Bouygues prepares to boost residential market presence
As part of its plan to expand investment around the country, Groupe Bouygues will develop residential projects in Warsaw, the French construction and real estate firm announced last week.
Until now Bouygues had limited itself to building office and retail projects for other investors through its subsidiary, Bouygues Construction. But that was before the company sent a real estate team from its property development unit, Bouygues Immobilier, to Poland earlier this year. Christian Laine, the local development manager for Immobilier, said the team would be registered as an Immobilier subsidiary and will invest in residential property projects.
"We think that for the time being we have to focus on one thing," Laine said. "We will concentrate on residential (projects) because we feel that's the best market."
Bouygues predicts Warsaw will see 20,000 apartments built annually over the next decade, a substantial increase over last year's 8,000 new units. The firm will focus on the residential market in the near term because the office market is "depressed" and the retail market "saturated," Laine said.
Bouygues also decided to look into the residential market because of the growing demand for low-cost housing, Laine said.
The company is planning to set prices for its apartments at $700-$800 per square meter, putting the units in the mid-range compared with those in the capital's new housing market, which typically run $600-$1,200 per square meter.
The group plans to complete its first land acquisitions by the end of the year, paving the way for construction in early 2001.
The company is looking to acquire land in suburban areas such as Ursynow, Piaseczno, Wilanow, and Bialoleka, Laine said. He added that Bouygues intends to acquire at least two hectares of land at $50-$100 per square meter since it needs at least two hectares to develop 100 residential units in one-to-three story multi-family buildings or semi-detached buildings.
Immobilier has developments in Spain and France and is in the process of expanding to Portugal, Germany, the U.K., Italy and other countries in Central Europe.
Investment risks and rewards
Investment in Poland's commercial real estate is riskier but more profitable than in Western Europe, according to a recent report by U.K.-based property consulting firm King Sturge.
"Prime office net yields in Warsaw are around double those achievable in major Western European cities," the report stated.
Despite the high returns, there have been few investor office building acquisitions in the capital, which has 102 modern office buildings valued at over $3 billion, King Sturge said. The main reasons for this are a lack of quality supply, high seller expectations and the risk of falling office rents, said Chris Grzesik, managing partner of King Sturge in Poland.
On paper, the Warsaw office market is appealing to institutional investors. Current investment yields on prime Warsaw offices are 11-11.5%, about twice those in Western European cities, the report stated. A higher yield means a quicker return on investment; an investment in property bought at a yield of 11% will pay back after nine years, while investment in property bought at a yield of 5% will pay back in 20 years.
Warsaw yields are likely to fall in the next few years. This prospect makes office investment even more attractive, since future lower yields equal higher property values, Grzesik said. He also said the "double advantage" of the current high yields and low future yields means that the average fund looking to invest wants a high return in about five years, at which point it will likely re-sell the building. About 20 such funds are considering office investments in Poland.
The funds are likely to finance up to 75-80% of their investment in bank loans, Grzesik said. Banks financing office acquisitions lend at about 1.75% over the U.S. dollar Libor or Euro Euribor rate, which are currently 7% and 4.7% respectively, the King Sturge report said.
Despite the market's allure and added spice of fairly low borrowing costs, Grzesik admits there have been few investments. The main barrier has been that investors are looking for quality buildings and there are few such buildings in the capital, he said.
In addition, there is "a mismatch of expectations" between sellers and buyers, Grzesik said. Landlords typically want to sell their office buildings at about a 10% yield, while funds would like to buy at 12%.
Another important factor preventing institutional investors from buying offices in Warsaw is the risk of falling rents. Many buildings were completely let three years ago when rents were as high as $40 per square meter. Tenants in the buildings still pay those high rents but when their contracts expire they're likely to renegotiate or leave, making it difficult to estimate future earnings, Grzesik said.
In brief: The Pol Nordic Group hired Jones Lang LaSalle and Unikat in early June as joint agents to market its Nordic Park office building in Warsaw's Powisle district, said Irena Daniluk, Pol Nordic's public relations manager. Pol Nordic has rented the ground floor of the 8,000 square-meter building to furniture retail operator Szmidt & Szmidt, Daniluk said. The building still has no office tenants. Asking rent is $27 per square meter a month, according to Jones Lang LaSalle.
