Small properties, big money

According to research by Cenatorium, the value of investment property transactions (of unit prices ranging from PLN 2 to 20 mln) amounted to app. PLN 20–22 bln (app. PLN 18 bln) in 2014. The final data for 2015 has not yet been published due to the scale and fragmentation of the market – app. 30,000 transactions take place on the market every year. “Based on the transactions that have been analysed, the turnover of residential and service properties increased by 4 percentage points – in terms of both number and property value in 2015, while the share of business units in the total turnover increased by 3.5 percentage points,” Cenatorium’s experts reveal. “As we expected the number of smaller office properties sold decreased by 2 percentage points last year. Investment in retail and service as well as residential and service properties were the most popular,” they add.

The main players on this market are local entities who are familiar with the local market and are able to accept a slightly higher risk on such an investment. Possibly they do not treat a property purchase strictly as an investment, but as a deposit or a purchase ‘for the children’. In medium-sized and large towns and cities the market is supported by larger companies and international players. These markets consist of small retail assets as well as individual office, retail, warehouse and hotel buildings.

Small retail facilities are particularly attractive for larger players. In March this year Czech company CPI reported its first purchase of a Polish retail park – a 2,200 sqm park in Tarnów. “This is the first in a series of planned purchases of Polish retail facilities. We believe that a portfolio of small retail properties in Poland will help us diversify the structure of such assets owned by our company. The Polish market is stable and the portfolio will be a good addition to our small properties in the Czech Republic and Slovakia,” said Zdeněk Havelka, the executive director of CPI Property Group after the purchase. There are also very large, well-known entities on the market, but they usually act as sellers. These include companies that own, mostly due to their history, very large, fragmented portfolios of small properties that are outside their core activities. What is a burden for some people could turn out to be an opportunity for others. However, as usual the devil is in the details, and the sale as well as the purchase of such properties is not always easy.

Marcin Miazek

deputy director of the occupier services department at Cushman & Wakefield

Tomasz Szpyt, ‘Eurobuild CEE’: What is the size of the market and who sells properties worth less than PLN 20 mln?

It is difficult to find a precise record of market transactions. We work for a specific group of clients, servicing large corporations, banks and companies from the telecommunication and power sectors. In the past these have mostly been state companies that inherited a lot of assets from the former political system, including properties that were no longer used for their core operations and were gradually put on the market. Such institutions have very varied portfolios – from a dozen to even a few hundred properties offering the full range of functions – from office to retail buildings, to warehouses and holiday facilities. However, this is certainly not a complete market cross section – the turnover in this segment also includes properties sold by state and local government institutions or individuals.

Who buys such properties?

Things differ widely in this respect. In large cities we have local players as well as companies with an international reach; however, in smaller towns the market is mostly limited to local players. Apart from local companies that specialise in property purchases, increasingly often we are coming across entrepreneurs whose core operations do not include real estate but they are depositing their surplus capital onto this market. In the case of international players, one obstacle in the way of purchasing properties from corporations is the lack of current revenue – they are most often slightly older, poorly rented buildings or simply vacant ones. Furthermore, tenders could also put off international players, since they vary from the transaction model investors are used to. They prefer to submit an offer and after its preliminary acceptance then to move onto the due diligence study. In tenders there is also some time to study a given property, but a potential investor has to submit a binding offer in due time. This could deter players who are not inclined to invest their money in something when they are not sure if they are going to buy it. In our practice we also come across sellers’ restrictive requirements in terms of the relinquishment of claims by buyers – which could be difficult to accept for international players. This option is open to local companies that have a greater propensity for taking risks, including entities that trade properties speculatively, participate in tenders and try to sell the properties onto others later. Entities that make purchases for their own needs are also a target group in terms of such properties.

Have you seen any revival on this market as far as the demand is concerned? Does trading smaller assets vary significantly from the sale of large office buildings and shopping centres?

There is some interest in these properties, but the market is governed by slightly different laws than for large transactions, which our capital markets department is in charge of. First of all, the number of players is much larger. This is not a narrow group of specialised entities. When selling smaller properties you need to take on board the need for wide-ranging marketing activities. Because of the wide variety of such assets in terms of their functionality or locations, it is difficult to predict who the final buyer will be when starting a transaction. This is due to a few factors. Firstly, tenders involve very broad exposure. Secondly, the product specificity makes it impossible to determine precisely who will ultimately be interested. As I mentioned earlier, these are mostly older buildings that are poorly leased or vacant. When buying such properties, investors have to take on a considerably higher risk related to their commercialisation, redevelopment or change of function. Acquiring financing for a property that does not generate any revenue is also a challenge.

How can you sell such a property?

It is undoubtedly a difficult market segment, which requires an individual approach and the constant monitoring of many different local markets. The most attractive properties are sold relatively quickly, but the remaining ones require patience and an individual approach to the sales process. An analysis of their potential is also important – you need to thoroughly analyse the conditions on a given local market and identify the strong points of the property – the assets of seemingly unattractive properties at first sight are often surprising. The availability of utilities of certain parameters or planning conditions could make a property seem more attractive to investors than it would at first glance. Investors are also tending to look not for a property but an idea for a business, which gives real estate advisers some room for manoeuvre when it comes to preparing the property for sale before it is put on the market. The commercialisation of the building before the sale or a sale-leaseback could be alternative strategies.

Do portfolio transactions take place on this market? Would a discount be expected in such a case?

So far we have been selling properties individually, but we are currently seeing some interest in portfolio transactions among investors, particularly international players, for whom the individual properties’ value is too low. However, there could be a problem as regards significant discounts – restrictions on the sellers’ part are often the result of high book values, while owners often cannot agree to sell at a loss. This could block the transaction in spite of the clear interest of the market.

What are the yields like for such an investment?

Such speculation is purely theoretical because, in cases where the property is empty, it does not generate any revenue. Furthermore, when buying such buildings investors do not always maintain their previous functions, e.g. when an office building is converted into a hotel or a residential building. Some properties are also purchased for their own needs. Many investors, particularly local ones, expect a rate of return of 10–12 pct, but each case should be considered individually taking into account the conditions on each local market – including the time needed for the commercialisation of the property and related costs.

What are forecasts for this real estate segment like?

The vacancy rate in older properties is and will continue to be higher compared to modern buildings, hence the need to enhance the quality of this space or change their functions. When buying smaller properties investors generally think long term. The properties are treated as a deposit of capital generated from other operations. This drives and should continue to drive the market. The development of small and medium-sized businesses should also drive the demand for smaller areas in older buildings, including small towns.