CEE REGION As European investors - spooked by the euro zone crisis and the gloomy economic prognosis - fall back on the security of prime assets, where does this leave the market for non-core product in the CEE region? As Tristam Larder, the director of Savills' cross border investment team, recently stated: "Opportunity funds can't base their business models off future yield compression - they need active asset management angles. Core funds, on the other hand, are looking for prime assets or good quality assets with long leases in ?B+' locations. There is a middle ground of secondary assets with no immediate asset management angle languishing between the two types of buyer."
On the Polish office market, core properties are still generally perceived to be those located in Warsaw's CBD, while those in the city's Mokotów business district are less core, and those in the centres of provincial cities tend to be regarded as secondary. For Polish retail, the word ?core' tends to be applied to major shopping centres in the five largest cities, but can also cover the dominant malls in smaller cities. How much in the way of secondary assets exists in the CEE region? According to Michał Ćwikliński, the head of investment at Savills in Poland: "In Warsaw's Mokotów district there is currently around EUR 750 mln of office properties for sale - a large volume considering that around EUR 1.5 bln of offices were transacted last year in Poland."
Lack of domestic investors
The supply of non-core to the investment market is clearly there, but the CEE region is currently facing a different kind of problem regarding the demand for these assets to, for example, Western Europe. And that is the lack of domestic buyers. As Patrick O'Gorman, the CEE capital markets director at CBRE, explains: "At the moment there are both core and opportunistic investors on the market, but there are very few investors going for the middle-risk properties. The product is there, but there is a lack of investors with a more ?core-plus' return target. Typically, in other more mature markets this core-plus gap is filled by domestic property companies and insurance companies - both of which are significantly absent in most CEE countries."
Another significant stumbling block in the way of investment in secondary assets is the level of pricing at the moment. The owners of such projects completed with finance obtained during the easy-credit years, who have experienced sharp falls in the values of their assets since the credit crunch, are still somewhat unwilling to sell below the construction costs - at least until the market recovers or they are forced into a distressed sale. Michał Ćwikliński of Savills agrees that "pricing is the other big issue. Some sellers are getting more realistic about pricing, but many need to be educated - they think they can get yields of 7-7.5 pct for non-core properties, but 8-8.5 pct is much more realistic. Non-core assets can be attractive if there is an upside - something for investors to play with. For instance, Atrium International in Warsaw [also recently sold], which is 16 years old, is in a great location. So an investor could just knock it down and build a new tower on the site. Others can be refurbished to look very modern." Patrick O'Gorman agrees that there has been some ?
movement in sellers' attitudes: "There needs to be either a new influx of core-plus investors, or vendors' pricing expectations need to fall to opportunistic levels. Vending side expectations are lowering so we should see more non-core and/or secondary assets sold on the market in the future."
These things take time
If owners of non-core assets are putting them up for sale because they think this is the right time to sell at the pricing they are looking for, then it seems they are sadly mistaken. Michał Ćwikliński makes the observation that valuations are often higher than the market price when someone is looking to sell an asset quickly. "To sell at valuation price needs an appropriate time for marketing. If you go straight to a buyer looking for a quick sale, they are likely to want a significant discount," he claims.
And it has to be remembered that the problem is not merely one of investors finding the current pricing of secondary or non-core assets unpalatable, but that finance will simply not be made available for such purchases, either by the shareholders of funds or from the banks. This, of course, is directly linked to the euro zone crisis and the need for the banking system to restructure, not to mention the very real prospect of recession. In the last quarter of 2011, record volumes for investment in CEE real estate were recorded, but this was in the main for core-ish product. Therefore, despite the obvious attractiveness of the region for investors, unless the sellers of secondary and non-core assets finally face reality, then their "for sale" signs are not going to be taken down any time soon.
