. He has been employed by the company for eight years. Prior to this, he worked for the Polish branch of Dutch company Tebodin Consultants and Engineers, also for eight years. He is a graduate of the Delft University of Technology, the Wrocław University of Technology and completed MBA studies at Calgary University. He began working in a science institute in The Hague. He was responsible for the construction of several dozen petrol station projects for Shell, manufacturing halls, warehouses, office buildings and for some of Nato’s infrastructural projects in Poland. He joined IVG in 2006, where he set up one of the first focus funds (specialised for one market) in Europe, which has recently invested EUR 200 mln in seven core projects in central Warsaw. IVG Poland is part of Bonn-based IVG Immobilien, which is listed in Frankfurt and manages assets worth EUR 22 bln, both from its own portfolio and for institutional and private clients via investment funds. IVG entered Poland in 1999 and opened its Warsaw office in 2006. It is currently managing and increasing the value of 17 assets.