A very cold winter

No major upheavals took place on The 2008 office market; but trying to make forecasts for 2009 has left the experts scratching their heads

 

Emil Górecki

 

If measured in terms of the volume of office development, 2008 was easily the slowest of the last ten years. The global financial crisis reached its peak and investing activity died down, especially in the most difficult months of September and October. This was when stock markets collapsed across most of the world and interbank lending fell to an all-time low. Most investment transactions came to a halt, while developers put new planned projects on hold and focused on those already under construction. Such was the market when 2008 shuddered to a close.

Problems act as market pacemakers

The prospects for 2009 are far from bright. John Banka, a partner of Colliers International investment advisory group, puts it this way: “You cannot forecast with any accuracy what the level of yields is going to be, since no new transactions have been concluded by institutional investors following negotiations in the new harsh economic conditions. That it is why it is so difficult to define the market’s starting point and the direction in which it will move.”

He adds, however, that initial discussions seem to suggest that yields for transactions for which negotiations have only just begun will be around 50 base points above those which were reached in mid-2008. But for the moment negotiations are still under way and no new transactions have yet been finalized, which means such estimates must be treated with extreme caution.

John Banka continues: “The best thing for the market at present would be for investors to be found who would be ready to sell their office buildings. It would, paradoxically, then become evident that their credit crunch contracts were being signed at yields similar to those reached previously, and this might get the market kick-started again. Let it not be thought, however, that all future transactions will be rooted in investors’ worries; those who are finally forced into action will play an important role in stabilizing future prices.”

Office space occupancy levels, similar to those of retail and industrial space, continue to be high. In Bucharest, vacant ‘A’ class office space is almost impossible to find. The vacancy rate in Kyiv is 2 pct, the same as in Warsaw, and reached 1 pct in Sofia in mid-2008. Colliers office leasing department continues to register a large number of tenants ready to sign preliminary contracts for projects which will only appear on the market in 6 to 18 months’ time.

Where it’s worthwhile, and where it ain’t

Poland and the Czech Republic have the most promising office markets in Central and East Europe, both as regards their economies, as well as their greater stability and sustainability, signifying that they are less sensitive to any reduction in the flow of foreign investment than Slovakia or the Baltic countries. John Banka stresses that: “It is the rule that, in more difficult economic periods, office buildings in the best locations will enjoy the greatest popularity and, thereby, will be worth the most. Office buildings situated in good communication hubs should also be treated seriously, since they are excellent for off-shore centres, this being an economic area which, like outsourcing, will enjoy relatively good health and will grow despite the economic slowdown.” Greater scepticism is felt by other analysts towards Hungary, Ukraine and the Baltic countries, but it must always be borne in mind that the worries of one investor is good food for another.

What’s new on the market

In early 2008, market analysts were already predicting a slowdown in activity. They were confident that there would not be many spectacular transactions over the subsequent 12 months, and that developers would be focusing on smaller projects; but nevertheless, in terms of the total volume invested, 2008 is likely to show a similar result to that of the previous year. For example SGI Baltis is developing a 10,000 sqm, 6-storey office building (including one underground car park storey), which has been entirely leased by Internet Group.

As far as new developments are concerned, in Lithuania construction work on the Vilniaus Verslo Uoastas office complex in Vilnius, which has a total area of 62,000 sqm, was completed. The project, comprising three 24-, 17-, and 6-storey buildings, was delivered in mid-2008 by NT Gama. Also in Lithuania, Scandinavian group Sjælsø launched a 4-building 28,000 sqm office project, on which construction work started last spring. In Ukraine, work began on the multi-functional PortCity development in Lutsk, which has a total area of 62,400 sqm. The complex, which should be ready in 2010, is being developed by Altis Holding.

In the Czech Republic, extensive modernization work was completed in early 2008 to the City Tower office building in Prague’s district 4, which is the tallest building in the Republic with 27 above-ground storeys and a height of 109 m., Such companies as Zentiva, Central Group, Honeywell Raiffeisenbank, GE Money Bank, Hewlett Packard. Microsoft, Telefonica O2 and T-Mobile now have branch offices in the building. The developer is the ECM company.

One of the most important transactions that took place on the Polish real estate investment market last year was Baltic Property Trust’s EUR 168 mln acquisition of properties from Telekomunikacja Polska. The deal concerned TP’s office buildings on ul. Twarda, ul. Moniuszki and ul. Obrzeżna in Warsaw, which have a combined total area of 62,000 sqm. Another notable deal was for Skanska’s Atrium City office building, which is currently under construction in Warsaw. It was purchased by the German Deka Immobilien investment fund for EUR 115 mln at a yield of 6 pct. Atrium City, which has an area of 21,000 sqm, should be ready in May 2009 and tenants including Deloitte, King Sturge and Deutsche Bank have already been secured, among others.

Another German fund, DEGI International, bought the Marynarska Business Park office complex in Warsaw from Ghelamco for EUR 167 mln. The four buildings have a total area of 43,700 sqm and are now fully-leased.

One of the largest investment transactions in Ukraine was the Ukrainian Group’s acquisition of the Horizon Office Towers office complex, which involved exchanging it for another property together with an additional payment. The sales contract for the 16,900 sqm complex was concluded in the first half of 2008, with Colliers International acting as the buyer’s advisor.

On the Moscow market, the Ducat Place II building was sold for USD 185 mln. More than 19,000 sqm of office space was bought from London & Regional Properties by the Finnish investor Sponda. In addition to this, Russian bank Otkrytie Financial Corporation sold four class ‘A’ office buildings in Moscow with a total area of 101,000 sqm to the German KanAm Grund KapitalanLagegesellschaft. The value of the transaction was estimated at more than USD 900 mln.

Turning to the leasing market, the entire office space of Lipowy Office Park on ul. Żwirki i Wigury in Warsaw, developed by Hochtief Development Poland, was leased to Bank Pekao – even before the earthwork had been completed. The contract was signed in May for the entire Lipowy Office Park complex (39,000 sqm) and is the single largest transaction on the Polish office leasing market. Europolis Lipowy Office Park is the owner of the complex. But this was not the record deal in the region, an honour which was taken by the Russians. An area of 50,000 sqm in the Western Gate Business Park was leased by TNK BP. The developer of this complex is Centurion Group.

Back in Warsaw, Nokia Siemens Networks leased 9,000 sqm of the Horizon Plaza office complex developed by Curtis Development, while the investor behind the project is IVG Development. While in the Czech Republic, Česká spořitelna bank leased 12.700 sqm of the Trianon office building in Prague. The investor behind this project is the Union Investment Real Estate AG fund, with Hochtief Development being the developer. In Ukraine, 6,600 sqm of office space was rented by the Ukraina TV broadcasting company in the Ritm business centre in Kyiv, with the owner being represented by Colliers International for the deal.

Funds with lots of cash

Banks are currently refusing to predict when conventional finance will again be accessible to purchasers of office buildings and properties in general. Much capital is being kept under cover waiting for better prices. Such funds as Apollo Rida, Baltic Property Trust and Credit Suisse Private Equity are now interested in office market investment or have even started to invest. Generally speaking, all private equity funds hold the necessary means and are ready to spend in the beneficial conditions arising as the market loses impetus. But who is going to sell? First and foremost those who are forced to do so by a lack of financial liquidity, though it is difficult to say how many such products will appear on the 2009 market. The answer to that is in the hands of the banks and whether they will lend more money to investors.

Whether purchasing an office building is a profitable venture or not depends on the rate of return. Purchasers seem convinced that the future will witness a substantial rise in risk due to savings imposed by tenants, evidenced in a reduction of the space they occupy. This is why they are waiting for higher yields. John Banka adds to this that: “Office building owners still claim they are waiting to see what the future has in store and only when the market situation changes will they start talking about selling. For the present, however, they prefer to hold office properties in their portfolios.”

The market at the moment is pregnant with expectation. It is impossible even to guess when investment activity will start to thaw out. But Colliers’ analyst seems sure that the banks will soon start lending again to finance investment deals. In his opinion: “The next three months and the MIPIM fair of next March will be when there will, probably, be widespread talk of the market situation and, I hope, plans for the rest of the year will be revealed. But it will probably be a very cold winter.” ν

This article was prepared in collaboration with Colliers International