Griffin sharpens its claws

Ewa Andrzejewska, ‘Eurobuild Central & Eastern Europe’: The beginning of September was rather a hot period for Griffin. So the summer must have been very intensive...

Przemysław Krych, CEO, Griffin Real Estate: The most important thing was closing the deal with Redefine to buy Echo Polska Properties (EPP). We also kept meeting with investors and prepared the IPOs of EPP in Luxembourg and Johannesburg. The company offered app. 71.5 mln shares priced at EUR 1.45 per share to invited investors. The flotations have enabled EPP to raise EUR 100 mln. It is worth noting that the subscriptions carried out as part of the private offer ended in considerable over-subscription.

EA: So how would you gauge the mood of investors – particularly after the Brexit vote?

It’s worse than before, due to the growing feeling of insecurity across Europe. This is not only about Brexit, but also the concern over the elections in France. The mood is affected by politics – including our local politics, if we are talking about our turf.

EA: And how is our politics being interpreted by investors? Besides, even though you say that the mood is worse, yet you have still raised a lot of money...

If you have a good product, you can also cope in more difficult times. The enthusiasm that was evident last year has now subsided.

EA: When will it evaporate completely?

It will certainly not be evaporating completely, but it will shift into a more cautious approach to what is happening here. It will be more analytical and reflective rather than the so-called followers’ game we have been seeing so far. This is due to the fact that globally there is a surplus of cash relative to the possibilities of investing it in sensible assets, and there are still few markets where sensible growth is evident And Poland still is such a market; however, if the macro politics was better, in Europe and in our country, we would witness a greater influx of capital than will be the case in the months to come.

EA: Who else is Poland competing against? What other countries have steady growth?

There are fewer and fewer of these. The countries that make up BRICS have left the game, apart from India, which has been doing more or less okay. Turkey has also pulled out of the game at its own request. In Europe: Ireland and Spain, which were at the top only two years ago as they emerged from the crisis, are slowly starting to be considered over-valued. Therefore the position of Poland is quite good.

Tomasz Szpyt, ‘Eurobuild Central & Eastern Europe’: Is there anything still available in Poland... at reasonable prices?

We will still see a few transactions this year and yields are still better compared to Western Europe, even though, as I said, the atmosphere is not creating favourable conditions for this. Some investors are more cautious about investing and this is mostly down to the political insecurity because the economy is still being powered by two engines – and the third is seizing up. The other two, export and consumption, are still working well, but investment is weaker. So we will still experience turbulence for a while unless the third engine starts working properly.

EA: When will we see the turbulence?

I think this will not happen this year. If we look at our budget and its needs, I think that in H2 2017 we will know whether the government is passing the exam in the management of state finances.

EA: And as far as the real estate market itself is concerned...

The situation on the real estate market is a derivative of what is happening globally. Properties are still considered to be a relatively safe form of investing capital. If we compare them to other classes of assets we can see that: governments are paying nothing, some even demand you pay them for securing your money; corporations do not pay much; banks demand to be paid for deposits; equities are either prohibitively expensive and overheated or prone to fluctuations in terms of investors’ moods – plus there is a limited number of them; private equity, i.e. investing outside the stock exchange, constitutes a very small part of asset allocation. So properties are the only thing that is left. They still provide good returns. Whether this is around 3 pct like in the UK or 4 pct like in Germany or 6 pct in Poland is of no significance – the important thing is that it generates a profit. The 6 pct in Poland is still a good investment, even taking into consideration the risk. We shall see how long this perception is maintained. Because the situation somewhere else could improve instead of here – then things will get worse for us. Everything is relative. Our experience from South Africa also points to that. The export of capital is the result of the phenomenon of there being a relatively large amount of money compared to the size of the economy and the opportunities to buy assets. So they look for possibilities for investing capital. We have been seeing the so-called global hunt for yield, i.e. the search for rates of return anywhere possible. They choose safe havens like, until recently, the UK, but also Poland is benefiting from this.

EA: Are new friends from South Africa also on their way?

We like those we have very much and we are strengthening the Polish–South African friendship. Our base of friends in South Africa has grown since mid-September. We have gained app. twenty new investors, including, in principle, all the major financial institutions from this market as well as quite a large group of individual investors, including the so-called high net worths.

TS: How has the sale of Echo affected the interest of investors from South Africa in Poland? It is not only EPP that is interested in the investors over there...

Before the transaction with Echo, two other entities from South Africa had invested in our region: NEPI, which is regarded as a great success so far, and Rockcastle, which... has not enjoyed such a perception. “They sold a fantastic dream about Poland, but the workmanship is not such great,” – these are the opinions I hear from stock exchange investors and analysts. GTC introduced parallel share trading in Johannesburg, but it has not raised any money from this market. Perhaps they will keep trying...

TS: A few more properties could be added to Echo’s portfolio, including the retail project on ul. Towarowa in Warsaw. However, the idea of another huge shopping centre near the city centre has not been welcomed in the capital city...

Many people think that you can only build a shopping centre like Arkadia or Galeria Mokotów. Much of the concern expressed in the press results from a lack of knowledge about the plans we have for this place. We are certainly not interested, as I read in one of the comments, in building “a tin hut, like in the slums of Kuala Lumpur”. If a shopping centre is to be built there, it will integrate with the fabric of the city and will reflect it. The draft for the local zoning plan includes an obligation to reconstruct ul. Wronia, a city square and a public park – this will be the only park in Wola district close to the city centre. I think that we will be able to reveal more details of the design, which is being prepared by the Kuryłowicz & Associates studio, around November.

TS: And what is happening to the flagship project of the company on ul. Emilii Plater? There was supposed to have been a large pre-lease?

I hope to be able to report on that during the Expo fair in Munich or soon after... We are also preparing its architectural concept, which will be followed by applying for a building permit. The size of the building will depend on its function. So far I can only say that it will not be an office building.

EA: And will this project be carried out by Griffin?

Griffin was never meant to be a developer and it will not develop anything else. Griffin is an investment manager but it so happened that we bought a few development projects and started building them. We have not purchased Echo in order to continue in the development business. Any projects that are in Griffin’s portfolio should be developed by Echo, either as a joint venture or as an external developer while maintaining the market remuneration principles for such services. We have successfully completed one project, Supersam, and will soon complete another, Hala Koszyki, and that will be all. This is our contribution to the progress of the development sector in Poland. We will be focusing on what we know best: investment and investment fund management.

EA: And what will happen to these two projects?

Ehm... I think that we will surprise the market with some new ideas before the end of this year. However, we are not planning to sell them as individual properties.

TS: Could you be more specific?

The experience we have with EPP shows that the creation of real estate portfolios are a good direction to go in. If EPP had a portfolio with GAV of EUR 1.2 bln and it found investors, with the valuation providing a 45 pct premium to NAV, we think that creating another such platform is a good idea. This could also include Renoma. To sum up: we are talking about creating another REIT. We are considering at least three stock exchanges in terms of the raising of capital.

TS: Which ones?

I cannot reveal this – I don’t want to give our competition a clue.

TS: Is there a chance to close these deals in 2016?

I don’t think so, but more detailed information on this topic could be published this year, provided that there is further progress in the negotiations. If so, it is a proposal for investors in Q1 next year.

TS: How big will the portfolio be?

More or less half of EPP – app. EUR 600 mln.

TS: And investment in apartments for rent. You have raised EUR 100 mln for this programme. How many apartments will Griffin be able to buy with that and what kind of LTV are we looking at?

If we assume an equity share of around 50 pct, the purchase of 7,000–8,000 apartments seems very realistic.

TS: When should the first purchases be expected?

This year, I think. We have already signed letters of intent with a few developers and we are transforming them into contracts. We are looking to put together a varied range of apartments. We want our portfolio to comprise popular as well as more upscale apartments – including in city centres. Browary Warszawskie [Echo Investment’s project – editor’s note] is the best proof of this. Apart from Warsaw, we are interested in Poznań, Wrocław, Kraków and the TriCity – these are our core markets. Then there is Łódź – we believe that after the improvements being made in its transport infrastructure it will be an interesting place for shared service centres.

TS: And apart from housing?

There will also be offices and retail space as well as the apartments.

TS: Will Echo Investment be the developer?

We are talking about cooperating with Echo as the developer.

EA: Where does this aversion to the development business come from?

This is not an aversion. Griffin was simply established as an investment manager. It has been active on the market for ten years. In October we celebrate our tenth anniversary. Neither myself nor my team have any development experience. We have hired suitable people for that. I have never had the ambition to build another developer. So this is a conscious business choice. We know about investing money and evidently we have been quite successful at that, so let’s do what we are good at.

TS: Since 2010 Griffin has spent EUR 650 mln of equity on app. 30 projects. Can this pace be maintained or do you have to digest what you have swallowed first?

We have been changing together with the projects we carry out. Not only are we shifting the development activity, but we are also reorganising. Today I would say that Griffin is an entity that manages investment platforms. There are six of these: EPP – where we have management contracts with investors; we assume that we will have set up another commercial REIT on another market in order not to compete with EPP internally; the next is a student halls REIT, which is already the largest operator of private student accommodation in Poland – however, this is a market at the beginning of its development and we want to invest money in this and support it significantly; another REIT is an entity created for apartments for renting; we have the largest commercial developer in Poland, Echo Investment; and we also have the fifth largest residential developer in the country – I am thinking here of Echo Investment’s residential activities, because the commercial and residential operations of the company should not be treated equally; we also have a financial platform, which is the largest non-banking institution that grants not only mezzanine loans but also so-called senior stretch loans. So far we have involved ourselves in three retail projects: in Warsaw’s Młociny district, Tarnów and Legionowo. Our team is now working on subsequent projects, including offices and apartments.

This is the flock of children we are leading and now we want to focus on supporting these entities in terms of capital, organisation and management. However, each of them has its own management, strategy and they have to operate individually. Coming back to individual assets, Griffin is not likely to do that anymore.

EA: Does this mean that the residential operations will be finally separated from Echo Investment?

It is the management of the company that should discuss that. However, I think this does make sense; however, this might be just my personal opinion.

TS: Could you, personally, estimate the degree to which the acquisition of Echo Investment has already been completed?

It is at least half completed – from the point of view of the return on the capital. In the sense of value creation... it is certainly more. We have been working on this project for two years, since a year before we bought it. We entered it well prepared, knowing exactly what we wanted to do.

TS: Could you say what the next moves will be for the investment known as ‘Echo’?

Please give us a chance to surprise the market with something. I think that Echo will be broadly covered in the media over the next few years.

EA: It has been said for quite some time that you also once spoke of possible acquisitions of other residential developers. Will such acquisitions take place?

I have not ruled this out. So far our evaluations do not justify paying out so much for the developers available for such acquisitions.

TS: When will the right time come?

The market will slow down at some point and the valuations should then become more attractive. If you have the money on such a market, then it is worth buying – and this has actually been Griffin’s story since 2010: we had the money when few other companies did. And it was the key to our success. But our experience has taught us that sometimes it is worth waiting.

TS: Will the IPOs of the REITs you listed take place in Poland or abroad?

We do not know this yet. We are looking at this in terms of app. three years. Perhaps the legislation in Poland will be more user-friendly then and it will make sense to do this here. At the moment the Warsaw Stock Exchange has stiff competition from the stock exchange in Johannesburg for REIT product.

TS: Does Griffin already have enough funds for the investment it has planned or is it still planning to raise this?

We have enough capital for this and the next year for the implementation of everything we have planned.

TS: How much is that?

Hmm... app. EUR 250 mln. I think that this will be enough, particularly considering the fact that you also have to add in the leverage.

TS: And is the situation ideal for this? What do you think about the current state of the real estate market in Poland?

I said a few years ago that there would be winners and losers. And this has been the case. The days of universal contentment, when everyone was doing well, have come to an end...

EA: But they are not completely over...

They are not – but this is no longer a given as it was before.

EA: Have you not overpaid for Emilka? A few companies entered the tender, but only Griffin offered such a high price.

We did not buy Emilka but the entire Meble Emilia company, which had its stock of goods, employees, shops, liabilities – including liabilities resulting from some rather disadvantageous development contracts – and real estate, including properties burdened with restitution claims. We have carried out extensive restructuring work on all this. The result is that after a few years of hard graft, we have obtained a plot between the Intercontinental Hotel and Warsaw Financial Center at the cost of euro millions in single figures. There is still some ground to cover before we could call it a success – because we need to build and commercialise a project. But we are more than happy with the place we have and with our work.

TS: Why did others not do the same?

Perhaps they couldn’t?

TS: But they seem to be able to operate on the market...

Super! Perhaps their calculation sheets got jammed in this case...

But seriously – our combination of market competences in private equity and real estate was useful here. Few companies can do this. It was not a transaction like any other. It was a functioning company with a weak structure that was losing money from its core operations – and this needed to be stopped and transformed to operate a new business. However, trivialising the process by boiling it down to the issue of the price paid for one plot is a rather confused way of looking at it.

EA: We discussed earlier the possible acquisition of a residential developer. Is Griffin no longer interested in fishing for another commercial developer?

We take decisions in a dynamic manner and examine all the opportunities.

TS: But can the dynamic rate of acquisitions that Griffin is now used to be maintained?

In any organisation you reach a certain scale when you have to stop for a moment and consume what you have bitten off. You can bite too large a piece to be able to digest it. This is the situation we are in this year. We have made the conscious decision to reorganise. Griffin will be more focused on corporate investment or buying portfolios. We are currently working on a number of portfolios we are planning to buy. One of these transactions is very large – we have been working on it for nine months and we are more or less in the same price range with the seller. However, transactions such as Echo do not happen very often – once every few years – and you have to cover some ground to get them. Now we have a deal that will be visible not only on the Polish scale but also on the European scale. Provided we manage to close the deal, of course.

TS: Will this be a mixed portfolio?

I cannot say anything more about this. However, in terms of value it is somewhere north of half a billion euro.

EA: Your activities are not only strictly focused on the real estate sector. What will happen to Smyk?

My roots stem from the private equity business rather than real estate. We became involved with real estate twelve years ago with the purchase of a company called Neptun Film. It is called Capital Park these days. It was developed with our money and our help, and by introducing Patron Capital to the project. When we made a successful exit from this investment and sold it to Patron, my investors said: “Why not organise and establish a real estate fund on top of the private equity fund?” This is how Griffin was established in 2006 and the same investors who invested in Capital Park with me invested in this one. I have been active in the private equity sector all my professional life and have more than twenty corporate exits from transactions under my belt. Returning to your question, we are not only an investor in Smyk. We purchased Proservice – the largest transfer agent in Poland.

EA: But what will happen to Smyk next?

Smyk is a significant beneficiary of the current government’s 500+ programme. We are very grateful to the powers-that-be for that.

EA: But you are well known for criticising the current government...

Not always. I take my hat off to them wherever they do something good. As I have said, we are a beneficiary of the scheme and the Polish business of Smyk is doing very well. Future openings are planned in Poland and abroad. We want to expand this chain of shops in our region.

EA: Which countries will they be?

Those where Smyk is already present. There is no need to open them in other ones. We have enough to do in countries such as Poland, Romania and our southern neighbours. Apart from this region, Smyk will mostly be developing through the franchise contracts it has already been working on.

EA: How many new openings are planned? Not all the countries in the region have 500+...

We are planning to open 20–30 stores per year across the entire CEE region. We will also alter the range of goods in the shops, with more clothes compared to toys.

EA: Is the margin better from clothes?

It is certainly better. Lego sells with the same margin everywhere, but you definitely make more money from a collection of clothes.

EA: Will there be any acquisitions in the BPO sector?

Yes, there will be. We are currently working very intensely on two acquisitions – they are at the due diligence stage – while a third is under preparation. We are looking at companies from this sector, in Poland and abroad, that could provide us with competences in terms of banking and insurance. If a platform based on that is created, and this year has been devoted to doing this, we will come out and look for clients outside of Poland.

EA: Who will they be?

Fintech companies such as Proservice, which still have development possibilities in such fields as banking or insurance service. These are more developed for banks, but considerably less developed for insurance companies. There is a clear trend for outsourcing to Asia, but we are winning in terms of competence. We are admittedly more expensive, but we offer a better quality in Poland. We want to buy companies that are now in Luxembourg, Dublin or Zurich, keeping a front office there for the sale of services to local companies, while moving the entire processing to Poland and creating jobs here. We will not be focusing on simple processes, such as bookkeeping or payroll – this can be done anywhere. We are interested in the so-called ‘middle office’. If you apply for a loan at HSBC in London, there is a 90 pct chance that it will be analysed in Poland. In Polish banks – located in Poland and done by people in the headquarters, but outsourced from Western Europe. There are many banks and insurance companies that will never open their own competence centres, e.g. the various landesbanks, sparkasse or kantonalbanks, which could not afford this. However, if you go over to them and offer such a service... well, everyone is looking for savings nowadays, so it works for them.

EA:... and such offices will be opened in many cities?

No, we want to launch them in two centres.

EA: One is on ul. Puławska in Warsaw.

Yes, it is, but because it has grown dramatically it will soon move to another building.

EA: I understand that this building will also be in Griffin’s portfolio...

... or in Echo’s. These are of course first-choice locations, but they have to have competitive prices and quality compared to what the other players’ offer. Apart from Warsaw we might open in Łódź – due to the good transport links
between the cities.

Przemysław Krych

The CEO and founder of Griffin Real Estate, managing partner of Cornerstone Partners and member of the supervisory board of Echo Investment. He has long-term experience in management, investment and restructuring. He was responsible for some of the largest transactions on the commercial real estate market in the last few years, including the acquisition of Echo Investment. Before starting his own business, he was the managing director and partner of Templeton Direct Advisors as well as a manager of Emerging Europe Private Equity Funds. He previously held various senior positions in Bank Handlowy.
He is a graduate (summa cum laude) and subsequently a junior lecturer at the faculty of law of Adam Mickiewicz University in Poznań.