Investment dilemmas

According to JLL, properties worth almost EUR 2.9 bln changed hands in the CEE region in H1. This is an excellent result, since it represents app. 65 pct growth on the EUR 1.7 bln generated in the same period in 2013. Poland stands out in the region with a 50 pct market share (EUR 1.43 bln). The Czech Republic, which is next in the ranking, accounts for one quarter of the transaction volume. Around 15 pct of the capital was invested in Romania, 8 pct in Hungary and 2 pct in Slovakia. Despite such good data, experts are reluctant to talk about any real estate boom. “In my opinion we are currently not looking at some extraordinary investment boom, but simply a great deal of interest in Polish commercial real estate from foreign capital,” believes Tomasz Trzósło, the managing director of JLL in Poland. “In the case of smaller countries, e.g. Slovakia, Lithuania, Latvia, Estonia and Croatia, investors are worried about the liquidity of these markets and the potentially limited possibilities in terms of exiting their investments in the future. There are no such concerns on the Polish market. Institutional investors are playing the leading role, but an increase in activity among opportunistic capital, which expects higher rates of return, is an interesting recent phenomenon. There are both investors who purchase assets in smaller towns or older buildings in the capital city, as well as indirect investors who buy shares in real estate companies, for example, LoneStar’s recent transaction to buy shares in GTC,” explains Tomasz Trzósło. Whether we are talking about a boom or not, the transaction volume is higher than analysts were predicting just a few years ago. “The current results for the investment market in Poland have exceeded earlier expectations. In 2009 the volume amounted to app. EUR 700 mln. When compared to the EUR 3.2 bln that has been forecast for this year, there has been growth of around 450 pct,” comments Piotr Kaszyński, a partner and the director of capital markets at Cushman & Wakefield. “If we look at the transactions so far, there is an improvement in all the market segments,” he adds.

Investors move further afield

It should come as no surprise that Warsaw is the best performer on the Polish investment market. The Polish capital, even though it has been attracting investor attention for several years now, has no monopoly when it comes to their affections, particularly considering the fact that the situation on the office market has been getting rather complicated. “In the Wola business district alone we have an investment programme of around 1 mln sqm. On top of this there is the development of Mokotów and the area of Dworzec Gdański. However, tenants are not growing dynamically enough to absorb all this space. So a question arises: at whose cost are the new projects being built? Even if they manage to convince a tenant to move into a new office building, their former premises will be vacant. This leads to certain investment and development challenges. What to do with the vacated areas? These are also dilemmas for investors,” remarks the director of C&W. Investors are now becoming increasingly eager to consider other Polish cities. According to Tomasz Trzósło, a limited choice of the best facilities available for sale is a safe challenge for investing capital. There is a shortage of top shelf products – mainly because flagship projects have changed ownership recently or are currently being negotiated over. Poland is attracting more and more opportunistic capital, which considers it a good place for investment and is searching intensively for opportunities. “The investors from this group are not limiting themselves to the centre of Warsaw – they are also analysing other capital city districts and some of the largest conurbations, such as Wrocław, Łódź, Kraków, Poznań and the TriCity. A number of transactions on these markets are currently under negotiation and could be closed within this year,” believes Tomasz Trzósło. Examples of such deals include the acquisition of the Green Day office building in Wrocław by GLL for EUR 44 mln and the July sales transaction for three office buildings developed by Ghelamco – one of these (Katowice Business Point) is located in Katowice. In H1, Octava FIZAN became the new owner of office buildings from the portfolio of Arka BZ WBK Fundusz Rynku Nieruchomości FIZ in Wrocław, Poznań, Łódź and the TriCity. According to JLL’s calculations, the value of investment transactions carried out in H1 2014 on the office market, excluding the capital of Poland, amounted to EUR app. 220 mln. The total value of purchase and sales contracts regarding office real estate outside Warsaw could reach the record amount of EUR 400 mln by the end of the year. “Since last year we have been observing an increased interest among investors in some of largest conurbations outside Warsaw,” says Tomasz Puch, the director of the department of capital markets, office and warehouse real estate at JLL. “Companies are becoming more open to new approaches, such as entering joint venture structures and handing over part of the developer’s profits. Some owners are prepared to renegotiate and prolong lease contracts in order to increase the attractiveness and value of their projects,” adds Tomasz Puch. The situation is similar according to developers: “Warsaw, Kraków and Wrocław are already considered to be attractive and safe places for investment; however, cities in the third tier, such as Poznań, Katowice and Łódź, still raise a few eyebrows. Nevertheless, it seems that it is only a matter of time before their day will come. The first few transactions are taking place in these cities, and nothing encourages investors more than success stories on a given market,” argues Adrian Karczewicz, the transaction director of Skanska Commercial Development. Investors are now more inclined to opt for a purchase if they can obtain financing easier. There is no major problem with that at this time – of course on condition that the project is well-designed economically. “The real estate financing market is different than a year ago. Banks have opened up a wider stream of funds. Stronger competition between the banks has also resulted in a decrease in the margins,” says Hubert Mańturzyk, the senior manager in the Polish branch of Aareal Bank. Meanwhile, the preferences of financial institutions remain unchanged. They are still more willing to finance the purchases of financial institutions in the best locations of large cities. “When it comes to the office segment, buildings in Warsaw, Wrocław and Kraków are the most favoured. Also, shopping centres in the largest cities can count on the interest of financing institutions. However, there are banks that are interested in financing the acquisitions of retail facilities in towns with around 100,000 inhabitants. Real estate purchases are most often financed at 60–65 pct LTV, but there are some transactions taking place at the level of 70 pct LTV, “ adds the representative of Aareal Bank, one of the institutions that co-financed the largest transaction in the retail segment in Poland this year: the sale of Poznań City Center.

Market challenges

The increased investment activity could raise some concerns, particularly considering the growing levels of vacancy and the rather a large supply of new office space. But what might seem like a worrying phenomenon at first sight, could turn out to be something of an asset for investors. Tomasz Trzósło argues that cyclicality is a normal phenomenon on the real estate market. The rule is simple – if we have a lot of unrented space, owners reduce rents. However, investors are not afraid of low rates. For them this is even one of the factors that confirms the attractiveness of a given market. If rent rates are very low, there is a good probability that they will grow and, consequently, there is a chance for additional profit when exiting the investment. When you buy an office building with low rent rates, you can count on there being an accordingly lower price for the building. If the situation improves, it should be possible to increase the valuation. “Nonetheless, vacancy is of course unwelcome, particularly among the ‘safe’ investors. The level of vacancy itself does not tell us everything, though. One important element when assessing the vacancy level is the question of where the vacancy is occurring. Tenants often move form older buildings to newer ones, leaving vacant space in uncompetitive buildings, which often have to undergo major renovations in order to be able to interest tenants. Such vacancy does not reflect the real condition of the market because it is the technical state of the premises that drives tenants away, rather than the health of the tenant market. At the same time there is a large group of tenants who are moving from older but nevertheless good facilities to newer ones for a variety of reasons. They are often modern buildings in good locations. This is a serious challenge for the owners of such facilities, which are often funds based outside Poland and, consequently, have fewer possibilities in terms of competing for tenants compared to developers who are present on the Polish market. In my opinion, such competition will reduce rent levels, particularly on the office market, but we are not very far away from the moment when developers will no longer be able to lower rents because it will simply not be profitable to build. So there is a natural barrier that protects the level of rents. I think that we have not reached it on the Warsaw market yet, but we are not far from it,” warns JLL’s expert. In spite of the burgeoning interest in Polish real estate, it is still far from easy to close a sales/purchase deal. “Negotiations for the majority of transactions still take over a year. Getting the bank financing in place takes a bit longer, while buildings on the secondary market take longer to sell – and there are quite a few of these on the market,” claims Tomasz Trzósło. Investors are also paying close attention to the offsetting of investment, so that in the case of certain projects they are able to make decisions fast. “From the moment of marketing a given product the sales process should at best take up to six months. Institutional investors from Germany expect to see a rate of return of around 8–10 pct, while opportunistic investors expect 14–16 pct in a few years. Nobody is being guided by the same yields. This is a significant indicator in the attractiveness of a given market, but an investor considers many factors to be important, including the total profit, maintaining the value of a given facility, the minimisation of operating costs, and the investment expenditure related to the service of a given facility,” argues Adrian Karczewicz. The task of those who are looking for retail facilities is not any easier. There are many challenges which the segment has to face, mainly connected with the development of technology and changes in customers’ shopping habits. “We need to place emphasis on the construction of retail facilities in city centres or in post-industrial space, where an investment impulse is required. The development of e-commerce is unavoidable, but it is difficult to predict its forms and effects. E-commerce will not stop people from going to shopping centres. They will still go there for entertainment or food-related purposes, and they will still do their grocery shopping there. There is a constant increase of footfall and turnover in large and stable centres. They have very good prospects. And this is what stirs the imagination of investors. However, there is a shortage of good quality investment products for sale,” argues Piotr Kaszyński, who warns at the same time that there is the risk of an excessive increase in the expectations of sellers, particularly in the retail sector. Increasing the pace of investment growth could result in an overheating of the market, which is in nobody’s interest.

Central and Eastern Europe under scrutiny

It is not only Poland that is a beneficiary of the current investor interest in this part of the world. Other countries in the region have also registered impressive increases in volumes. In the Czech Republic, the total volume of investment in real estate in H1 increased by 36 pct y-o-y to EUR 673 mln. A total of 22 investment transactions were concluded over the period, compared to 15 in H1 2013. The largest transaction in the first half of the year was the purchase of City Tower in Prague by PPF Real Estate for EUR 130 mln. According to CBRE, the strong activity is the result of an increased allocation of funds in commercial real estate across Europe and the intensified activity of local capital. The driving forces behind the investment flows are lower costs and the greater availability of debt financing. “It is the increased liquidity combined with the fact that many investment funds have exceeded their maturity dates that are causing the growth in investment volumes. Higher prices normally constitute an incentive for sellers; however, the demand is clearly focused on the best products,” claim CBRE’s analysts. Hungary is also extricating itself from investment stagnation. According to Colliers International, the volume of investment in property in the country increased by 46 pct in H1 to EUR 283 mln. According to Colliers’ analysts, for the whole of 2014 the transaction volume in Hungary could exceed EUR 500 mln. This would be the best result in the last three years and would be due to an improvement in the country’s macroeconomic situation and low interest rates. “The return of investor interest in buying logistics parks, which have enjoyed the least interest since 2009, is a promising trend,” says Bence Vécsey, the head of the investment service department at Colliers International Hungary. The Romanian market has also accelerated in extraordinary fashion. “In H1 the turnover amounted to app. EUR 350 mln. This is more than for the whole of 2013 (EUR 300 mln) and indicates a major shift on the Romanian market,” says Robert Miklo, an associate director in the CEE investor service department at Colliers International Romania. “The trend is continuing into Q3, mainly thanks to the warehouse and retail segments, while subsequent transactions are now at the negotiation stage. Subject to how many are finalised before the end of the year, the total investment volume on the Romanian market could amount to EUR 0.8–1 bln. The average for the previous five years only amounted to app. EUR 250 mln,” emphasises Robert Miklo.

The East on the hot seat

The uncertainty generated by the conflict in Ukraine has seen droves of investors turning their backs on investing their funds in Eastern Europe. “Some investors used to actively invest beyond our Eastern border. The current events in Russia and Ukraine are making most of them stay within EU borders. Some are also considering reducing their exposure to such markets and divesting from them completely,” claims Piotr Kaszyński. Not a single major transaction has been recorded on Ukraine’s investment market this year, while very significant declines have also been registered in Russia. According to CBRE’s estimates, the influx of investment to Russia fell by app. 60 pct in H1, to EUR 1.15 bln, mainly due to its tensions with Ukraine and the extremely high transactional activity in Q1 2013,” the analysts explain.

Warehouse internationalism

Warehousing is the segment that has really kindled investors’ desire lately – and this has been going on for a good few quarters. The multi-million portfolio transactions that have taken place are usually trans-national or even trans-regional – as was the case with the acquisition of a warehouse portfolio in Germany, France and Poland by Segro European Logistics Partnership. In addition to this, 18 warehouses have been acquired by Blackstone for EUR 275 mln spread across an even larger area. These are located in eight European countries: Austria, France, Germany, Hungary, Holland, Norway, Spain and Great Britain. Where is all this warehouse investment activity stemming from? “Investor interest in warehouse assets is the result of the high availability of capital, the conviction that rent levels have decreased and are at an attractive level, while vacancy is under control. The belief that the demand for warehouse space can only grow due to the development of e-commerce is also helping convince investors quite a lot. As a result investors at the moment consider warehouse investment to be safe – and particularly when considering the fact of the accelerating economy together with the expected growth in demand from tenants, there is a good chance of increasing rent levels,” explains Tomasz Trzósło. Investment of this sort is now being eagerly financed by the banks. “As far as warehouse real estate in Poland is concerned, leased facilities near Warsaw, Silesia and in Central Poland are the most favoured by the banks when it comes to financing transactions,’ adds Hubert Manturzyk. Thanks to such advantageous conditions, the warehouse segment is clearly making a mark on the market. According to C&W’s calculations, industrial properties worth EUR 307.6 mln were sold in Poland in H1 2014 alone – a 77 pct increase on H1 2013. According to the agency’s analysts, activity in this real estate sector might, however, fall off at the end of the year and into 2015 due to the limited supply of assets.

Cautious forecasts

The market experts are convinced that the level of investment in the region should remain at an attractive level and at least match last year’s figures. However, there are a few, specific concerns. “The impact of the conflict on the investment market is a big question mark. So far we have not registered any significant negative effect further west, but it is hard to make predictions about how the situation will develop. If investors come to the conclusion that investing in Poland and Central and Eastern Europe has become less secure, this would be reflected in the state of the market. Nevertheless, I trust that this will not happen and Poland is not only now being regarded as part of the region, but also as an independent, reliable and secure market. Next year we will also have parliamentary elections and investors and will be following the new signals from the Polish political scene. In the long term – over the next five years – there is a chance for more local capital to be invested on the Polish market, even pension-related capital. I personally very much hope that this will happen. So far, it is mainly pensioners from other countries who have been investing on our market,” says Tomasz Trzósło. Most of the funds in the region are set to be invested in Poland, which should maintain its significant share of the office segment – and there is even a chance of this increasing. But this could be more difficult in other segments. “The total volume of investment transactions on the commercial real estate market at the end of 2014 will be close to last year’s result of around 3.5 bln. Taking into consideration the number of transactions in progress, we expect that a result higher than that of 2013 is possible. Despite the current significant interest from investors, it is also possible that a few transactions will be moved to the beginning of 2015,” claims Tomasz Trzósło. ν