Capital IDEAS
By : Anna Staniszewska
The search for space: Investing in warehouse storage can still bring healthy returns.
When Brian Burrough, the managing director of U.S. warehouse developer TGK/Ceicdo International, arrived in Poland in 1995, demand for warehouse space was at a premium. "We were lucky to get here on time," Burrough said. With the country's rapid adoption of a market economy in the early 1990s, a host of business start-ups saw local and foreign firms scrambling for storage space.
Early warehouse projects such as TKG's Warsaw Distribution Center and the U.S.' Menard & Doswell's Warsaw Industrial Center, completed in 1997 and 1998, brought just 14,000 square meters of modern warehouse space to the market. More distribution centers were needed. Burrough estimates that it cost about $500 to build one square meter of modern warehouse space when he arrived. That figure has fallen to $300. When Burrough first set up, returns on warehouse schemes varied from 14-16% in 1997. These days the figure is closer to 12%.
Although returns were higher in the early days, Burrough said investing in property in the mid-1990s was anything but easy. "On one hand it was very lucrative, but on the other the investment process was complicated and demanded a lot of effort," he said.
Finding the capital to build was the biggest headache. "It (property development) was new to banks, which didn't want to sponsor speculative investments," he said, adding that the only way to raise capital was from the European Bank for Reconstruction and Development (EBRD) and venture capital funds. "There was money waiting to come to Poland, but investors didn't want to throw it at insecure businesses," Burrough said. However, companies bold enough to enter Poland in those days could receive a return on their investments within three or four years, he added.
Cash wasn't the only concern buying land was also a contentious issue. "Farmers were a big problem," Burrough said. Landowners were either emotionally attached to the land or asked enormous prices per square meter. "You can't ask $100 per square meter in Raszyn," he said. "Warehouse land is not the same price as land for retail development. It was unreal."
In addition, local authorities had to reevaluate how land was zoned. Agricultural land, for instance, was rezoned to qualify as industrial or commercial space. "Mayors had no experience with the modern property market and weren't sure what would be the best solution for a particular piece of land," Burrough said.
A maturing market has meant that the toughest times are over. "The real estate market is more advanced and less risky now," he said, adding that all property sectors office, warehouse, retail and entertainment have experienced substantial growth. Lower yields also reflect this trend.
More importantly, he said, raising capital has become easier. A number of banks, including new mortgage banks Rheinhyp-BRE and HypoVereinsbank, as well as investment funds and insurance companies, specialize in granting loans for property projects. "Investing in property is a secure, long-term investment that guarantees financial liquidity," Burrough said. It is also an important part of a company's portfolio diversification, he added.
Enter the investment funds
The high economic growth of the mid-1990s, falling inflation and unemployment along with Poland's proposed accession to the European Union (EU) brought increasing interest in property investment from international institutions. "Many investment funds set up separate branches to invest in Central and Eastern Europe, with capital devoted to Poland ranging from $50 million to $100 million and with loans reaching $300 million to $400 million to be distributed among Poland, the Czech Republic and Hungary," said Dorota Latkowska, head of the investment department at U.K.-based Knight Frank Nieruchomosci, a property consultancy.
While office space has grown during the past few years, and 380,000 square meters came onto the Warsaw market in 2000 alone, analysts said demand for offices has since flattened out. Last year, take-up stock amounted to 200,000 square meters, compared to 275,000 square meters in 1999. "It's a sign that the market is stabilizing," Latkowska said.
When Commercial Union bought the Wisniowy building C in Warsaw in February 1998 for $14.5 million, the estimated return on the investment was 13.5%. The buyout of Skanska's Atrium Business Center in Warsaw the following year by Pricoa Property Investment Management, a subsidiary of U.S.-insurer Prudential, showed that capitalization was likely to go down as more offices opened. According to Latkowska, returns on office investments are falling. Even so, Warsaw's returns are higher than Prague and Budapest (9%), and much higher than in Western Europe (5.5-6.5%). "There are many modern office buildings in Warsaw potentially for sale," Latkowska said. She estimates three to four transactions are planned in the first half of the year and that the return will be more than 10%. "It's still a good deal for an institutional investor," she said.
Other analysts agree. "It's an excellent market for institutional investors," said Pierre Couderq, head of Couderq & Partners, a property consulting firm. He said developers are willing to sell if they can receive decent return ratios.
But good returns are occasionally hard to find. Latkowska said large funds, which have been active in Warsaw since the mid-1990s, have had only a few of their A-class office buildings attract serious attention. "A building has to fulfill certain strict conditions to be considered a good investment," Latkowska said. Not only does it have to meet all technical requirements necessary for A-class buildings and be fully let, but it also has to have at least five reliable tenants with long-term lease contracts. It takes a property fund about 18 months to check all the details for a property purchase. "First research and analysis are always difficult and after the first acquisition, the next transaction can be concluded within a couple of months," Latkowska said.
Bargain hunting
A happy shopper: Saturday at Warsaw's Galeria Mokotow.
With the explosion of retail outlets such as in shopping malls and hypermarkets during the past few years, property funds have started to watch these sectors closely.
According to Latkowska, shopping malls are not suitable for funds as they don't generate large enough returns. "There is not much to offer right now and the only qualifying malls are Klif and Galeria Mokotow," she said, adding that these malls have a good tenant mix and strong customer base. Latkowska said that once more projects are completed it's likely funds will become active in the sector. "Projects such as Zlote Tarasy, Wilenska or Arkadia could be good products for investors," she said.
For institutional investors, warehouses are considered the most secure investments. "It's a rapidly developing sector and can bring substantial profit," Burrough said. Latkowska agreed, saying returns on warehouse investments can yield 12-13%. So far, however, only one such transaction has been completed, when U.S.-based Prologis bought Warsaw Industrial Park. However, more deals are in the offing, she said.
View to a killing: Real estate companies are still investing in residential property despite a saturated market.
Investment in the residential market has largely depended on bank loans. "Housing construction has worsened significantly over the past year," said Michal Kubicki, vice president of Howell, a Polish developer listed on Warsaw Stock Exchange.
The main problem with the residential sector is inflation, coupled with a slowing economy and the reduced purchasing power of Poles, who cannot afford the high interest rates. As a result, developers have found it more difficult to obtain credit.
Kubicki said banks are not willing to grant loans to residential projects as people are not buying apartments. "It has become too risky for banks," he said, adding that luxury apartment projects have been particularly hard hit. "Deluxe suites are not selling anymore," Kubicki said. Even medium-priced apartments are too expensive for Poles. "It's a vicious circle," Latkowska said.
According to Kubicki, only developers that guarantee financing will make headway in the residential sector in the short term. In the early 1990s, investors often received 100% returns on their investments after just three to four years. Now, as residential building projects have stalled, many developers that overestimated costs sell out to bigger companies, Kubicki said. He said that on average it costs about $500 to build one square meter of an apartment. That used to be a six to seven-year investment; now it's 10-12 years.
Many banks are now involved in financing or refinancing of real estate projects. "Banks, property funds and insurance companies treat it as a long-term, safer investment of constant value," said professor Ewa Kucharska-Stasiak, head of the investment and real estate department at Lodz University. Office, warehouse, retail and residential developments are a secure allocation of capital, provided their quality is high. "We have to learn from Western examples, where this type of investment is taken for granted," Latkowska said.
