Change of priorities

The real estate investment slipped down the list of investors’ priorities in Jason Sharman, partner and managing director of King Sturge Poland.

Nathan North

I                                             This means that some properties –office, some retail and industrial –have been over-rented. It is hard toargue in thecase of properties leased two years ago that rents will grow for some time. There is thefeeling that banks are opening up again and coming tothetable todiscuss investments. In 2010 banking terms should improve, creating more activity on themarket. One of thethings that opportunistic investors look at in particular, as well as core investors, is theInternal Rate of Return on themoney they invest. But it has been extremely difficult toachieve these returns considering theunpredictability of themany moving parts that real estate is experiencing at this time.           Downturns in thepast have been generally caused byanunwinding of major unbalances in theeconomy causing alack of consumer confidence, reduced spending and areduction in investment. These together then result in two consecutive quarters of negative growth. What’s different now is that governments around theworld have had toborrow large amounts tobail out thebanking system and have gone heavily into debt. Undermining thepositive signs wehave in amoss market, is thefact that thedebt burden will have tobe paid off through higher taxation. So if there is anupturn, this will be very gradual. 2010 will not be aboom time for investment –it will be better than last year, but nowhere near thelevels of 2007-8.  . However, one of thethings I’m hearing from investors is that thebanks and traders have actually done rather well out of therecession, after shares bounced back up from thebottom. So banks, and their fund managers and subsidiaries, are now feeling more confident about real estate investment. As aconsequence there is likely tobe more interest in prime properties in top locations in large regional cities, such as city-centre office buildings or best-in-class properties out of thecentres –particularly those that have secured tenants for longer than 10 years. Prime shopping centres are especially interesting toGerman funds. In November there seemed tobe more interest for opportunistic or asset management opportunities –in properties that have potential for improvements in building quality, or for renegotiated leases, or for being extended onto adjacent land. But it is difficult tofind properties that tick all these boxes.

At theend of theday, properties are investments, and so need tobe modelled toassess therisk in order todemonstrate toboards how these risks will be managed. The further east you go, themore unstable thepolitical environment, and thegreater thevariations in rental and capital values. Legal and planning issues become more complicated and less transparent. In themain, investors are looking at Poland as being thecountry toinvest in this year, with theCzech Republic