CEE REGION Not many US investors have been active in the CEE region since the collapse of Lehman Brothers, as they retreated to the safety of their core markets. But one US investment group making the headlines recently is Heitman. In December the company announced a joint venture with Hungarian developer TriGranit to own and operate four class 'A' office properties with a combined area of 70,000 sqm in Budapest. The buildings, which have been developed by TriGranit, are to be known as the Millennium Portfolio and are all located within the Millennium City Center project in the city's 9th district.
Heitman is to take a 74 pct stake in the joint venture valued at around HUF 45 bln. (A 50:50 joint venture between TriGranit and Heitman was announced early last year for the ownership of the 60,000 sqm gla Arena Centar mall in Zagreb). This was followed in early January by the announcement that Heitman had bought the 32,800 sqm Science Park and 23,000 sqm Alkotás Point office buildings in the same city from Aviva Investors. A loan of EUR 60 mln by pbb Deutsche Pfandbriefbank was provided for the deal. And at the beginning of January this year Heitman announced that it had bought Aupark Tower, a 34,500 sqm class 'A' office property in Bratislava, from HB Reavis Group.
Last year of the fund
All of these deals, as well as the acquisition of Office Building 2 (22,500 sqm) in Moscow from Metropolis last summer, have been transacted on behalf of the group's EUR 505 mln Heitman European Property Partners IV (HEPP IV) fund, which is now in its final year of deployment. According to Otis L. Spencer, Heitman's European managing director and co-head, the company is now in the process of closing a transaction for another office portfolio in Hungary (at the time of writing this, it was due to be signed on January 31st), as well as pursuing an office opportunity in Warsaw. "We are now at the stage where we have app. EUR 200 mln, or about 40 pct, of the original commitments to invest. We will be focusing on opportunities in Russia, Poland, the Czech Republic and maybe Slovakia. Depending on how volatile the market is, we expect to fully invest the EUR 505 mln this year, but could possibly extend the investment period if needed. However, our pipeline is currently robust enough, so we are confident of committing all the capital in 2012," explains Mr Spencer.
Changing emphasis
The fund is the largest of the four European funds launched by Heitman since 2000, when Heitman Central European Property Partners fund (HCEPP I) was launched with equity commitments of USD 135 mln, followed by the HCEPP II fund with equity commitments of EUR 175 mln in 2002. In 2005, Heitman European Property Partners III was launched with EUR 350 mln of equity to be invested in ten countries from the Baltics to the Balkans. Around 83 pct of this was invested in seven countries, before the news broke about the Lehman collapse and Heitman decided it would be prudent to rein in their investment programme. The latest fund, which launched at the end of 2008, added Russia, Ukraine and Croatia to the list of target markets.
Heitman has clearly been investing in the region with some confidence over the last year or so. However, the altered financial and economic environment has forced a change in its emphasis. "The question is," says Otis L. Spencer, "what is the optimal portfolio structure given the dynamics of the current market? We like the risk-return profile of retail in Poland and offices in Moscow. The investment premise we follow is to invest where there is growth and always to focus on achieving good entry pricing. But the challenge we now face is that with rising prices for retail projects we have to really pay attention to tenants' affordability ratios."
According to Otis L. Spencer, the latest fund is similar to its predecessors in that it is not a core or opportunistic, but a value-added fund; however, it is slightly different from the previous funds in that there is a much higher allocation for developments (50 pct). "For such purposes we are looking for joint ventures with established developers," he reveals. "One example of this is the residential project we are investing in with a developer in Kraków. Now we prefer to partner up with institutional developers."
Over here?
The increased activity of Blackstone and Heitman could be the start of a new wave of US investment in the region, but at the moment this is very few and far between. As Otis L. Spencer explains: "A lot of US investors don't fully appreciate the potential of these markets, which is why you don't see many of our US peers with a similar presence in the region. Our investors like it that we have 'boots on the ground' and are not viewed as just parachuting in on an ad hoc basis. We are seen here as established and a safe pair hands. But Poland is definitely on the radar screens of institutional investors, so the market will get a lot more competitive over the next year or so."
