Speed is the key

Today the warehouse market is as hot as it’s ever been. As shopping centres and hotels continue to suffer under the impact of the Covid-19 restrictions, investors are instead looking to make returns from the booming warehouse market. In a competitive market, where everyone wants to build with scale, speed in decision-making has become the key to success. Neither investors nor developers can afford any delays, since bargains might pop up that they don’t want to miss.

These days what most characterises a typical warehouse transaction is the early involvement of investor capital. According to Artur Kulawski, the head of real estate and a managing partner at the Linklaters law firm in Warsaw, the logistics sector is currently dominated by development financing, otherwise known as forward funding. An investor will finance a developer so that a project is completed first before they then buy it and lease it out. In such a transaction, the developer will first find a suitable plot as part of the agreement, sign a pre-purchase agreement, and then apply for all the administrative decisions including the building permit for the warehouse project – and also find tenants to fill it and negotiate the leases for the buildings that have yet to be constructed. To make all these preparations and to sign the contracts, the developer uses an SPV company, and after the warehouse is built and occupied this company is then be sold to the investor together with the rights to the land and the lease contracts. The developer and the investor are also associated with each other through a development management agreement (DMA). Under such an agreement, the developer is – for an appropriate fee – responsible for the construction of the buildings and their management, whereas the investor is responsible for meeting all further construction costs as well as any costs previously agreed upon with the developer until the completion of the project. This process comes to an end when the centre is fully built and leased out and all the costs, including the developer’s fee, are settled. When a contract is laid out like this with the investor involved at an early stage of the development and sharing some of the risks of the construction and the lease, the return on investment is higher than for buying an existing building. Indeed, it can go up to several dozen per cent. This is because although the responsibility for the construction and the leasing out of the space rests on the developer, in the event of some unforeseen occurrence, which is something that can never be ruled out (the developer might go bankrupt, a tenant might pull out of a lease agreement when a project goes off schedule, or an occupancy permit might be withheld), the investor stands to lose some of the capital already invested. However, investors are becoming less risk-averse and this is forcing them to go off the beaten track, because logistics projects are costing more and more. “Yields for the best properties, leased to a well-respected tenant for a 15-to-25-year period, are now above 4.25 pct. For standard warehousing of an institutional quality with several tenants they come to 5.5 pct to 7 pct depending on such factors as the location, the quality of the tenants and the length of the leases,” reveals Piotr Mirowski, the director of investor consultancy at Colliers International. The ‘Low Four’, as the most expensive properties are termed in this sector, are Amazon’s distribution centres. These are large, imposing centres on long leases signed with a tenant that has an extremely strong brand. Yields are still dropping in Western Europe. In Germany, they are already talking about the ‘Low Three’, and as Paweł Partyka, a partner at Cushman & Wakefield, points out, the pressure on prices seen by Poland’s neighbour is also affecting the return rates on the market here.

Fuel on the fire

Not even the pandemic has been able to slow the rise in prices. Only for a brief moment did the coronavirus put the brake on transactions. “The negative effects of the coronavirus could only be seen in the second and third quarters of last year. At that time, Covid did slow down transactions. A couple of contracts fell through and in the case of two others the prices were revised, with the purchaser receiving a small discount for the uncertainty. But in the third quarter, it was back to what it had been previously and the fourth quarter saw a huge rise in activity, with rising prices and a greater investor appetite for the market,” explains Paweł Partyka. Total investment for the whole year came to a record EUR 2.6 bln and the market is continuing to accelerate. “Because sectors such as shopping centres, hotels and offices were hit a lot harder by Covid, today there is still a huge amount of capital that is looking to go into logistics,” adds Cushman & Wakefield’s partner.

A large number of portfolio deals have also been evident. Of the EUR 2.6 bln investment volume last year, portfolio deals, both big and small, accounted for up to two-thirds of the total. The larger the deal, the better – because everyone is looking for scale. “Today you will find a group of investors for any size of deal,” points out Paweł Partyka.

As a result, there’s nothing strange in the fact that every development is so sought after and thus the reaction time has taken on a major significance. For this reason, there are so many development funding contracts, where the investor comes into a project at a very early stage, but also the contracts signed between developers and investors are beginning to take on the form of long-term partnerships. “With today’s scale and speed of delivering a property, having a partner able to invest quickly in a given location is sometimes key to both winning tenants and securing the site. That’s why a strategic partner makes success easier to achieve. If you already have a strategic partner and your operational procedures have already been figured out, it is possible to react very quickly to the situation on the market,” insists Paweł Partyka.

One good example of this is South African investment fund Redefine, which together with asset manager and investor Griffin Real Estate formed a partnership with developer Panattoni. This cooperation resulted in the development of the European Logistics Investment (ELI) platform, which in 2020 was joined by a third investor – Madison International Realty. Panattoni has since acted as the developer for the platform, supplying it with warehouse facilities as well as acting as their property manager.

“Looking at it today, I can certainly say it was the right move. Since then it has become increasingly difficult to find suitable logistics and industrial assets to invest in. By partnering with a market-leading European logistics developer, we are not so dependent on the limited market supply and are benefiting further from the dynamic logistics and industrial market development. We continue to work on fulfilling our goal of building a portfolio with an asset value of over EUR 1 bln gross. Within the next 12–18 months, we should achieve the next milestone we are targeting, to grow our portfolio to over 1 mln sqm gla of completed projects,” declares Nebil Senman, the managing partner of Griffin Real Estate.

When comes to the stake that a developer holds in a typical investment platform (which might include a portfolio of several properties developed over a certain period of time) or a joint venture, normally this would be between 5 pct and 20 pct and more often than not it is the smaller quota. The investor is the majority shareholder in such a venture with the main role of supplying the capital. “A host of SPVs are being set up with such a structure and they are acquiring land and signing development management agreements or similar such contracts. Later the partners sell the final investor particular properties or all the assets as part of one large transaction. They might even place such a platform on the stock exchange. Offering a large number of shares in one sale has an additional benefit because such a platform takes on a strategic share of the market or markets, which can give it a greater value,” explains Artur Kulawski.

When we look at the broader European market, we can see that similar partnerships between developers and investors are an everyday occurrence. Allianz works with VGP, while Segro collaborates with PSP in continental Europe, and CBRE Global Investors has partnered with Montepino in Spain while in UK it has set up UK Logistics Venture with Prologis. There are many more such examples without even mentioning that sometimes large investment funds will buy up entire development firms not only for their real estate but also for their competencies. Singapore-based GLP in recent years has bought up Goodman’s CEE division, while GIC (also from Singapore) acquired P3 and China Investment Corporation purchased Logicor.

Is it therefore possible to talk of there being a trend for investors to team up with developers and will we be seeing more partnerships in the form of joint ventures? Harry Bannatyne, a partner and the head of the industrial agency at Colliers International, believes so: “This will allow developers to develop more sites, creating bigger platforms and BTS projects on the land they already own, by basically not tying up their own capital within the current project. Investors can also generate more returns by getting involved earlier in the development process,” he says.

What will the future bring?

Paweł Partyka of Cushman & Wakefield believes that the market will continue to boom and so prices are still bound to rise. “We are seeing no sign today that the yield compression is going to come to an end,” he says. The heightened competition over product means that investors will still want to secure it at an increasingly earlier stage. “Wherever possible, they’re going to want to go into forward financing. At the moment, the possibility of securing product is more important than the actual purchase of the property. The forward funding prices for appropriate product are not going to become detached from the prices for buying such product for cash. For the best developments this will, in effect, really be purchasing a property at a very early stage for the price of a completed warehouse building while at the same time financing the construction costs,” explains Paweł Partyka.

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A new trap for investors

Kobus de Lange

the CEO of Vistra Corporate Services

At the moment, share deal transactions are the most popular method of buying and selling property on the commercial market. Since the beginning of 2021, the situation for foreign investors holding shares in companies in Poland has become more complicated due to new legislation coming into force to tighten up the tax system. Among other measures, a definition for ‘real estate company’ has been introduced, imposing new tax payer obligations under certain circumstances on the company. The challenge this creates is that these new regulations reduce the liquidity of the market, as until now investors could with relative ease engage in new investments and withdraw from those that were less promising. But now, such investors are faced with newly introduced tax regulations that may directly affect them. The key issue is to identify those entities that by definition should be treated as ‘real estate companies’. Generally, these will be entities where at least 50 pct of the market value of the assets – or the rights to these assets – are located in Poland, provided that their value exceeds PLN 10 mln. The designation of an entity as a ‘real estate company’ imposes additional obligations on that entity. For example, a ‘real estate company’ without a registered office or management board in Poland should appoint a so-called ‘tax representative’, or risk a potential fine of up to PLN 1 mln. There are also other obligations, such as those concerning the reporting by ‘real estate companies’ of their shareholding structure. It seems to me that in no other country in the CEE region are there similar regulations related to ‘real estate companies’. Certainly, the ‘tax representative’ model or concept is nothing new, but so far it has been associated with VAT settlements rather than income tax. It’s worth noting that during the legislative work on ‘real estate companies’ it was discussed that similar regulations are in force in China, Canada and India, among others.