The REIT way forward

Adam Zdrodowski, ‘Eurobuild CEE’: One of the strategic goals of EPP is to further extend its existing real estate portfolio. Can we expect any new purchases later this year?

Hadley Dean, CEO of EPP: For sure, absolutely. Life would be boring if we just stood still. We have just bought 70 pct stakes in a centrally located Warsaw property of 6.5 ha together with Echo Investment buying the remaining 30 pct of the shares. This was the deal closed with Griffin Real Estate as the seller. We are growing, primarily in retail – our aim is to become the dominant landlord in Poland. App. 70 pct of our portfolio is retail and we want to grow further in retail as well as in offices. Our message here is very consistent.

Is EPP, which is owned by Polish developer Echo Investment and South African real estate investment trust Redefine Properties, mostly going to buy projects developed by the former entity?

We have just bought four office buildings from Echo Investment, including those built into the original Redefine Properties–Echo Investment deal – we own a 25 pct stake in ten Echo Investment development sites. We are going to acquire another four of the ten properties, with the remaining two expected to be sold to the market – giving us 25 pct of the profit from the two transactions. But beyond that, we will also make deals with other developers and investors active in the Polish market.

You have pointed out that EPP’s portfolio currently mostly consists of retail assets. Are you going to diversify the portfolio a bit by acquiring more office buildings in the near future?

Our investors prefer retail – they say this is much more sustainable in the long term. I think that historically there have been more challenges in the office market. Of course, we will buy some office buildings too – nine of the ten development sites are office sites. It makes all the sense in the world to buy them if you’re buying them at a discount. We have offered our shareholders double-digit growth in terms of the dividend per share over the foreseeable future, and with the office projects in the Echo Investment pipeline we will be able to hit a double-digit return. Seven of the eight projects we are going to buy from Echo Investment are office projects and one is a retail project. The office projects are located in major cities across Poland and are all under construction, with four of them being completed now.

Are you not interested in buying the Q22 skyscraper in Warsaw?

Dominant shopping centres and office skyscrapers are not our main target since the yields that they offer are too low. We are interested in yields of more than 7 pct and are ready to take some development risk to achieve such yields. We are lucky to already have a great portfolio of retail assets; now we just need to cherry-pick strategically in the major cities where we are not yet present

Do you have a defined amount of money that you could spend on new purchases this year?

We have just raised EUR 100 mln, which we will spend on five acquisitions this year, including four of the already mentioned office projects in which we already have a 25 pct stake. These are located in Katowice, Gdańsk, Łódź and Kraków.

Are you optimistic about the already mentioned Warsaw project that you have recently acquired from Griffin? The shopping centre site is located
in the Wola district, relatively close to the huge Złote Tarasy mall…

This is a fantastic site, located in the fastest-growing part of the city, just next to the city centre. By the time the shopping centre is completed in 2021, 1 mln sqm of office space will have been developed around it. You also have a lot of residential projects there – Echo Investment is going to develop app. 2,000 apartments on the nearby Browary Warszawskie site. The whole area has not been served by any particular shopping centre. The existing housing estates in this part of Wola district have, in practice, been cut off from Złote Tarasy by al. Jana Pawła II. If you think about it, the street is such a huge barrier. All the way down from the roundabout near the Marriott hotel to Rondo ONZ there is no single point at which you can cross it. Retailers are already very enthusiastic about the planned project, which will also include entertainment facilities and a new public square.

How much money will you be able to spend on new acquisitions in the next few years?

It’s unlimited – everything will depend on the amount of money we’ll manage to raise. We need to be buying two to three projects a year, which means app. EUR 200 mln worth of assets in equity. In terms of portfolio value, we want to go from the current EUR 1.5 bln to EUR 3.5 bln within the next five years. We want to raise more money on the Johannesburg Stock Exchange, but once the REIT legislation is in place in Poland we would love to list in Warsaw as well. It would also be good if Poland’s official status was changed from a developing economy to a developed economy, which would automatically mean more capital inflows into the country.

Are you potentially interested in buying logistics and hotel properties?

I love logistics, but logistics is difficult and you just need to get it right. We would be interested in e-commerce logistics, in buildings with long-term lease agreements. However, at the moment we have so much on our plate that over the next six months we will certainly be focused on the pipeline that we have. Later on we could add some logistics assets to our portfolio.

What about the so-called alternative asset classes?

No – the student accommodation projects that Griffin Real Estate is doing, for instance, are a great business model, but this is not for us.

What is the current availability of prime assets in Poland at the moment?

It’s hard to find the right product, but it’s always hard to find the right product. You have to find the right asset and you have to move quickly. However, what we’re actually seeing now is that there are less buyers. There is always the chase for yields, but the new capital is not replacing the old capital as quickly as the old capital is leaving. Some of the German funds, for instance, are saying they have bought enough in Poland and are not planning new acquisitions here. There is a lot of uncertainty in the market and the banks have also become a bit more cautious.

How attractive, then, is the commercial property investment market in Poland now, compared to the rest of Central and Eastern Europe, as well as to Western Europe?

Poland is a Western European country, but priced like an Eastern European country. The investment market here is much larger than in some of the other countries in the region. The beauty of Poland is that in 2009–2010, after the outbreak of the global economic crisis when much of the activity in the European real estate markets simply died, it was London, it was Paris, it was Munich, it was Frankfurt, and then it was Warsaw that traded. So investors see Poland as a liquid market, in good and bad times.

Which project sizes are you focused on?

I think this needs to be around EUR 80 mln.

What is the average vacancy rate across your current portfolio?

This is very low, app. 2–3 pct in retail and around 8–9 pct in office – and it is shrinking.

Which locations in Poland are you mostly interested in?

We are interested in Warsaw – particularly in retail since we are not in the Warsaw retail market yet – and in all the major regional cities across the country. What has happened in Poland in recent years is that the middle class has spread to the regional cities and there are now more and more young people everywhere in the country who can spend a sizable portion of their monthly salaries on shopping. Additionally, the introduction of the 500 Plus programme is great news for retailers, as much of the money goes straight into retail. The scheme is giving a real boost to the sector. It is a great redistribution of wealth policy, even if financing the programme will be a challenge for the government.

A record-breaking deal

The acquisition of a 75 pct stake in Echo Polska Properties (EPP) by South African fund Redefine Properties in H1 2016 is the largest transaction ever to have been closed in the commercial real estate investment market in Poland. Valued at app. EUR 891 mln, the transaction dominated the investment figures for the country in the first half of this year, accounting for 44 pct of the total investment volume recorded for the period. The EPP portfolio comprises a combined 18 retail and office assets, whose total value is estimated at around EUR 1.18 bln.

Hadley Dean

Hadley Dean has more than twenty years of experience in the real estate market. Before joining EPP, he was the CEO of Compass Offices’ European, Middle Eastern and African operations. Before that, he was a managing partner at Colliers International, where he was responsible for the Eastern European region. He managed the Colliers business across a total of 16 offices in twelve countries and was also Colliers’ EMEA management board member. He holds a BSc degree from the University of Newcastle-upon-Tyne and a degree in property valuation and management from Sheffield Hallam University.