Regional magnets

The property investment market is thriving even though it never ceases to throw up surprises. Firstly, in 2014 the value of investment in warehouses exceeded the level on the retail market; this year more offices were sold in provincial cities in Poland than in Warsaw. This completely turns on its head the picture we have become accustomed to over the years

According to research by JLL, the value of investment transactions carried out on some of the largest office markets outside Warsaw amounted to EUR 234 mln in H1. “In H1 transactions worth EUR 385 mln were finalised on the Polish office market, EUR 234 mln of which were purchase and sales contracts outside Warsaw. This means that regional markets had a higher result compared to Warsaw and their share in the total volume of office transactions in Poland amounted to 59 pct. Kraków, which had the highest volume of transactions out of all the regional markets, was the investment star of the H1 outside Warsaw,” remarks Sławomir Jędrzejewski, the director of office and logistics capital markets department at JLL.

The H1 results reveal a very significant change in investors’ approach, considering the fact that Warsaw accounts for app. 60 pct of the entire office stock in Poland. The second part of the year is also likely to be favourable for regional cities, particularly after the exceptionally good summer volumes increasing the share of these cities even further. “The total value of investments concluded from January until the end of August on the Polish office market exceeded EUR 606 mln,” says Przemysław Felicki, the director of capital markets at CBRE. “Investors were particularly active in the regional cities and so far only 21 pct of the investment value has been attributable to Warsaw,” he adds.

Regions growing insignificance

This serious shift in investor interest in regional cities is no accident. It is partly down to the rather limited supply of asset available in Warsaw, but not only that. “Firstly, investors became interested in regional cities because of the development of business services and the scale it has reached. It is often the case that investors are surprised by the size of lease contracts we deal with in these cities. These are contracts for 10,000 sqm, 15,000 sqm or even more than 20,000 sqm. For example, HP will eventually lease an area of over 16,000 sqm in our Dominikański office building in Wrocław, Infosys has occupied an area of over 20,000 sqm in Łódź. These are very large transactions – even by Western standards,” explains Adrian Karczewicz, the transaction director at Skanska. “I would compare the structure of the Polish office market to the German one. Of course, it is not of the same scale, but even at first glance it can be seen that outside Warsaw the regional markets are thriving and there is no exclusive focus on the capital city. Thanks to the business services sector, which employs app. 150,000 in Poland, these cities have become efficient business centres with heavy demand for office space and, importantly, they have great potential for further development. ABSL forecasts at least a decade of stable growth, while McKinsey is even predicting a doubling in the employment in this sector by 2020,” adds Adrian Karczewicz. He points out one more factor: investors are comparing Warsaw to Kraków and Wrocław. In the two latter cities it is possible to buy buildings in the city centres or in the direct vicinity of the centre, where the rents will be comparable to peripheral locations in Warsaw. In this way they can obtain a very attractive product in an excellent location and with moderate rent levels that are less prone to the risk of declining compared to Warsaw, where rent rates have greater scope for changing. Prime properties in Kraków and Wrocław are now attractive enough to provide yields in the range of 6 pct, whereas in Warsaw’s Mokotów district they amount to 7.5 pct.

This view is shared by Maciej Brożek, the commercialisation director of Torus, which has recently sold the first stage of Alchemia in Gdańsk. In his opinion, what is happening right now on regional markets in Poland, including the TriCity, is the effect of long-term development. The first few signs of this could be observed 2–3 years ago when the first transactions for concerning office properties took place in some of the largest regional cities following the crisis of 2009. The frequency of these later fell away for some time, but the current market situation, which is seeing a revival on financial markets, reduced interest rates and a relatively small number of attractive investment properties in Warsaw, is encouraging institutional investors to divert their attention to the provinces,” believes Maciej Brożek.

Ameasure ofrisk

Polish regional cities have been waited to catch the eyes of investors many years. The main factor that had been putting them off from investing was the relatively low liquidity of these markets. This, however, has changed, but the measure of risk still depends on the particular city and location. “In Gdańsk and Poznań, the yields for the best facilities amount to app. 7 pct. In Łódź and Katowice you can get close to app. 7.5 pct. Funds buy properties with a later disposal in mind, so liquidity is the key aspect. In this respect, regional cities are becoming more and more attractive,” claims Adrian Karczewicz.

Adrian Karczewicz, Skanska

Thus investors’ interest in regional cities is fully justified but not uncritical. “They assess the building that is the subject of a potential transaction very thoroughly in the due diligence process. The audits take a long time and are extremely detailed, particularly in terms of the technical aspects of the project. It is not the case that investors are buying everything and at the prices the sellers come up with. When investing their capital on regional markets funds still need a clear difference in price compared to Warsaw, even though the best projects have already reach the same or even higher prices sometimes compared to properties located, for example, in Warsaw’s Mokotów district,” comments Maciej Brożek.

Investment Internationale

With investor increased interest having been eagerly awaited in regional cities for some time and expected to happen as these markets matured, the vanguard of entities interested in purchases might be slightly surprising. It turns out not to have been aggressive opportunistic funds that are clearing the way. “Invesco was the pioneer on regional markets when it bought the Euromarket office building in Kraków in 2002. It was followed by Polonia Property Fund (AIB, EBRD), with its purchases in Kraków and Poznań. These were the first few transactions on regional markets. But serious interest in regional cities started in 2008, when DEKA bought Bema Plaza in Wrocław and Andersia Tower in Poznań, while RREEF purchased Grunwaldzki Center in Wrocław. German funds have a more conservative investment policy and are trying to buy in city centres, whereas the more aggressive, American funds are looking for added value in locations further away from city centres. This is due to the fact that they are not able to offer the sort of prices – or rather, yields – as the German ones,” explains Skanska’s director. Last year was marked by a crop of transactions in provincial cities. Among the heavyweight players, local investors, who are becoming ever bolder in this environment, are trying to find some room for themselves and are even starting to play the leading role sometimes. “The investor market interested in office buildings in regional cities is currently dominated by REINO Partners – the fund bought one of the buildings in the Kapelanka 42 office complex in Kraków at the price of EUR 29 mln in 2014 and in 2015 it has already purchased two office buildings: Malta House in Poznań and the first stage of the Alchemia office project in Gdańsk,” believes Łukasz Maciak, the director of capital markets at Cushman & Wakefield.

The investment approach of local players is, however, specific and they are not adopting the policies followed by international entities. “They try to locate their strategy somewhere in between. For example, REINO bought the Kapelanka 42 B building from us –a project with excellent transport links, but it is not located in the inner centre of Kraków. The same is true of Malta House in Poznań. I think that they are trying to succeed on the basis of their better familiarity with local markets. You need to have a feel for the properties and it seems to me that Polish investors have a better sense of this market and are able to buy a project that admittedly is not located in the city centre but is still very attractive,” argues Adrian Karczewicz. The truth of this is confirmed by the investors themselves. “Due to its location, basic parameters and the developer’s reputation, Skanska’s office building in Poznań was an excellent target as the first investment of our new vehicles – and this is also confirmed by the involvement of the Bluehouse fund, without which the execution of the enterprise would not have been possible,” explains Radosław Świątkowski, the president of the board at REINO Partners. The company subsequently had to fight over the project in the TriCity with seasoned international players, (some of which even admit that they regret throwing in the towel), which, of course, pleased the seller of Alchemia.

“In the case of Alchemia, the entire sales process for the first stage took more than one and a half years, but only because we were initially unable to obtain a satisfactory price. Only a dozen or so months earlier it was mainly opportunistic funds that were interested in the TriCity market and they were focused on making a high and quick profit from reselling the properties. We chose a few entities to negotiate with. Eventually we finalised the sales contract for the first stage of Alchemia with a joint venture of Bluehouse Capital Advisor and REINO Dywidenda Plus, which is managed by REINO Partners. We have also recently signed a letter of intent for the sale of the second stage. There is also some preliminary interest in the third stage of Alchemia, the construction of which is just getting underway,” reveals Maciej Brożek of Torus. More exotic investors are also increasingly taking a bolder approach to the Polish market. The future direct involvement of investors from Asia, including China, is highly likely, as they are actively looking for investments.

Strong finish

The end of the year could be quite exciting for the regions and JLL is already predicting more purchases. “Taking into consideration transactions that are waiting to be finalised and assuming that the negotiations currently in progress finish before the end of the year, it can be concluded that the total value of purchase and sales transactions for office facilities outside Warsaw could amount to as much as EUR 750 mln – app. 70 pct more than last year,” believe the consultants.

However, the investment turnover from a year ago will probably not be reached in Poland in 2015. “A lot of transactions are in the process of negotiations and even at the due diligence stage, but I am afraid that it might be too much to ask to reach the EUR 3 mln for the entire market. In my opinion, the reason for this is that there is a temporary gap between the price expectations of owners and buyers. Yields are slipping further and further, so sellers’ appetites are growing. However, buyers are remaining cautious when it comes to spending money. Something could change in this respect next year and the demand would meet the supply again. Speaking of the sales volume, it is worth considering how the analysts will treat such transactions as the purchase of Echo Investment’s shares by Griffin (Oaktree),” wonders
Adrian Karczewicz.

A temporary hiatus in Poland is unlikely to affect the turnover levels in other countries in the region, and if anything, could possibly increase them. “Because Warsaw has become slightly risky according to some, since it is unclear what levels rents will drop to and vacancy will rise to, Prague is starting to look better and better in comparison. It is being perceived as an alternative to Warsaw, particularly this year. There have also been more enquiries about Budapest, particularly from Anglo-Saxon and Austrian funds, but also German ones. Local players are also active, with yields for the best office facilities around 7 pct. Next year we could witness the return of German funds to the capital of Hungary. Bucharest is a rising star because Austrian and German players are very active there. Yields in the best locations amount to app. 7.5 pct, which is a very attractive level for investors, particularly considering the fact that in Warsaw and Prague the rates have declined below 6 pct (5.75 pct),” argues Skanska’s director.

However, the conclusion should not be drawn that Warsaw has lost its appeal for investors. On the contrary, it remains the first choice market when it comes to Poland and the CEE region. “Warsaw continues to be the most attractive market for all kinds of funds and many of them are already present here. However, they are only focusing on the best new office buildings located in the city centre and fully leased. German funds are in a fierce battle over such assets,” insists Przemysław Felicki.

Vendor can only be pleased about such a turn of events. This does not mean that office buildings will be purchased at any price, but rather there will be no shortage of parties willing to negotiate. “Poland is one of the most developed and liquid markets in Central and Eastern Europe. The number of buyers and the variety of capital flowing into the country have been growing, which translates into increasing competition among investors and pressure on property prices,” says Piotr Mirowski, partner and director of the Polish investment services department at Colliers International.

Włodzimierz Stasiak

the member of the board responsible for financial issues, Polski Holding Nieruchomości

Acquisitions are significant part of our strategy

PHN is intensifying its activities aimed at the reorganisation of its property portfolio. We are investing in the profitable properties that are most sought after by office tenants. Over the last few months we have informed the market about two finalised acquisitions and the signing of two letters of intent for the purchase of more investment properties: a modern class ‘A” office building with an area of more than 25,000 sqm and a shopping centre with a leasable area of app. 5,000 sqm. Both properties have excellent locations in key Polish regional cities. Through its acquisitions PHN is planning to strengthen its position on the Warsaw office market as well as the best developing regional markets in Poland, where it has been previously absent. Investing in high class commercial facilities that generate stable revenue is a significant element of our strategy.