Time to cross the Tatras

Currently you are developing your first two Polish office projects in Warsaw – in the Mokotów and Wola districts. Have you already secured financing for the projects?

Jozef Oravkin, partner at Penta: We are a very strong equity player and we are ready to develop both projects speculatively. We have committed to providing the full budget for the projects: about EUR 45 mln for the Mokotów project and about EUR 60 mln for the Wola project. The funds stem from our own resources. Obviously, if we get pre-leases signed, we will turn to financing from local banks since the cost of equity is higher than the interest rates on the market. If we don’t sign pre-leases before completing the buildings, we will finish them on time anyway.

Have there been many enquiries about the projects so far?

We are marketing our first project now. We have already seen some interest from potential tenants. We are not yet at the point when you can ask for bank financing (app. 30 pct gla pre-leased is required), but we are not far from this. Being a large financial conglomerate, there are also some cross-selling opportunities within our own portfolio, which is spread across such cities as Prague, Bratislava and Warsaw. We own a total of about 170,000 sqm of completed office projects in the CEE region, with 80,000 sqm of office projects under construction, as well as app. 130,000 sqm of office space in the pipeline. Although we estimate that Penta-owned companies are not going to take more than 10 pct of the portfolio, this is always a start. I can imagine that this will be one of our competitive advantages in Warsaw, too. The real estate market is really tough here. It is a large market: it is more or less the size of the Bratislava and Prague markets combined. And the competition here is probably even stronger than in those two cities.

What other tenants do you aim to attract to the Mokotów project? The BPO/SSC sector?

BPOs and SSCs are just one group of tenants, but we don’t really want to limit ourselves. Our building is flexible enough to be offered to all types of different tenants. We are now answering some RFPs [requests for proposals]. For sure we will be working hard on the leasing process.

Warsaw’s Mokotów district is a rather challenging office property zone. Why did you choose this location?

It is a very well-established office location with transport infrastructure that is improving all the time. The size of the market is well over 1 mln sqm and, yes, it is challenging. The vacancy here is higher than the average rate for Warsaw. But everything comes at a price. We looked at over 100 projects when searching for the location. We did our own valuations and talked to advisors – and this was the right combination of the price, size and location. We are prepared to be a patient long-term investor as we intend to keep what we have built. However, there could always be an offer we won’t be able resist. Nevertheless, we are prepared for the ups and downs of the leasing and investment cycle.

When beginning this investment two years ago, we estimated that the scale of rental income and all the incentives you have to give to tenants these days would be even less favourable for developers than today. The market is now simply better than we had expected: the leasing income is higher than we predicted – not only in terms of headline rents but also effective rents – and incentives are lower than we had thought. We took a very pessimistic and reasonable approach when doing our forecasts. So even if we had seen double-digit price drops in the future we would still be doing fine and getting what we expected from the investment. Maybe we did come here a bit late, but it is an excellent product in a good location. We have no doubts that we will benefit from it in the long-term. We have valuable experience, so I think it is going to be a great project.

Warsaw’s Wola district, on the other hand, is becoming a flourishing place for new developments of different kinds. Did you take that into consideration when designing your second office project?

We are just about to sign an agreement with the architect of the project. The project itself is at the master planning stage. A shopping centre is to be built nearby, so the whole concept needs to be thoroughly worked out. There is also an interesting project on the other side of ul. Prosta: Art Norblin, a revitalisation scheme. Our project will be a good compromise, since it will fit in with surrounding developments, but the design will be distinctive enough for people to spot our building. When selecting the architectural concept, we went from the very conservative to some very striking designs. We held a competition and talked to different people and sounded out different options. Ultimately we decided to take the middle-road. A highly original and bold design would be too much for that part of Warsaw.

Does having a big name architect matter to you?

We work with famous studios, who cost more but bring better quality to projects and long-term value for developers, tenants and the city. We have worked with Massimiliano Fuksas, who designed our Bory Mall in Bratislava. We are going to develop a few buildings designed by Zaha Hadid in downtown Bratislava soon.

Could you elaborate on that?

The office and residential project is designed to provide a total of over 100,000 sqm in a few stages. The concept has recently been approved in principle by the Bratislava authorities. We would like to start the project this autumn, subject to obtaining all the remaining permits, and finish it in autumn 2018. It will comprise three residential towers by Zaha Hadid with 800 flats. We would like to launch the sales process within the next couple of months, when the permit issuing process progresses further. Based on the pre-sales results, we will either build the two blocks first and later develop the third tower or all three structures at once. Two office buildings are also planned within the project: a tower and a mid-rise building. The latter will be built together with the residential towers, either two or three, as I said. The office tower was also designed by Zaha Hadid, and the mid-rise building’s concept is the work of former architects of the Zaha Hadid studio. This part of her team, which has worked with us on the project, have set up their own a studio and designed a building that matches the rest of the project. This is going to be our key project for this year in the region.

What about the revitalisation project for the historic Masaryk Station?

This is going to be our most important project in Prague and a regional flagship project in the years ahead of us. I think it will be three more years before we receive all the necessary permits for the project and will be able to start it. It is located in Prague 1, which is part of the historic centre of the city, and this makes things more complicated. We have had positive reactions from our main stakeholders, but getting all the approvals will definitely take some time.

Why did you select Warsaw for your Polish debut? Regional cities, with their lower prices and vacancy rates, are now on the rise in Poland. Was the capital city a safer choice?

Over the short-term perspective, Warsaw is actually risky, with a growing level of vacancy. But if you look at our decision over the longer term, with all the ups and downs that are definitely ahead of us, it was more reasonable for us to choose Warsaw, which is a much more professional market for services providers. It also possesses higher liquidity. If we, for some reason, decided to exit Poland, Warsaw would be the safest location. We are quite optimistic about the Polish economy in the long-term. But if a crisis occurred, the regional markets would be hit more severely. If we want to be present in Poland, we have to be present in Warsaw. Why would we make ourselves more exposed to such risks in Poznań or Kraków, if we are a long-term player? If a downturn comes, you are left with an asset that no one wants to buy. Therefore we do not intend to go to the regional cities. We have invested a couple of hundreds of millions of euros in our portfolio companies in this country. If any of them would like to take on a BTS outside Warsaw – yes, we will consider it. But for now we are not planning to build anything speculatively in regional cities.

How is your cooperation with the Polish authorities going?

One of the advantages of Warsaw is the transparency of the permit issuing process. The process is also faster here. This is a huge advantage over Prague, for example. There have been no unpleasant surprises on the Polish market so far. Warsaw is less bureaucratic and more developer-friendly compared to the other CEE capital cities we work in. However, there is some room for improvement in Warsaw, too.

And what are your expectations for the Warsaw office market in 2020?

We will be happy to see a steady occupancy in our Mokotów building at a level of 95 pct three years after the completion and beyond. But it is impossible to predict where the market will be in three years.

The Penta group has a wide scope of investment interest. How important is real estate to you?

The real estate business is our second biggest platform (after healthcare) in our portfolio. Currently it represents around 20 pct of the net asset value we manage.

How much is this share going to change in the future?

We would like to increase the real estate share in our business, but would not like this to exceed 30 pct. Whether we will get there or not will depend on the profitability of other investment platforms. We aim to maintain a certain balance to our entire portfolio. This is all about the relative share, because Penta’s entire portfolio is growing constantly, and so is our exposure to real estate investment.

What are your plans for the growth of your residential and retail portfolios?

The contribution to the bottom line of the group’s residential portfolio will probably grow. Last year we sold almost 500 housing units in the Czech Republic and Slovakia. Some are still being constructed and are going to be delivered this year. In 2016 we expect the number to be similar, if not higher. In the residential segment, you don’t buy to rent, you buy to sell; while in the office segment you keep your assets for longer. So if you take a look at the profitability and balance sheets, the residential sector probably will be stronger. When it comes to retail, we currently have one shopping centre in Bratislava, which is one of the most competitive retail markets in Europe. Everyone owns a shopping centre there. But we don’t plan to add anything new. Maybe in some smaller Slovak cities there is still some room for retail projects; but even so, these would be too small for our group. However, if there is an opportunity, we would be willing to develop a retail project in Prague. Currently we are looking at one such possibility.

What about Warsaw?

We are not looking to have any retail assets in Warsaw, because we don’t feel we have the right competitive advantage and understanding of the local dynamics in this segment. We currently have no intention of going into the residential market in Poland either. We might take a look at some residential projects at some point in the future. It is a different market, with different clients and requirements. In Poland we will be focusing on building our presence on the office market for the foreseeable future.

Is your Polish real estate team now going to be expanded?

We don’t have a large team at the moment, although we are gradually enlarging it. We are also able to receive support from our other offices, such as Prague or Bratislava. The Warsaw team’s growth will reflect the scale of the projects being developed here. Right now we have two projects underway and are looking at several acquisitions as well. Also, we would like to have a constant pipeline of projects at different development stages, so we will adjust the size of the team for the developments.

You also provide facility management services. Are you thinking of expanding these services in Poland?

In Bratislava and Prague, we have our own comprehensive property management teams. They employ a number of subcontractors, but the key decisions concerning the leasing, engineering, architecture and property management are made in-house. We have a company called AB Facility, which also provides property and facility management services. It operates on the Polish, Czech and Slovak markets. In Poland it is known as Clar System and is mainly involved in cleaning services, facility management as well as security, but we can see the company expanding further here as well.

Are you willing to invest in real estate projects in Western Europe at some point, such as one of your competitors, HB Reavis?

We own several companies in Germany, for example, in the automotive and pet food industries, and if attractive opportunities arise, we could invest in Western Europe in other sectors as well, mainly through our portfolio companies. However, we do not intend to invest in real estate there yet. We are looking for opportunities in healthcare, for instance, in several countries, including Italy, Germany and Netherlands. As far as HB Reavis is concerned, I do not want to comment on their strategy – they are a very reputable competitor but are a pure real estate company. They are strong in offices and retail, and they have probably grown to the point where in order to further expand they have to move to a bigger market, whereas for us real estate activities are part of a bigger portfolio. We will never become just a real estate company.

Do you think the Polish healthcare sector is an attractive property investment target?

The population ageing trend is evident in Poland, which raises questions over the state’s ability to efficiently manage hospitals due to the gradual increase in the costs of healthcare. Sooner or later the private sector will have to be allowed to provide healthcare services to a much larger extent. Poland could be one of the countries where the consolidation of private and public healthcare providers will open up promising opportunities for us.

Evergreen equity from the south

Founded in 1994 in Bratislava by a few college friends, the Penta Investments group is a shareholder of such companies as EM&F Group, Fortuna Entertainment Group, Dr. Max, Vltava-Labe-Press Group and Prima banka Slovensko. In 2014, Penta’s total asset portfolio was valued at EUR 6.7 bln, while the company generated EUR 70 mln in net profit. Penta, which operates mainly in the Czech Republic, Slovakia, Poland and Germany, invests in the healthcare (40 pct), retail, manufacturing (14 pct), financial services (12 pct) and real estate (22 pct) sectors through an ‘evergreen’ fund, controlled by Penta’s partners, who are at the same time the group’s only shareholders. Penta entered the real estate market in 2005, first in Slovakia, expanding later (in 2010) to the Czech Republic and four years later to Poland. The company’s real estate portfolio currently comprises twenty projects at different development stages. These include eleven projects in Slovakia, seven in the Czech Republic and two in Poland. In Poland Penta is currently developing a 25,000 sqm and a 28,900 sqm office building in Warsaw’s Mokotów and Wola districts respectively. As of the end of September 2015, the group as a whole had developed a total of 246,600 sqm gla, 70 pct of which was office space.

Jozef Oravkin is a founding partner of Penta. He is mostly responsible for the development of the group’s real estate business.