Not competing for square metresInvestment & Finance
Rafał Ostrowski, ‘Eurobuild Central & Eastern Europe’: In H1 MLP Group leased out almost 100,000 sqm. This is nearly as much as for the whole of last year. Are you satisfied with this figure?
Radosław T. Krochta, CEO and president of the management board, MLP Group: It is a satisfying result that puts us among the top industrial developers in Poland. Importantly, however, we are not competing for square metres. It is the quality of the tenants, lease contracts and their profitability that are important for us. We have signed all our contracts with very good tenants on good financial terms, with healthy rates of return. The average period of the contracts signed last year amounted to about ten years. Our shareholders also don’t look at the square metres, but at our net profits. And our profits of around PLN 60–70 mln per year certainly make us one of most profitable developers in Poland, if not the number one.
What do you owe this success to?
We look at our business over a very long-term perspective – we are not a company that sells our projects after their completion. I think it is important that the tenant does not feel like a commodity. Other developers build parks and then sell them on a year later to some fund and then the fund could sell it to someone else in two years – this is not a comfortable situation for the tenant. Because a warehouse is not a fully self-service facility. The tenant might want to replace the cooling system or the ventilation, etc. and a fund that operates in London might say: “It’s your problem, I bought cash-flow.” So tenants come to us because they know that we will continue to cooperate with them for a long time; that we are a developer that does not sell its assets and if they need to change something in five years, we will be there to talk to about it.
However, it isn’t the case that you keep everything in your portfolio.Two years ago you sold the MLP Bieruń and MLP Tychy parks.
Indeed, we have finalised such transactions. If I could do this again, I would probably not sell these assets. We are a long-term investor, with a ‘build-and-hold’ strategy; we are approached by clients prepared to accept slightly higher rates, because they know that in a year or two or five they will be talking to the same people.
Last year MLP Group started to talk about setting up a REIT. What are your plans, exactly?
The eventual form the REIT Act will take is still unknown. The legislation is in progress but the submission of the final bill seems to be getting postponed from month to month. Despite this, we shall still be establishing a REIT. I assume that if the Polish parliament fails to pass this act in the next two or three months, then we will base our REITs on Luxembourg law.
What would a REIT give you? After all, the group already has rather good liquidity. You have investors who want to invest capital, so why the need to increase your funds even more?
In order to be able to speed up our expansion. The goal is to have more than half of our portfolio in Germany in the next two or three years.
This seems to be an extremely ambitious idea. The market in Germany is rather mature – that is, saturated.
No, it is not. Contrary to appearances its saturation is very low. Admittedly, the mythical ratio of warehouse space per number of inhabitants might suggest otherwise, but you need to take a look at the type of warehousing. In Poland we have 14–15 mln sqm for almost 40 mln inhabitants – in Germany there is 80–90 mln sqm per 80–90 mln inhabitants. But over there they are mostly class ‘B’ and ‘C’ warehouses built in the 20th century, mostly by their owners.
How is that significant?
While looking for cost optimisation, i.e. a good class ‘A’ warehouse, owners generate a great deal of demand. The annual growth is very high, in the range of 8–9 mln sqm, because old warehouses are replaced by new ones.
And what about the competition? After all, Goodman, Panattoni and Prologis are all present in Germany.
But nobody has any significant share of the market or even 1 pct of the total area. There is a very deep fragmentation of the market. Furthermore, if you look at the structure of tenant acquisition, 90 pct of this in Poland is generated by agents. In Germany they are responsible for 20–30 pct and the rest is attributable to relations. This is not a market where somebody wins a contract because they offer a price 2 or 3 pct higher. They won’t. I will repeat this once again: what counts over there are the long-term relations with the client, including the fact that the developer remains involved with the tenant for a long time.
According to the last interim report, MLP Group’s investment portfolio is valued at app. PLN 1.1 bln. Will substantial capital be needed to create a similar value on the German market? Where will you get this from?
We carried out our first bond issue this year and there will probably be more to come. We have a total limit of up to EUR 50 mln. We will be using it according to our needs. Furthermore, as I have already mentioned, we want to set up a REIT inorder to realise some of our assets.MLP Group will have a 60 or 70 pct stake in this and a minority block will be sold to shareholders.
Would there not be enough capital for expansion without a REIT?
The expansion would be carried out anyway, based on the bond issue. We have quite a lot of cash because we have already completed one issue, and we have also sold Tychy and Bieruń. We are also selling our BTS projects. I don’t think that we will need any additional sources of capital for this year and the next.
If your assumptions are correct and everything goes to plan, then the value of your portfolio will exceed PLN 2 bln very soon, in two or three years at the latest.
Without any difficulty. When I look at our projects in Poland today, I have no doubts whatsoever that we will exceed PLN 2 bln in two or three years.
This march to the West, so to speak, has already started. This year you bought 12.6 ha for your first park in Unna near Dortmund. What stage is the project at?
We bought old class ‘B’ and ‘C’ warehouses. One, which is 10,000 sqm, will be refurbished by us; the other will be demolished. A modern class ‘A’ facility of 50,000 sqm is to be built on the site and this will open next year. Importantly, Unna is a kind of German Stryków – at a junction of two major motorways and thus it is the best logistics location in Germany.
What about tenants?
We are pretty advanced in negotiations with two tenants who we will be signing contracts with over the coming months.
And what about other parks?
We will make a similar investment in Mönchengladbach, where we should be buying some land in the next few months. This has also been scheduled for opening next year. Apart from Dortmund and Mönchengladbach in the Ruhr region, we are also planning to invest in the Frankfurt and Berlin areas in the near future.
How big will these projects be?
We always look into the possibility of building a minimum of 50,000 sqm of warehousing space when buying such plots. The ideal size for us is 60,000–70,000 sqm. In 2018 we want to have four parks of this size in operation.
Apart from Germany there is also Romania. What are your plans over there?
In the next few weeks we will buy a plot in Bucharest, where we will be able to build 75,000 sqm of warehousing. We will be building a logistics park there. We have one or two clients who are our tenants in Poland and want to open branches or production plants in Romania. Some large international clients are not only looking at locations in Poland but also want to move part of their production to Romania due to the availability of labour there. If the demand for Romania is strong, we will open one other park, but I would not expect our scale of operations in Romania to suddenly increase in any big way.
Will you be entering any other countries apart from Germany, Poland and Romania?
We are really looking at only two markets – Poland and Germany. Romania in fact consists only of one park in Bucharest. Poland and Germany are the markets we really want to allocate our resources to.
So what’s new in Poland?
Last year we bought a plot in Psie Pole near Wrocław, where we built a warehouse for Makro Cash and Carry. The construction of another warehouse for Makro is in progress in Czeladź and we are also closing a contract with another large tenant there. Apart from that a large number of other projects are also under construction. We will buy some land in Dąbrówka near Poznań and a plot in central Poland, near Łódź and Stryków, before the end of this year. We are also enlarging MLP Pruszków II, where we have bought an additional 5 ha. Our plan is to add 25,000 sqm to the park.
By how much will MLP Group be expanding its land bank in the near future?
We will buy the two previously mentioned plots this year and probably a similar number next year. We are planning to focus on the main, core locations. So we will not be investing in Zielona Góra, Rzeszów or Białystok. This would not change even if tenants temporarily became very interested in these locations.
Nevertheless, MLP Group is present in Lublin, which is not a significant location.
Indeed, we are. The leasing process is progressing, but we already know that we will not be investing in locations other than the core ones. This is rather similar to the office market in New York, where I lived 20 years ago. Everyone was saying at the time that rents were very high and employees were very expensive or they were completely unavailable and a lot of other things. And where did they open their office? In New York. It’s the same in the warehouse sector. Every tenant complains about shortages of labour and the fact that things are expensive, but when the time comes, they choose the main locations rather than alternative ones. The world revolves around large cities and they will continue to grow.
In Poland we currently have 1.6 mln sqm of warehousing under construction. An area of 1.9 mln sqm was rented in H1 alone. The market has been breaking all the records. What is in store for it in the future, in your opinion?
I think that the market will continue to develop positively but moderately. The statistics do not always reflect the true picture of the situation because they are not free from errors. It sometimes happens that companies register extensions as new contracts, others announce existing contracts as new ones, which can distort the figures by millions of square metres. There is no point deluding ourselves: new tenants are entering Poland, but not on the same scale as two years ago. Unfortunately, the political situation is having a negative impact here. But I am still a moderate optimist. Meanwhile, the German market is very healthy and will grow by 5–10 pct per year. We want to grow together with the market.
When will the present boom end?
I would like it to be of no significance for MLP Group. I would like us to have such a stable portfolio that when the bad times come, as they will, because the economy is cyclical and you have to take this into account, MLP Group will continue to run its business as usual. And the contracts we have signed so far provide us with such stability and security.