Who will buy this wonderful office?

Anything can be bought… apparently. It is just a matter of price. You can also become the  owner of the  office you work in. But developers may wonder if there is anybody interested in such a transaction

Ewa Andrzejewska, Mladen Petrov

“Purchases of offices for own use constitute app. 30 pct of transactions concluded in the office sector in the countries of the Western Europe,” estimates Joanna Kowalska-Szymczak, director of investment, land and development at DTZ. The company has been commissioned by  Concept Development BSD to  coordinate the sale of office space in the Concept Tower project in Warsaw. At the  end of last year, details about the  launch of the  project were circulating around the  office market, which had been in a state of torpor for much of 2009. Tenants were looking out for opportunities to  change their locations; developers were preparing newer and newer (and cheaper) offers and management boards were blocking their decisions anyway. A  46  pct slump in demand in 2009 (compared to 2008) alarmed the  developers, hence their interest in a re latively new concept which was to  liven up our office market.

Borderline business

Construction work on the  Concept Tower office building should soon start on ul. Grzybowska in Warsaw’s Wola district, after the  demolition of the  old Metronex building on the site was completed at the end of January. The investor has a building permit for the construction of the office building. “We just have finished the tender for the general contractor and are now negotiating the contract details,” reveals Karolina Wierzchowska, head of sales and marketing at Concept Development BSD. There will be app. 9,000 sqm of offices for sale located on 15 above-ground floors and 101 cars will be able to park on 3 underground floors. “Discussions over the sale of office space take longer than those for signing leases, because of the involvement of at least one other entity, namely, the bank financing the purchase. We have already signed preliminary agreements with several buyers for smaller spaces, but for larger areas this needs a little more negotiation,” claims Ms Wierzchowska.

Joanna Kowalska-Szymczak adds that the sale of offices as an alternative to traditional leasing is an innovation on the Polish market, which DTZ has, however, not been afraid to get involved in itself. “The sale of offices is a business activity requiring input from two departments: the  office department, where I used to work, and investment, which I manage now. We carried out a marketing campaign in autumn last year to gauge the interest in such an offer. The replies were mostly positive back then. Sometimes we were given the reply “we are not interested”, which was followed by the explanation that the company had already bought an apartment earlier and had adapted it to its office needs,” relates Ms Kowalska-Szymczak, who was persuaded into cooperating with Concept Development BSD by the fact that in the case of nearly every commercialization of an  office building, the  question was being asked: Can I  buy this office? Up until now, a company that wanted to own its office usually decided to buy an apartment or a house and adjust it to its needs, or to build or buy its premises, such as, for example, PZU and Allianz.

Something nice for everyone

Can promoting the idea of offices for sale be a threat for developers building for leasing? “The clients interested in such a solution are not the same companies that my colleagues from the office department cooperate with. They are not big corporations – these do not want to have real estate among their assets –  but smaller private companies, such as law firms, notary offices, clinics and consulting companies,” says Ms Kowalska-Szymczak of DTZ.

The developers of office buildings for leasing have not been panicked by  this latest phenomenon. On the contrary, they have started to consider whether or not it would be worth risking and preparing projects for the sale of office space. One of these is Radosław Sieroń, president of Mermaid Properties, whose portfolio includes the Jasna 26 building in central Warsaw. This property was formerly a tenement house built in the  1940s over the foundations of the  former Victoria hotel. When Mermaid bought the tenement a few years ago, the  original intention was for it to be renovated as an apartment building. At the end of last year, however, the  developer declared that it would instead be adapted into an office building and that selling the offices was one of the options under consideration. The situation has changed and so have the models for doing business. “The office market, not just in Warsaw but also in regional cities, for instance, in Łódź, has been experiencing a revival since the beginning of the year. The demand is coming from tenants interested in larger areas. They are often companies that had postponed making such decisions all through last year,” claims Radosław Sieroń, the  president of Mermaid Properties. Pinning its hopes on the long-awaited re-activation of tenants’ decision-making processes, the developer, along with the investor, the Augusta I fund, changed its plans. The most probable scenario would be creating an office building with space for lease. Sale is also a possibility to be taken into account, not with regard to  individual offices, however, but to  the whole project. In the existing tenement house, app. 3,500 sqm of offices can be built, which could be ready within half a year. We also have a permit for adding two extra wings. In which case the  space would be extended up to 5,700 sqm,” explains Radosław Sieroń.

Precious square metres

According to real estate experts, the prices per sqm for sale are often comparable to those of top city centre apartments. In the Concept Tower office building, it would cost around PLN 18,500 per sqm to buy offices, with the top price amounting to PLN 21,700 net. This rate includes a share in the common area. Meanwhile, in the Elite Garbary Residence office and residential project in Poznań, the smallest office that you could buy has an area of 175 sqm and an asking price per sqm of PLN 11,500 net. Instead of the apartments that had been originally planned there by the investor – Israeli company A.K.M.M.K. Development – app. 1,900 sqm of office space for sale has instead been built in the ul. Szyperska wing. The offices should be ready in May next year; 35 pct of them have already found owners.

One of the projects developed on the office market in Bratislava and containing offices for sale is Universo’s Ružová Dolina Offices. It features an office for sale with an area of 619 sqm, which can be divided into 17 smaller rooms. The total price amounts to EUR 1.4 mln, i.e. nearly EUR 2,300 per sqm. There are even cheaper offices in Bratislava, such as the 1,729 sqm for sale at the price of EUR 1,510 per sqm in the newly built Art Centrum on Majoranova. But is this expensive or not? According to brokers, the prices in the capital of Slovakia reflect the real value of the property. Compared to Bratislava, the Hungarian capital seems much more expensive, with prices as high as EUR 6,000 per sqm (according to market reports). Offices for sale can be found, but there are proportionally fewer of them than in Bratislava. Developers of smaller ‘B’ and ‘C’ class buildings usually decide to go for this option. Whereas in Slovakia, the sales offer is not restricted to lower class buildings: local developer ITB is due to finish its Wallenrod office project in Bratislava in Q1 2011, where the price per sqm is among the highest in the capital – around EUR 2,860.

No revolution in the offing

The concept of building offices for sale does not, however, herald a revolution on the market in Bratislava. This option appeared on the Slovakian market four years ago and still remains more exotic than common practice. Market analysts estimate that offices for sale constitute 10 pct of the market at the most and nothing suggests that this share will grow. Quite the contrary, in fact. The interest from potential owners is weak, which has led developers to  change their sale strategies. “We had a client recently, a developer, who carried out a project of this type in Bratislava. However, the  market reality forced him to convert the  project and give up on the  idea of offices for sale altogether. Now the whole building is for lease only,” reveals Marek Ferko, an adviser at CB Richard Ellis in Slovakia. CBRE currently has six projects of this kind in its portfolio. So what type of developer decides to  carry out such office projects? First of all they are smaller, local players. Why? “They often have very good contacts with local companies and the buildings are developed with them in mind, nearly always to order,” explains Marek Ferko.

Proform and BIF in Hungary already have such projects in their portfolios, and Gestor is the latest developer to plan an office project for space selling. According to the calculations of consultancies, there were as many as 60,000 offices for sale developed in Budapest within the last couple of years.

Some of the pros and cons of buying offices are summed up by Marek Ferko of CBRE: “Buying an office is like buying an apartment: at the  beginning the  costs are very high, but there are also big advantages, and you are the  property owner,” Among the disadvantages you have to include the fact that the owner is given the keys to the office when it has only reached so-called “developer’s standard” (a basic finish). As a consequence, the  new owner has to cover the full costs of the  finishing work. ν