A family affair

It has been a couple of intense months for both the banking and real estate industry in Austria and Central and Eastern Europe in general. Austrian banks and real estate developers, both known as firm believers in the potential of the region and for being big investors have had to start dealing with the consequences of their expansion policies. In 2009, Hypo Group Alpe Adria bank, Austria’s sixth-biggest lender, was nationalised. The bank’s rising loan losses in Eastern Europe had been threatening to bring it down. The bank, which was particularly exposed in Croatia, Bulgaria and Ukraine, closed last year with an annual loss of EUR 1.6 bln.

Pricey optimism

The nationalisation of the bank did not bring any relief to the market, as other banks also announced losses related to their Eastern European exposure. Overall, banks in Austria have lent a total of EUR 186 bln to borrowers in emerging Europe. And that is not all. In its baseline scenario, the central bank estimates that Austrian banks are faced with another EUR 10 bln in write-downs over the next two years. What does this mean for CEE real estate markets?

“In a less optimistic scenario the troubled Austrian banks could start working on diminishing their exposure to real estate by decreasing their loan-to-value ratios. They might require from owners an increase in their equity stake in projects co-financed by them. In more prosperous times the banks would finance a project even in excess of 80 pct of the purchase price; whereas now, in order to maintain a healthy balance book, their participation in the financing of a project has been reduced to around 65 pct. Those property owners who fail to secure the capital needed for such a move might end up being forced to sell some of their assets. Nevertheless, I don’t expect such a situation to arise. Austrian banks have been having a few setbacks for quite a few months now and yet they haven’t adopted any such strategy,” says Jarosław Wnuk, head of investment at King Sturge in Poland.

In 2009, Österreichische Volksbanken, the fourth largest bank in Austria, posted a loss of EUR 1.1 bln, prompting questions about its levels of capitalisation. In January, the troubled bank, after receiving EUR 1 bln in state aid in 2009, announced that it had hired financial advisor Lazard & Co to evaluate possible strategic partners. Obviously, the time had come to trim the fat. A proposal to sell off Europolis, the real estate arm of the bank established in 1990, was now brought to the table. With a portfolio book value of EUR 1.5 bln across the CEE region, the company was not considered a core business for the bank. According to various market reports published earlier this year, the bank was in negotiations with four potential buyers, including CA Immobilien Anlangen, Perella, New York-based investment manager Weinberg Partners, and another New York firm, AREA Property Partners, formerly known as Apollo Real Estate Advisors. In the end it was CA Immo – in which Bank Austria has a 10 pct stake – that finally struck a deal. Following the announcement, one of the business dailies commented: “The Austrians are buying each another in order to survive.”

Firm with a mission

Europolis owns offices and shopping and logistics centres in the Czech Republic, Hungary, Poland, Romania, Slovakia, Croatia, Russia and Ukraine. Most of the company’s assets have been developed in partnerships with the European Bank for Reconstruction and Development, Union Investment Real Estate and AXA Real Estate Investment Management. For the 100 pct shareholding in Europolis, CA Immo paid EUR 272 mln. “The times are hard, but we are optimistic, which allows us to go shopping. One of the reasons why Europolis is a perfect fit for us is the fact that its portfolio consists of strong, income-producing properties,” reveals Bruno Ettenauer, CA Immo’s CEO. “But yes, I have to admit, this deal is a major step for us as there is a lot of debt involved. Nevertheless, we are looking to restructure Europolis’ debt and are talking to the banks. Over the next five years there are no mature payments due. Additionally, over the coming 18-24 months, CA Immo is seeking to release capital by way of further divestment in Germany and Eastern and South East Europe in order to reduce the debt balance and thus raise the equity ratio.”

Europolis reported a loss of EUR 177 mln for the year – mainly due to property write-downs. “The EUR 272 mln price tag seems to reflect the current market value of the company. The difference between the sale price and the value of Europolis’ portfolio (EUR 1.5 bln) indicates that the company has arranged a typical bank financing deal for most if not all of the assets. Additionally, they have a number of joint venture partners, such as AXA REIM, the owner of 49 pct of the Polish portfolio, which further decreased Europolis’ commitment to the individual portfolios,” believes Jarosław Wnuk.

The purchase price is subject to the usual final adjustments that are likely to follow from the annual accounts up to December 31st 2010, as well as the financing package. One half of the purchase price is to be paid upon the closing of the transaction, which is scheduled for January 2011. The other half is to be deferred over a period of five years from the closing date. “This acquisition fits our long-term strategy and the times are good for such purchases. This is why we are putting our equity into this transaction. We’ve been looking for such an acquisition for the last 3-4 years – and this was the right one, so we are not looking for more firms to acquire,” Bruno Ettenauer adds.

Things are changing

The deal will increase the property assets of the CA Immo Group to about EUR 5 bln. At the same time the relative significance of the Eastern and South East Europe segment to the company’s overall portfolio will be doubled to slightly more than 40 pct, putting it on a par with its German assets. In Romania, for example, CA Immo is now the second largest player on the Bucharest office market with a portfolio of properties consisting of 100,000 sqm of space – and second only to Immoeast, another Austrian player.

The proportion of property assets under development will fall from around 30 pct to 20 pct, with the change being accompanied by a rise in the share of income-producing properties. “We are not aiming to be the number one player in the region. The key issue for us is to have our costs under control and a good product to offer. Germany remains our key market when it comes to the development of new projects, but we are comfortable with the entire portfolio. Therefore, we are not planning to issue new equity bonds,” Mr Ettenauer reveals. The annualised rental income of Europolis is currently in the region of EUR 100 mln. Next year, the figure is expected to grow by around 5-10 pct.

Given that the transaction is scheduled to be closed in January 2011, CA Immo has time to answer all the usual organisational questions, such as whether a legal or a functional merger is to take place. “There has been no decision yet on whether this will be a legal or a functional merger. Basically, there should be one comprehensive group structure in the end operating in the most efficient manner possible. However, we are more inclined to the ‘one organisation – two functions’ solution,” admits the company’s CEO. ν

Looking outwards once more

Manfred Wiltschnigg

member of the executive board,

Immofinanz

One of the region’s major real estate players that has been in the news recently is Immofinanz Group. At the end of April, the merger was finalised between the Austrian real estate investor and its CEE subsidiary Immoeast. Manfred Wiltschnigg, a member of the company’s board responsible for the CEE region, spoke to us about the merger and the direction that Immofinanz Group is now planning to take

Nathan North, ‘Eurobuild CEE’: Was the decision to merge Immofinanz with Immoeast forced on you by the credit crunch?

Manfred Wiltschnigg, Immofinanz: The merger was part of our restructuring programme. One listed company being the major investment of another listed company can always arouse suspicions about conflicts of interest and corporate governance issues. Also, two stock-market listed companies with nearly the same focus was illogical and cost-intensive. And the financial community did not appreciate this structure anymore.

So what tangible effects will the merger have?

The merger will lead to a significant improvement in the financial situation. The structure of the company will be much more simple and clearly arranged. The same scope of activities remain and therefore there will be no downsizing. We still want to grow and hiring people will be essential. The merger has not forced us to sell off any projects. The cash flow of our business is generated from asset management, trade and development.

But you do now seem to be more active when it comes to acquisitions and development.

Our 18-months of restructuring work has been completed. Now we are fully concentrating on our core business: investing, developing, selling, doing asset management, securing leasing contracts. Secondly, we intend to optimise the structures of the group and the disposal of all assets which are not core to the business – such as fund investments and minority stakes.

Do you feel that the credit crunch has now ended and that the good times are just around the corner?

The crisis has not ended yet, though we are more used to it now and have developed strategies to cope with it. Credit markets have relaxed, especially when it comes to financing income-producing real estate properties. Good opportunities have arisen out of the crisis. Some of our competitors left the scene, and their remaining projects on the market can be acquired easily.

How active would you say you are at the moment?

In the CEE region we currently have a land bank of varying stages of development and quality. Some of the plots have permits, some still have old buildings on them. This represents a huge potential for future projects. At the moment we are very active – over the next 18 months we are planning to open 12 new Stop.Shop retail parks in Hungary, the Czech Republic and Slovakia. In Katowice we are investing EUR 50 mln in extending the retail area of Silesia City Center, the largest shopping complex in Upper Silesia, by 20,000 sqm. And in Romania we have just bought the remaining shares in Polus Center Constanta, making us the exclusive owners. We will continue to invest in high-class standing investments…

Would you say that what landlords are now faced with is a tenant’s market? Are you having any problems with more – shall we say – assertive tenants in your properties?

In Poland, as well as in other countries, we benefit from qualified asset management. In this country we enjoy a low vacancy rate and we are continuing to renew contracts. The market has changed slightly – it is easier for tenants to get high-quality space on favourable terms. In Hungary and Romania especially the need for professional and efficient asset management structures is even more vibrant, and we are glad to have these structures.

Which countries in the region offer the best possibilities for an investor and developer such as Immofinanz?

We are mainly focusing on Poland, the Czech Republic, Slovakia, Hungary, Romania and Russia. Russia for us means Moscow. We have four shopping centres in Moscow, which are enjoying high footfall and have done exceptionally well despite the crisis. However, Russia is a difficult market to work in – it’s necessary to have local people and a local structure to get anything off the ground. But once a project is up and running, it follows the normal rules. Operating in Russia is always more challenging and the process needs more work when it comes to asset management, the legal framework, public relations, etc. You have to be aware of this, and if you have the right structure on the ground there, then you can tap into a great potential. Moscow has a population of 16 mln – so this is a market that cannot be ignored.

And how about the other countries in the region? Are you not interested in any of these?

We are also active in what we regard as secondary markets, e.g. Croatia, Bulgaria and Slovenia. However, our CEE core countries are Poland, the Czech Republic, Slovakia, Hungary, Romania and Russia.