Growth in the shadow of a new crisis

The stock exchanges are sky-diving; the bankruptcy of Greece is still possible. The global economy has still not managed to breathe freely after the crash of 2008 and many believe that we are about to be hit by another global recession. However, the investment market in Poland is picking up momentum

Despite the global economic downturn, we have some good news: the investment market in the CEE region (particularly in Poland and the Czech Republic) has so far been resilient despite the prospect of a new global crisis. "The possible bankruptcy of Greece has not upset the markets. After the collapse of Lehman Brothers in September 2008 everything froze. Now, however, the situation on the global markets is not triggering the same sort of panic among funds investing in properties. So far no transactions have been suspended and nothing suggests that this will change," argues Wojciech Pisz, head of the capital markets group at Cushman & Wakefield. He goes on to add that Poland is in a particularly good state. "Positive signals concerning the condition of the Polish economy are attracting investor attention. New players are entering the scene, and the volume of transactions could reach up to EUR 2-2.5 bln - or even more," explains Wojciech Pisz. According to Cushman & Wakefield's calculations, the value of transactions in H1 2011 reached as much as EUR 960 mln - 23 pct more than last year. More transactions could be finalised at any moment.
Interestingly, Wojciech Pisz is not alone in this view. A large number of developers and investors are also looking into the future with some optimism. Shopping centres are enjoying much of this interest. "The period of stagnation on the commercial property market is behind us. The Polish market is growing and is currently very interesting for funds and other investment entities. Their interest in purchasing shopping centres has been growing. The proof of this? This year we have concluded four transactions," reveals Jan Mroczka, president of the management board of Rank Progress. The group has finalised the sale of Galeria Twierdza in Zamość with a company connected to the Blackstone Real Estate fund. The mall, which was built in an investment of app. PLN 90 mln, was sold for EUR 44 mln net (app. PLN 180 mln). The same buyer also acquired Galeria Twierdza I and Park Handlowy Twierdza II (both in Kłodzko) for PLN 149 mln. The profit on the valuation came to PLN 48 mln. And this is not all: the sale of Galeria Tęcza in Kalisz is to be finalised by December 30th to a company connected with Blackstone Real Estate for EUR 39.8 mln. And Galeria Piastów in Legnica is to be sold to Spanish investor Bolsa Global Quimera for EUR 68.5 mln. The interest in Rank Progress's assets is part of a general trend on the market. It could be said that shopping centres have become the investment hit of the last few months. "There is particular interest in facilities providing stable revenue. Besides, there is no problem with the collectability of rents on the retail market," remarks Wojciech Pisz. According to the latest data prepared by Cushman & Wakefield, transactions for office properties constitute 55 pct of the EUR 960 mln invested so far. However, the retail market has more than tripled its rate of growth since H1 2010, with investors spending EUR 302 mln on Polish shopping centres. The Carpathian fund sold Warsaw's Promenada mall for EUR 171 mln to Atrium European Real Estate, as well as four smaller centres: Tulipan Łódź, Kometa Toruń, Centrum Handlowe Sosnowiec and Centrum Handlowe Osowa in Gdańsk for a combined EUR 74.7 mln to UK fund Pradera.

Office appreciation
There is no denying that funds are now keen to invest in office buildings. In Poland six transactions with a combined value of app. EUR 528 mln were concluded in H1 this year. And the biggest deal was? The acquisition of part of the Europolis' portfolio by Austrian financial group CA Immo. Cushman & Wakefield notes that the activity of German funds has been growing in Poland. In Warsaw Deka Immobilien has bought the North Gate office building for EUR 103 mln, Union Investment bought Zebra Tower for EUR 76 mln and IVG took over BTC Office Center and Al. Ujazdowskie 10 for a combined price of app. EUR 43 mln. Interestingly, the majority of the transactions were concluded in Q1. What will happen next? The forecasts are optimistic, but it is worth listening closely to the views of investors. "The Polish economy is developing well, but we expect the pace to slow down in the next few months due to its connection with the economies of other European countries. In the region we are only interested in Poland and the Czech Republic," declares Fabian Hellbusch of Union Investment.
"Apart from Germany, Poland continues to be the most interesting market for us. It looks good against the background of other countries and its economy is stable. We are of course monitoring the situation all the time. The threat of recession can be felt, but it concerns the global market and not only the countries which we are present in. We are not planning any sudden changes at this point. If we maintain the pace of the last two years next year, we will be satisfied," adds Assem El Alami, the head of international real estate finance at Berlin Hyp.
Safety first
What will the future of the investment market be? Finding the answer is rather like reading tea leaves. It is still not clear how the markets will react to the bankruptcy of Greece, which is becoming an increasingly probable scenario. The representatives of funds continue to emphasise that they will not stop investing - and this is what property owners are counting on. "The investment market is shallower than a few years ago. However, it continues to be active. I believe that good products will always find buyers. Properties are long-term investments, which is why the investment market does not react as nervously as, for example, the stock-exchanges or commodities markets. Undoubtedly any kind of turbulence on the capital markets affects property investment, which is reflected in a smaller number of active investors," comments Jacek Wachowicz, the director of leasing and sales at GTC. "When it comes to the revival of the commercial property sector in Poland and the growing interest of foreign investors, it is likely that the market will remain promising, despite the situation on the global markets. Our negotiations with the Blackstone Real Estate fund over long-term cooperation confirm this. They concern not only advanced projects but also those at an initial stage of construction," adds Jan Mroczka. However, it is worth noting that funds are approaching investment much more cautiously these days. "The fact that we are observing increasing interest in real estate does not mean that we are experiencing a boom. Investors are being very careful - but in a positive way. They are simply concentrating on the best properties and are screening each of them before making a purchase," explains Wojciech Pisz.

The barrier of reason
So far the increased interest in Polish properties is pushing up their values. According to Cushman & Wakefield's data, yields have been dropping. "At the same time it should be noted that differences are appearing for the first time with regard to their levels, depending on the quality of a property. This is precisely the effect of cautious and reasonable investment," explains Wojciech Pisz.
For the best office buildings in the centre of Warsaw, yields are at the level of 6.4 pct, whereas outside the city centre they amount to 6.75 pct. In regional cities they are nearer the 7 pct mark. Even more discrepancies are evident on the commercial market, where yields for the best projects come to app. 6.25 pct and for lower quality projects with a weaker tenant structure they can even exceed 10 pct. "What is stopping a blind rush to invest in all possible properties is the barrier of reason. And this is very good for the market because it is now in no danger of overheating," concludes Mr Pisz.

Radosław Górecki

In cooperation with Mladen Petrov and Zuzanna Wiak

Isabelle Clerc
Head of asset management real estate, AEW Europe
Cautious optimism
Our CEE portfolio, with properties in Poland, the Czech Republic, Hungary and Romania, constitutes close to 10 pct of the European portfolio that we currently manage. In the region we have around EUR 1.5 bln of assets, with Poland having a 50 pct share in our CEE portfolio. What can we see across the region? Hungary and Romania have been challenging markets for some time now, but it is fair to say that over the last six months the Romanian market has been steadily improving. In fact, it is in Hungary that we are having more difficulties securing office tenants. For us the Czech Republic is a very sane market - which could be also said of Poland, but the high level of debt is a macro-economic concern. We feel positive about ongoing reforms in Hungary, whereas the situation in Romania remains tricky, but we are also seeing positive changes there. This is particularly true of the Czech Republic, and also of Poland to a large extent, even if we are concerned that these countries are very dependent on the German economy, which shows signs of a slowidown in its growth cycle. For the next year we are globally optimistic, even if we remain cautious. That is why we are starting the extension of Wola Park shopping centre in Warsaw, our largest property in the region. We are adding 20,000 sqm of new retail space, half of which has already been leased, while simultaneously refurbishing the existing space. The new, larger scheme, the second biggest in Warsaw, should be operational by the end of 2013.