Thinking globally, but acting locally

Money has no homeland. Is that really so? When we take a good look at real estate investors, it turns out that the power of local players has been growing, and they have been driving away the German funds that had once settled on the CEE region

Ewa Andrzejewska

Properties in the land on the Vistula river are now being bought by Poles, while Czech properties are being snapped up by the inhabitants of the country famous for its beer and the beautiful old city of Prague. “In H1 this year, purchases on the real estate market had a value of app. EUR 1.5 bln, of which app. EUR 78 mln was spent by local investors. Among the biggest acquisitions were: the Millenium Hall shopping centre in Rzeszów, Galeria Jeziorak in Iława for 
EUR 16.5 mln, the Indomo interior furnishings centre in Lubin for EUR 12 mln and the Jantar mall in Kalisz for EUR 600,000,” lists Wojciech Pisz, the director of Cushman & Wakefield’s capital markets group. Last year this share was even greater – the value of local investment amounted to app. EUR 92 mln out of a total volume for all transactions of app. EUR 700 mln. “However, the real boom is taking place on the Czech market. It is estimated that 50 pct of the market currently belongs to local investors at this point,” adds Wojciech Pisz.

Homes make way for commerce

“The plastics processing industry has been developing dynamically, and new technological solutions are constantly being created. We are cooperating with a number of research institutions in this respect and are continuing to invest in our parent company – Marma Folie Polskie. We also manage a furniture manufacturing company. So why have we invested in real estate? We are open to different business options,” emphasises Marta Półtorak, co-owner of the Rzeszów-based company Marma Folie Polskie and head of Develop Investment. In February this year, she and her husband Mariusz offered PLN 233 mln in a debt collection auction and took over the unfinished project of the mixed-use Millenium Hall centre (a leasable retail and service area of 55,600 sqm with 7,750 sqm of hotel rooms and business areas). This is the biggest acquisition transaction in Poland by a local investor this year. The purchase is not the first venture into real estate by this adventurous duo from Rzeszów. “This was our debut in the commercial sector. We had already built the ‘Pod Gwiazdami’ residential estate in Józefosław, near Warsaw, some time earlier. Last year the new owners of the 105 apartments were able to start moving into them. We are also the owners of an office facility in Bielsko-Biała, which we are currently considering modernising,” explains Marta Półtorak, who sees Rzeszów through different eyes than the well-established market investors do, who tend to come from outside the area, e.g. from Warsaw. We see a town which is located in the borderlands of different cultures (Polish, Ukrainian and Slovakian) and creates excellent business opportunities. “In Rzeszów, an extraordinary city, there are app. 200,000 inhabitants plus around 
60,000 students – young people who have no place to buy fashionable clothes. Our city does not have a regional centre that combines retail with a cultural, entertainment and hotel section,” explains the head of Develop Investment. All this sounds great, but after all a developer builds a shopping centre in order to make money. Probably even if you are Grażyna Kulczyk – one of the richest Polish women who created the Stary Browar shopping centre in Poznań. According to Marta Półtorak: “Of course a commercial investment must be able to support itself. We took the decision that it is should be both beautiful and also generate a certain amount of revenue. The return on the investment? The initial estimates say eight years. But for now the centre is to stay in our portfolio. Will this remain the case after some time? I do not know. The market changes, so I cannot make 100 pct predictions about the future.” She promises that the champagne corks will be popping at the opening of the centre as soon as in October next year.

A step further

The growing affluence of Polish society has allowed each of us to think about investing in real estate. Perhaps not about buying an office building straight away, but, for example, a retail property for several hundred thousand złoty. According to the data of the National Bank of Poland, there are app. PLN 640 bln of deposits in Polish banks. If just 1 pct of this amount were invested in real estate, which would give PLN 6.4 bln or app. 
EUR 1.5 bln, then this would be twice as much as the volume of transactions on the investment market in 2009. This illustrates the situation rather neatly. Keeping our funds in a deposit account we are able to benefit from a yield of 5-6 pct annually; but in the case of real estate we are looking at more than 10 pct. Banks have started financing again, so the return on an investment might be even higher if we leverage our equity,” insists Wojciech Pisz. He reminds us that we are used to investing in apartments in order to make money out of renting them out, which nowadays, however, has become less and less profitable. “I suggest going a step further and investing in commercial property,” says the representative of Cushman & Wakefield.

This is the step which has been taken by another Polish entrepreneur, Jerzy Szymański. Some time ago he bought a few holiday apartments in Kristensen Group’s Baltic Park Promenada in Świnoujście and in Osada Zamkowa in Pasym (Masuria). He spends time there himself with his family and business partners, who, he assures us, are enchanted by the place. This gave him reason to believe that the business had future potential. When the Danish parent company of the Polish branch of the developer got into financial trouble and the official receiver started selling off the company’s assets in different countries, the entrepreneur from Wyszków got out his wallet, and thanks to him the only branch to survive was the Polish one, which still operates under the same business name and without any liabilities towards the creditors of the parent company. The takeover was announced in September. “The Polish branch has assets worth over PLN 70 mln. But the new owner took over the company for less than half of its value, finalising the transaction during the holiday period,” claims Jacek Twardowski, a management board member of Kristensen Group. How did the owner of Agro Handlowiec come up with the idea of investing in a development company? “I have been investing for a long time, starting with bonds, before eventually moving into real estate. The purchase of shares in Kristensen is now my second venture into this market. Over two years ago I invested, thanks to a recommendation from the Secus fund, which is a kind of pearl hunter, in Kraków-based family firm Sento, which develops residential projects. When the crisis hit, the company wasn’t able to handle a project located on a huge, perfectly located site near the Wawel citadel in the city. In this case, just as in the case of Kristensen, I became the majority shareholder,” explains Jerzy Szymański. In his opinion, the retail and service business he operates in, which generates an annual turnover of more than 
PLN 200 mln, keeps changing all the time and requires your finger to be always on the pulse and the ability to react immediately. “I look for solid enterprises. Besides, I believe that in the case of properties, if you find the right one then success is guaranteed,” says Jerzy Szymański. He has a lot of working meetings in front of him, in which he will get to know the company, its properties and management style. “I have given myself and the company at least two years to ramp up the business. So far I have faith in the people on the management board,” declares the new owner of Kristensen Group.

Bargaining chips of local players

Wojciech Pisz also mentions that companies from, e.g. the production or service sectors, currently have a surplus of capital, and he also speaks of the role of local funds that have paved the way, such as Arka BZ WBK, and about newly-established ones. “We are talking to the representatives of private banking departments because this is where a lot of the interest is coming from. Wealthy bank clients have themselves noticed that the conditions and returns on investment in companies, for example, listed on the Warsaw Stock Exchange, are still not great, and bonds give limited returns, so perhaps it is worth considering properties instead. We are observing the first attempts to acquire money from open pension funds. One example could be the newly-created MF Capital fund,” adds Wojciech Pisz. A few days before putting this issue into print there was a lot of talk about another national fund. The Warsaw-based company Pridehold, owned by PZU, became the new owner of the Athina Park office complex. Projekt Echo-93, a subsidiary of the Kielce-based developer Echo Investment, will receive EUR 32.13 mln net for selling the Warsaw property (PLN 126.3 mln). The new owner also purchased the perpetual usufruct right of a property located on ul. Wybrzeże Gdyńskie in Warsaw’s Żoliborz district, with an area of 11,870 sqm, including the ownership of office buildings with a total net area of app. 22,170 sqm. “Despite the holiday season, the sales process and negotiations with PZU AM lasted five months. The fact that both Echo and PZU are Polish companies was definitely an advantage. It gave us the possibility to hold the negotiations and prepare the due diligence in Polish, which considerably shortened the negotiation process,” emphasises Adrian Karczewicz, the business development director at Echo Investment. He still remembers negotiations with a Spanish partner, Azora International Group, which is to add to its portfolio the Kraków project Avatar – the head office of BNP Paribas Fortis Polska. In August the developer announced that it had concluded a preliminary sales agreement worth EUR 30.5 mln (app. PLN 121.66 mln). The transaction should be finalised by the end of October. In Adrian Karczewicz’s opinion, domestic investors have an advantage over foreign ones, who have to draw their knowledge from the reports of consulting companies. These are valuable but do not give a full picture of the market, which you can only get if you live on the spot, observe it for many years and know the specificity of a given town (Warsaw in this case) from your own experience. “You can look at our Athina office complex, which is located in Żoliborz district, and decide that if it is not the centre or a business district, such as Mokotów, it is not worth including in your portfolio. However, the project has practically no competition, and is fully-leased with a list of companies waiting for the chance to increase the amount of leased space or to lease an office there,” claims the Echo representative.

Biting off more than you can chew?

“The disadvantage, or rather the specificity of Polish players, is the size of the capital they have at their disposal. In the case of the Kraków Avatar project, we had a situation in which two Polish funds were considering a joint investment in our facility, because on their own they would not be able to close the transaction. Unfortunately, in such a situation the decision process is very complicated. Polish funds (Investment Fund Societies) are often unable to compete with foreign ones (open or closed funds) mainly due to insufficient capital. Open pension funds have statutory restrictions with regard to directly investing their funds in real estate. That is why the investment property market is dominated by foreign funds, mainly German ones,” argues Echo Investment’s development director.

Does the representative of PZU Group – the new owner of the Athina complex – have any complaints about this situation?” “Two years ago, PZU Group established a real estate investment fund. The capital raised from the issue of certificates amounted to PLN 300 mln. We concentrate on buying commercial properties for the fund: office buildings, retail and warehouse facilities. We do not exclude hotels as potential purchases and we have been quite active recently. Our aim is to build a property portfolio relatively quickly. But the details concerning the operations of the fund are covered by a confidentiality clause,” explains Włodzimierz Kocon, the director of the property sector office at PZU Asset Management, which manages the closed, private property sector fund. He remembers that about a year ago it was possible to see the first signs that we were emerging from the crisis, so he started looking around the market and expanding the portfolio of the fund. “What is the state of the market? From my point of view as a commercial property buyer, it is getting more and more difficult, i.e. the price expectations of vendors are getting higher, but the number of properties to buy is not growing. However, banks are offering better and better conditions for financing and the economic indexes are good, so perhaps this will translate into the expected revival of the real estate market,” says Włodzimierz Kocon.

Czech millionaires

The Czech market this year has actually been dominated by just one player – CPI. It is by no means a typical Czech fund, but a company which started out as a developer and now invests its profits in real estate. “The company belongs to a Czech entrepreneur and uses 80 pct of his capital. Its current strategy involves purchasing facilities whose prices are still attractive in the context of the expected yield compression. The strategy also includes taking over properties whose current financing is characterised by a higher LTV (loan to value) index,” explains Wojciech Pisz.

“So far this year we have invested around CZK 3 bln, i.e. around EUR 121 mln. Of this, we have invested about EUR 48.6 mln of our own equity, with the rest being comprised primarily of finance taken over as part of the purchased projects – in the ideal case with a loan concluded in the pre-crisis era. We are investing in almost all segments except for logistics. If someone would have asked me a year ago whether we wanted to buy prime buildings, I would have said no, because we would encounter too many foreign competitors. Now I say yes, because we are capable of competing with them,” says Zdeněk Havelka, CEO of CPI Group. Over 2010, CPI Group is looking to invest EUR 81–121.6 mln of private equity. “We have been active in the Czech and Slovak market since 1991 and this is our advantage. We benefit from a very good knowledge of the local environment. We still see potential on the domestic market,” Mr Havelka points out.

In Q1 2010, the company acquired in a EUR 25 mln transaction an office building in Prague-4 Modřany (15,000 sqm). This was followed by the acquisition of retail property from Betonstav with an area of 14,000 sqm, with which CPI Group expanded its current portfolio by several buildings housing the Interspar, OBI and Penny Market chains. The investment came to about EUR 23 mln. In May the firm acquired control of Litoměřice company MB Property, with which it received the ownership of a retail park in Mladá Boleslav (18,600 sqm) for EUR 25.6 mln. “Maybe the June acquisition of a residential portfolio of 2,700 apartments in Litvínov which, to a greater extent, formerly belonged to petrochemical concern Unipetrol RPA was a little atypical for the Czech Republic. CPI Group’s residential property was thus increased to virtually 13,000 units in an investment of EUR 33.4 mln. We can also now announce our recent acquisition of four buildings with Billa supermarkets from T Land – two in Prague and one each in Kolín and in Zlín. The value of the transaction is around EUR 11.6 mln. We implement most of the transactions as share deals, i.e. by purchasing the companies that own the properties,” adds Mr Havelka. ν Contribution by Mladen Petrov