Funds have the wind in their sails

A lack of money on the market? Nonsense! The money’s there and those who have it are continuing to invest in property through real estate funds. Specialists seem shocked at the number of funds that have appeared since the storm blew up in the West

Emil Górecki

Although the real estate industry is struggling all over the world, these difficulties pale into insignificance compared with the turmoil on the stock exchanges. By creating products focused on properties, investment funds have so far resisted the bearish behaviour of the exchanges. They are in fact benefiting from the cooling of the markets, where prices have fallen, where developers are more inclined to sell projects and also where difficulties are being encountered when applying for mortgages. The first real estate funds appeared in Poland in 2004, and now the second wave is about to make its mark. In January, the Skarbiec-Nieruchomości FIZ fund was unable to collect the minimum issue amount of PLN 250 mln. This autumn it will try to open one or two closed real estate funds. A second BPH TFI was opened in early July, with the first trial step being planned for late 2007, although the issuance of certificates was eventually postponed. May saw the closing of certificate subscriptions for Arka BZ WBK Real Estate Market Fund 2 FIZ. A sum of PLN 210 mln was raised, far in excess of the minimum required, which had been set at PLN 97 mln; although still a long way to the planned maximum amount of PLN 582 mln. The issue of certificates was initially planned for February, but BZ WBK decided to back out due to the poor demand. PZU TFI also received consent from the Finance Supervisory Commission to open a new fund with 
a value of PLN 300 mln. Series ‘A’ certificates were purchased by the PZU and PZU Życie insurance companies, with this sum – together with a possible 70 pct lever in the form of a loan – designated for commercial real estate. The market today is more difficult than it was 3 to 4 years ago, which is why decisions over new investments should be taken with great care.

Bad means good

There is no general consensus as to whether the problems in obtaining bank loans to finance commercial properties are a bad sign for the market. At any rate, the heads of funds are not complaining. Artur Czerwoński, president of BPH Investment Funds Society that has just opened a second BPH FIZ Real Estate Sector, remarks that: “Speculative investors, and developers who want to build and sell at a huge profit, are having problems with getting bank loans. Such businesses are finding that things have cooled somewhat, as access to money was much easier a short time ago. We are finding that our situation is better than two years ago, when we got our first fund off the ground.” His company will be focusing on purchasing properties where they will profit by modernizing, redeveloping, and updating the tenant mix.

When asked what fact most proves that the market situation for funds has improved, Artur Czerwoński adds: “When we established our first real estate fund, there was a greater demand for properties than the supply. Those who want to sell come to us independently. It is much easier to talk with them today since market prospects in Poland are no longer seen as unequivocally positive, 
as they were two years ago. That, of course, is the result of the turbulence on foreign markets.”

Funds rise Phoenix-like from the ashes

New funds announcing their entrance onto the market between September 2007 and March 2008 were few and far between, but after almost a year of turmoil in Europe, more than 25 of them have persisted and have now materialized. This comes as no small surprise to those who have been operating on the market for a considerable time, while it simultaneously proves that properties are an excellent way to diversify investments. According to Dorota Latkowska, partner and head of the financial and investment department at Knight Frank: “In the past, funds operated either globally or in a specific region of the world. Today they are clearly diversifying their portfolios and linking, for instance, Romania and Poland with Germany and Sweden. And capital is also gradually making its way back to the UK.” The Americans have also not turned away entirely from investing in properties, though not necessarily in their own country. Quinlan Private Golub recently secured EUR 400 mln from its Quinlan Private European Strategic Real Estate Fund, specifically from large American institutional investors, insurance companies, funds and a large number of individual investors. The fund is going to invest in Western, Central and Eastern European countries where Quinlan Private is already active. David Clark, head of marketing for Central and Eastern Europe of Quinlan Private Golub, reveals that: “We are interested in those markets where we have a significant market share and, in the case of Central and Eastern European countries – where large local developers and investors are additionally operating. Our scope of interests includes hotels, entertainment, retail, office and residential projects. At the moment we are investing in shopping centres in Bulgaria and Slovakia, office buildings in the Czech Republic, Poland and Slovakia, and hotels throughout the entire region.”

Another kind of financing

The Griffin Property Finance mezzanine fund has also made an appearance in Poland. It differs from real estate funds in not purchasing, but participating in the financing of investments. It aims to spend EUR 250 mln – mainly in Poland, with part of this sum already invested, although GPF executives are refusing to reveal who their customers are. It is known that residential, commercial (except hotels) and industrial projects will be jointly financed. Mezzanine allows developers to fill the financing gaps which exist between their own capital and loans.

Helmut Fischer, who was once connected with BPH bank and HypoVereinsbank Mortgage Bank and is today a senior partner with Griffin Advisors, expresses the view that: “Banks must fulfil their customers’ expectations, who are counting on great care being taken in investment decisions. Furthermore, banks that operate in our region are more conservative in their attitude than European financial institutions in the West. I worked in a bank for many years and observed interesting investment possibilities which would not be acted on for that very reason. That’s why our mezzanine fund was established and will capitalize far more on the possibilities existing in the real estate market.”

As the sources of its financing are one of the largest government funds in the Persian Gulf region and Western European financial institutions, GPF has had no problems with raising money. Moreover, investors trust in the stability and growth prospects of the Polish market. As Helmut Fischer adds: “Our offer has generated great interest. 
I have had many contacts by phone – often from people whom I had never talked with before. The credit crunch supports our product, but it is not what created it. Even if we had started our funds two years ago we would surely also have not encountered any problems in finding customers. Some developers today are expecting a higher level of credit-financing for their projects than banks can offer. So where are they to look for the remainder? One option is mezzanine funds.” ν