Getting down to business

MIPIM 2011: On the one hand there was the beautiful French Riviera, the never-ending flow of fine wines in chic cafés and all those banquets aboard luxury yachts. On the other, there were the crowds of people, the stuffy rooms of the Festival Palace, the thousands  of stalls and hundreds of meetings. In other words, this year's fair was more constructive than in recent years

Radosław Górecki

Around the table:
Jason Sharman
partner, managing director at King Sturge in Poland

Rory Mepham
director in the investment consultancy at King Sturge

Michał Skotnicki
president of the management board of BBI Development NFI, a development company which operates on the office, residential and retail markets

Grzegorz Strutyński
regional director of Skanska Property Poland, a development company which currently specialises in the construction of eco-buildings

Maciej Tuszyński
executive director, head of real estate finance Poland at Westdeutsche ImmobilienBank representative office in Warsaw. The bank specialises in financing commercial properties

MIPIM is something of a bubbling melting pot for the European property market. It is one of the most important events in the real estate industry because in Cannes the the most influential market players get to meet up. Informal meetings lead to new ideas and new contacts, which can turn into actual deals in the future. A week after the fair, ?Eurobuild CEE' invited a few of the main players to share their impressions of this year's event.

Still as important
The French fair has its own unique character. During the investment boom, nearly the whole of Cannes would turn into one big party, where the creme de la creme of the property market could let their hair down. Our assembled experts are the first to admit that the fair itself was once just an excuse for having a good time. Not many people attending were actually thinking about doing any serious business. Another point they all agree on is that the quality of the fair was diminished by the sheer number of visitors. But when the credit crunch came along it put an abrupt end to the carnival-like atmosphere. Since then things have been very difficult for MIPIM's organisers, as the number of exhibitors and visitors fell away drastically. In 2008 the fair was visited by a record number of people: 29,000. In 2009 the attendance shrank to 18,000. This year the organisers registered 18,600 delegates. But does the Cannes fair have any great significance? It does. And paradoxically the shrinking number of visitors might actually add to the prestige of the event. "I think that MIPIM continues to be important. It is good to meet in a place where everyone is present. However, it is important not to waste time. Frankly, it is not worth spending time with friends in Cannes. You need to meet and get to know professionals from other regions, cities and companies," asserted Jason Sharman, partner and managing director of King Sturge. Is it reasonable to expect to sign any contracts at MIPIM? The market players admit that this is not really possible. However, a lot of discussions that lead to finalised contracts start at MIPIM. "Let's not delude ourselves: sitting with a glass of fine wine in a restaurant is much better than sitting in a conference hall somewhere in London or Warsaw," believes Jason Sharman. Grzegorz Strutyński, regional director of Skanska Property Poland nods in agreement. "We have never concluded any contracts at MIPIM. However, in this place we have in the past started many discussions that turned into concrete contracts later," he added.

The heartbeat of the property market
Our interlocutors agree that the pulse of the property market can be taken at MIPIM. The mood of the participants reveals a great deal about the state of the sector. What was it like this year? "At the fair it became evident that investment funds are focusing on the German market, with the  CEE region coming second. Institutional investors are looking for better buildings in Poland, particularly in Warsaw. But they were also clearly interested in Wrocław and Kraków. Other cities in Poland are being looked at right now, but haven't generated a lot of enthusiasm among investors," claimed Grzegorz Strutyński. "There has been a lot of investor focus on the French and German markets. Poland has also been of interest to international investors. Funds are aware that they should still apply a risk premium here, but the foundations of the economy are solid. A number of the investors active here are also looking at the Czech Republic. Other CEE countries are perceived as higher risk and therefore the investors looking at these countries tend to demand a higher return - this is true for Romania or Bulgaria, for example," added  Jason Sharman. Our experts do feel that our part of  Europe is arousing investor interest. "There is clearly higher interest in these markets in 2011 as investors with capital seek to deploy it before the end of their fund investment periods. A number of active funds continue to have opportunistic return criteria and are seeking to make returns over a short period of time, taking advantage of short term pricing opportunities," commented Rory Mepham, director in the investment consultancy at King Sturge. In his opinion, funds are determined to act more aggressively. "The regions regarded as stable, such as Poland, continue to be of great interest to German funds as the growth potential of these markets continues to attract investors. They are mainly looking for top quality new buildings. The expected yield on investment in the case of the best office buildings in Warsaw is likely to continue to hover at around 6-7 pct for the best buildings. Interestingly, we are still seeing a gap between the expectations of sellers and buyers. I think that a lot of owners still have unrealistic expectations," feels Jason Sharman.
"I agree, but I believe that some of the funds that expect to receive yields on investment in the best buildings in Poland of up to 8 pct, also have unrealistic expectations. However, it was possible to sense a return to normality at MIPIM. Besides, we shouldn't forget that the supply of new buildings in Warsaw has been considerably limited recently due to the more difficult access to financing," remarked Grzegorz Strutyński.

A self-regulating system
Many developers are still complaining about the attitude of the banks. "Indeed, it is commonly believed that the banks are responsible for the lack of new projects, as they are still unwilling to grant construction loans. There is some truth in this and it is a problem which is occurring on a global scale. However, I would like to point out that offering such opinions without providing the context is to be unfair on the banks. Until recently, the lack of new projects under development could be attributed just as much to there being very limited tenant interest and therefore few pre-leases.  In the light of this lack of demand, expecting banks to finance speculative projects is unrealistic," emphasised Maciej Tuszyński, executive  director and head of real estate finance for Poland at  Westdeutsche ImmobilienBank's Warsaw representative office. "We shouldn't be blaming the banks for blocking projects," concurred Jason Sharman. In his opinion it is necessary to look at all the factors that have a bearing on the success of a project. Access to capital and loans is important, but one should not forget that developers should have preliminary agreements in place before starting any new projects. Keeping a lid on the expenses connected with construction is also a crucial factor in the success of a project. "This is a self-regulating system. It is big problem, particularly in the case of shopping centres, when one falls into this kind of vicious circle: the bank requires a preliminary agreement from the developer, but tenants do not want to sign any agreements unless the developer confirms that it has all the financing secured," explained Jason Sharman. "However," argued Maciej Tuszyński, "it is worth noting that the banks active on the Polish market are becoming more and more flexible. It is no longer unusual to see banks competing to finance good projects." But at the same time, as he went on to add: "Let us not forget to apply some common sense, however. It is unrealistic to expect that every development project in Warsaw or Prague, irrespective of its quality, will be provided with financing," he stressed.
Some developers have now decided to start projects without preliminary agreements or having secured the financing. This is what BBI Development did when it started the construction of a shopping and office complex on pl. Unii Lubelskiej in Warsaw with Liebrecht & Wood. Incidentally, the conclusion of the cooperation agreement between the two companies was announced at MIPIM fair - but in 2010, after the construction work had already begun. "We are satisfied with the negotiations with potential tenants of the retail section. It is harder to fill up the office section, but we are in a number of advanced negotiations," revealed Michał Skotnicki, president of the management board of BBI Development NFI. "Interestingly, only a few months ago the banks were being very cautious with regard to such big projects. We had to negotiate with consortiums. But now, when the construction work has already started, our negotiating position is much stronger. The banks have also changed their approach and are now actually interested in financing such projects themselves," insisted Michał Skotnicki.

A bright future
When the time came to sum everything up, the group agreed that the MIPIM 2011 fair had shown that the property market is coming back to life. Although the opinion was sometimes heard in Cannes itself that over-optimistic forecasts should be taken with a pinch of salt, our invited experts cannot see any reasons to worry - quite the contrary, in fact: "At MIPIM you could really feel what is happening on the market - and the Polish market is doing very well at the moment," concluded Maciej Tuszyński. Developers are happy about the growing interest of funds and in some cases are willing to start speculative projects. And what about MIPIM itself? The number of visitors has shown that it is still far from recovering its former glory. Is this a bad thing? Not necessarily. "Compared to previous years, this was a more promising event. Despite fewer people visiting Cannes, nearly everybody was interested in doing business. There was less fun but more constructive conversations. This is why I think that we can expect many more interesting transactions and projects launched this year," summed up Jason Sharman.