Out of season purchases

Carrie Bradshaw (the heroine played by Sarah Jessica Parker in the ‘Sex and the City’ series) cheers herself up by going shopping. Many development companies and investment funds are also preparing to splash out, although these customers, unlike Carrie, are not limiting themselves to shoes from Manolo Blahnik. They are supposedly planning to buy land – and certainly not just to cheer themselves up

Emil Górecki

Some market players are secretly sighing with satisfaction as the credit crunch continues. It is, after all, the best time for shopping – provided you have enough money to do it. So far there is no sign of any shopping spree in the development sector; however, there is apparently some evidence of activity. “The companies with cash at their disposal are still waiting for the absolute bottom, which I would expect we will hit at the end of Q2, and such economic conditions might last until the end of the year. This is when the signing of preliminary agreements will start, as will the finalizing of transactions already in progress on the land market. I hope that as soon as Q3 the market will have got over the shock of the disturbing events on the financial markets and the fear of investing in real estate. We are currently involved in eleven processes which will soon be transacted. The buyers represent a variety of sectors, with 80 pct of the transactions being land purchases for their own needs rather than of a manipulative character, for example for funds or land banks,” adds Daniel Puchalski, the associate director of the land department at Colliers International. He admits that companies are afraid to make decisions about purchases because they are still nervous about a further deterioration in market conditions, as well as buying at prices that are still too high. “I hope that the concluded transactions will encourage more purchasing decisions and prove that the time for buying is right now,” is his upbeat assessment. Even though observers of the real estate sector are expecting the bottom for residentially-zoned development area prices  to be hit in a short while, they are advising on not waiting to make acquisitions any longer. “You don’t buy land in the course of a few days, so I would recommend starting the negotiations now. Negotiations are a game, if you wait too long, someone else might be doing the raking in your plot of land. We haven’t participated in any significant transactions so far but we are engaged in talks,” discloses Aleksander Skirmuntt, the chairman of the 
Emmerson real estate agency.

How much cheaper is land?

Many investors are expecting some spectacular bankruptcies of developers and the possibility of taking over their projects or plots of land. They are even speaking of the possibility of taking over entire land banks in a few cases. There are a number of companies on the real estate market, both Polish ones and those with foreign capital, who have a realistic potential for taking over projects, and which are typically looking to buy areas where 20-30,000 sqm of residential space could be built i.e. several hundred apartments. Investors who have just made their debut on the market or have not yet got round to it, are now poised to do so – especially the Polish and Israeli ones. They are checking up to 15-20 plots a month, they are listening to offers, verifying documents, carrying out preliminary technical and legal analyses, establishing the value, price and – most importantly – the possibility of selling on the investment with a satisfactory rate of return. The next group of investors are the retail sector players. So sure are they of the strength of this sector, they are searching for sites throughout the entire country. “These are plots of land from 5,000 sqm up to 2 or 3-ha. There are a number of companies planning to develop such projects as large shopping centres or retail parks, and they may need even ten or more hectares. Smaller plots of land are also being looked at at the moment and these transactions have a greater chance of being closed. Investors are counting on cheap acquisitions; in negotiations they are trying to obtain the largest reductions possible and in this they are succeeding. We have seen reductions in asking prices by 30 and even 50 pct, even when assuming that these asking prices were at a lower level than before the economic downturn. For example, we are currently negotiating the purchase of a plot of land with a building permit in southern Kraków. The asking price was PLN 700 per sqm of the floor space of the projected apartments, but at the moment the negotiations have stopped at the level of PLN 350,” relates Daniel Puchalski.

In every cloud...

Bankruptcies of real estate players are increasingly likely these days, so potential buyers are waiting to pounce on any acquisition opportunities. These buyers are as usual mostly interested in plots with building or planning permits rather than unpermited sites. And this is particularly important now, as prices are not rising together with the progress of a project. “We are preparing for the sale of the entire portfolios of two companies. One of them has a number of properties in Kraków, the other has some very large and interesting properties in the old Gdańsk area and Bydgoszcz. I know that some large international development companies and investment funds are interested in the acquisition of such projects. The demand is there, but can this be converted into transactions? We must remember the price level assumed by the buyers. Will they decide to take the risk of purchasing the whole portfolio, including unattractive plots of land or those with legal or technical defects? I know of at least five companies that have decided to sell their development sites. Several other companies are also considering it,” Daniel Puchalski reveals.

Smaller projects are of value

The situation with residentially-zoned development areas is starting to become more dynamic. Most of the planned projects have come to a halt because of the lack of funding both for the construction and project launches and for the purchase of finished apartments. The investors who are now looking for bargains should appear with their projects in two or three years, when there will be considerably fewer apartments on the primary market. We can, however, forget about the price dynamics and sales levels of two or three years ago. “The biggest interest is in developments with 60-150 apartments. We have received three orders to locate land in Warsaw from completely new companies. In Powiśle and Żoliborz, the prices of plots amounted not so long ago to PLN 2,500-3,000 per sqm of apartment floor space, whereas now we are looking at PLN 0,500-1,800. Have we now reached the lowest level? In my opinion we haven’t. In principle, land in the most attractive locations and cities is not going to get any cheaper and you need to negotiate if you are hoping for even lower prices rather than watching the market in a passive way. Many investors are still waiting to make their decisions,” remarks Daniel Puchalski.

The negotiations between the owners of land and developers were simpler and shorter during the bull market of 2005-2007. Even if an investor paid too much for a plot of land in comparison to the market prices of the time, they would not lose out as the mad growth rate of apartment prices compensated for this. Nowadays, they are returning to the land value calculation methods which had been used before. “In terms of locations beyond city centres, the price of land has to constitute 9-10 pct of the sqm price of the apartment and up to 15