Back on our feet?

The doctors remain hopeful. A series of operations is having the desired result, and the patient, which has now has been taken off the drip, is becoming ever more active and his appetite is improving. The threat of complications is fading. But The insatiable appetite which put him in hospital in the first place will probably not return – At least as long as he remembers the consequences of his former gluttony

Emil Górecki, Mladen Petrov

This summer Jones Lang LaSalle predicted that the global volume of investment transactions for the year would grow by 40-50 pct compared to 2009. In its summary of the first half of the year, the consultancy revealed that on the commercial property market investors spent USD 132 bln – USD 56 bln more than in H1 2009 – and a growth of over 45 pct. Arthur de Haast, the head of international investment at Jones Lang LaSalle, believes that the growth might not be as high in H2 2010 because of certain economic factors and due diligence processes, which are now taking longer. Despite this, the results for the whole year will be in the region of USD 275-300 bln, much more than in 2009.

Classic recovery

“The first forecasts for the performance of the investment market in 2010 were published at the very end of last year. And so far they have turned out to be accurate. The expected revival has taken place, although it mainly concerned the countries of the so-called old Europe. Transactions have also been concluded in Poland. A real revival can be expected here next year, although the end of 2010 might surprise us in a positive way. What I am pleased about is the fact that Poland has become an alternative for Western Europe with regard to investment and is the leading country in the region for attracting funds,” claims Maciej Kiełbicki, the vice-president and managing director of developer Mayland Real Estate, which was involved in one of the biggest transactions so far this year on the Polish market. In January, MGPA Europe Fund III bought two of the shopping centres built by this French company, Karolinka in Opole and Pogoria in Dąbrowa Górnicza, for the price of EUR 187 mln. The vice-president of Mayland RE claims that this was a excellent transaction, even though it was closed at a time when neither investors nor developers had been very willing to meet each other in terms of financial expectations. “A developer nowadays needs funds for projects more than before. I believe it is better to carry out five projects with a slightly lower margin than to wait for a great opportunity and not carry out anything in this period,” argues Maciej Kiełbicki.

Laurent Luccioni, the managing director 
and fund manager for the European funds of 
MGPA, was also satisfied with the transaction. In the last four years the company has spent over 
EUR 600 mln in Poland and is still observing the region from its Warsaw office. “CEE countries, in particular Poland, the Czech Republic and Slovakia, are very attractive for investors – and not only when it comes to their capital cities. Our purchases in Opole and Dąbrowa Górnicza confirm the fact that they can also be very attractive,” claims Laurent Luccioni. He goes on to add that the forecasts for 
2011 are still very uncertain because the region will still have to contend with the lingering consequences of the credit crunch, and so the investment market will probably behave in a more cautious manner than it had previously. Poland will remain the leader in these conditions. MGPA is in the process of preparing another property fund, this time not opportunistic but of a more conservative character. This year could be the last chance for investors to do some good shopping. But good does not mean exceptional. “The managers of opportunistic funds who expected that they would be able to take over projects and companies at super-low prices have miscalculated. There have not been such opportunities in Poland and there probably will not be any more,” says Maciej Kiełbicki.

The big three

As for larger investors, Poland and the Czech Republic are still the number one choice when it comes to purchasing new properties. According to data from CB Richard Ellis, commercial real estate investment turnover in the CEE region reached EUR 1.7 bln in H1 2010. This figure represents a 190 pct increase on the H1 2009 figures. On a quarterly basis, investment activity in the region rose to EUR 970 mln in Q2 2010 – a 34 pct increase on the Q1 volumes. Despite the current turbulence in the German open-ended funds sector, German investors accounted for 17 pct of CEE investment in the first half of the year. The purchase of the Grunwaldzki Center (27,650 sqm), developed by Skanska Property Poland in Wrocław, for app. EUR 77 mln by RREEF was in fact the first office acquisition by a GOEF in a regional CEE city this year, and a transaction that sent optimistic ripples through the market.

To add to this, two office buildings developed by Globe Trade Centre – Nefryt and Topaz – were sold to become part of RREEF Investment’s portfolio. These Warsaw buildings, with a combined area of 27,000 sqm, changed hands for an estimated EUR 79 mln and a yield of around 7.2 pct. “This transaction has been the first sale of buildings by GTC since September 2007,” claims Eli Alroy, president of the supervisory board at GTC. “A continuation of this positive trend on the real estate market might encourage us to a further freeing up of capital through property sales in the future. In past years, GTC had been used to selling one or two facilities per year,” he recalls.

Geographically, CEE H1 2010 investment activity was primarily concentrated in Poland, the Czech Republic and Russia. In Q2 of the year the core Central European markets accounted for 60 pct of the total CEE investment. Poland alone accounted for 47 pct of all the CEE investment deals in 
Q2 2010, with levels not seen since mid-2006. Surprisingly, this investment activity was mainly outside the prime segment. “Most prime yield compression reflects a change in sentiment and has not yet been backed by transaction evidence. Despite the current shift in prime yields, there is still a difference in the trend for pricing between prime and secondary properties,” CB Richard Ellis writes in its H1 CEE investment activity report.

They want more

“Hopefully, by the end of this year we will be able to close one or two more deals in Poland,” believes Daniel Harris, director of investment at real estate investment management firm AEW Europe. At the end of May, European Property Investors Special Opportunities (EPISO), a fund co-advised by AEW Europe and the Tristan Capital Partners investment management boutique, completed the purchase from Panattoni Europe and Standard Life Investments of five warehouses in Poland for app. EUR 91 mln. AEW Europe is now looking for more warehouse buildings to acquire in Poland, but is also interested in prime shopping centres in cities with over 100,000 inhabitants. “In Hungary the lack of liquidity is still present, whereas in Poland and the Czech Republic we are seeing very high levels of visibility, which makes these markets easier to transact on, as opposed to Romania or Bulgaria for example,” adds Daniel Harris. According to him Romania currently offers interesting pricing opportunities, but exiting an investment still carries higher risks. “Why do the big players look so favourably upon Poland? The country is now comparable to developed markets in terms of understanding pricing. In our opinion the properties in the country are priced at the right levels.” The EPISO fund has already spent around EUR 400 mln. Over the next 18-24 months, AEW Europe is looking to invest an additional 
EUR 800 mln through this pan-European fund.

Russia was the second largest market in terms of activity, accounting for 25 pct of investment transactions in Q2 2010. The majority of other South-Eastern European and Eastern European markets remain illiquid according to market analyses. The Bulgarian investment market saw only one major open market transaction at the end of August this year. Bluehouse Capital of Greece acquired four properties for EUR 27 mln from special purpose companies belonging to the Bulgarian-American Enterprise Fund. In 2009 the fund acquired the Auto Union Center office building for EUR 27.3 mln, also the largest investment deal on the market at that time.

They search in the outskirts

Perhaps even more than in Poland, it is definitely worth buying in the east. The directors of East Capital funds are so convinced about this that in September they announced they would soon launch a new fund entitled Special Opportunities Fund II. It will be focused on purchases of real estate companies that have good development prospects, but that due to market problems can be taken over at prices much lower than their real value. The fund will also be able to make higher risk investments if the potential returns are also higher. The interesting sectors here are retail and offices, and mainly in the big cities – although the directors of East Capital have also got their eyes on other cities, particularly in Ukraine. Money is still being raised, with the maximum size of the fund being EUR 100 mln, which has to be spent within the last quarter of 2010. The targets are Russia, Ukraine and the Baltic states. “Countries in Central Europe have quite strong positions. That is why we are looking at the more eastward ones, those which have been very severely affected and in which the value of real estate has drastically fallen. The markets are still not stable there, lacking liquidity, and this enables us to invest in conditions similar to those just after the 2008 crash,” explains 
Biljana Bozic, the head of the real estate department at East Capital. She also reveals that apart from raising the funds for the Special Opportunities Fund II, the company has just put into operation a fully leased warehouse in Odessa and is at the preliminary stages of two other projects.

Transposition of risk

At the very end of the real estate boom, the banks were providing finance for as much as 95 pct of the costs of an investment project. Now the LTV (loan to value) rate has settled at a lower level, but one, as Maciej Kiełbicki admits, that is still attractive. The transaction risk is spread out more equally to all its participants.

Also the approach of tenants has altered. Nowadays they are being more selective and spend more time analysing the offered projects. In spite of this, tenants are continuing to develop their retail chains and, more importantly, new players are appearing on the market. “This simply means that good projects will always hold their own and will eventually be completed. We are returning to the fundamentals of this business,” says Maciej Kiełbicki.

Will we return to the ‘wild and unstable’ market on which we had to operate only three years ago? According to Biljana Bozic of East Capital, the answer is both yes and no. “The players on this market have learnt a lot from the credit crunch, particularly those from emerging economies. They cannot afford to repeat the mistakes they made in 2007. But we will reach the record turnover of that time in the medium-term perspective,” she predicts. Laurent Luccioni of MGPA is not so optimistic. “The market has a short memory, and it is not impossible that we will return to the madness of 2007,” warns Mr Luccioni.

A glimmer of optimism

The improving mood of investors can also been seen in the Baltic countries, one of the biggest victims of the crisis in the CEE region. Estonia, the only country in the region that is expected to have a positive GDP growth this year, is clearly driving the positive change. According to an economic forecast by the European Bank for Reconstruction and Development, the recessions in neighbouring Latvia and Lithuania are only just beginning to bottom out. In Estonia the amount of foreign investors considering purchases in the country has been increasing over recent months – especially those that are Scandinavian-based. “Although just half a year ago nobody would consider buying properties for yields below 10 pct, a few recent office transactions followed with yields of close to 8 pct, and a couple more transactions in office and retail segments are currently being negotiated at a similar level,” reveals Neringa Rastenytė, head of investment and research for the Baltic region at Re&Solution. “The situation now prevailing on the market can be explained very simply: the major macro indicators have stopped falling, registered unemployment seems to be declining, exports are demonstrating solid growth, and the euro currency is almost here,” adds Neringa Rastenytė.

Vicus Capital Advisors, the Helsinki-based investment company, riding on a wave of optimism has just established a new fund, which is to invest 
EUR 60 mln in retail properties in the Baltic states. The fund will be focused on developing retail properties for top-tier tenants in the market. In September the company opened a shopping centre in the city of Narva, anchored by a Prisma hypermarket. Is Estonia the safest bet for the company? “All three countries are at different stages of recovery: Estonia is moving towards the euro and is the first one to recover. Latvia is facing the most serious problems and a deep depression, but at the same time is enjoying improving exports and has also been exemplary over its public expenditure and following IFC rules. Lithuania, on the other hand, was the last to fall into recession and so it is difficult to forecast whether it will also be the last one to emerge from it. We believe that the recovery is already on the way,” says Risto Hiekka, Vicus’ managing director. “The lowest property prices have been already been seen, at least in Estonia, and good, income-producing properties are not really up for sale. Most of the properties available for purchase suffer from a lack of tenants, among other problems. In Riga there are still lots of unsold properties up for sale, but yet, in our view, Latvia and Lithuania still carry significantly higher risk,” adds Risto Hiekka.