Capturing the big money
To look into the future of real estate in Poland, you might want to read the California newspapers. A small article published last month in the Sacramento Business Journal reported that the state's pension fund for government workers, the California Public Employees' Retirement System, had just approved Poland, as well as Hungary, the Czech Republic and a list of other countries as emerging markets in whose real estate industry the fund would approve investing.
The total amount of money from that fund which could come into Poland is probably quite small; it has a total real estate portfolio of only zł.139.5 million ($30 million) in all emerging markets. But what the fund's decision represents is huge: A whole new class of investors who were previously either barred from, or simply not interested in, putting their money on the country's real estate developments.
"It's a sign that the Polish real estate market is maturing and becoming predictable," says SALANS attorney Marek Grodek of the general trend of increased participation by institutional investors in Polish real estate.
Grodek is convinced that we have seen only the beginning of this trend, and that the next couple of years, in particular, will prove him right. "The next two years will be aggressive ones. Institutional investors will be betting on the future of Poland. After that period, the market should stabilize, because by then you will know what demands there are. Now, though, we still aren't quite sure what the market wants and it's more exciting."
Unlike many of the big investors who finance projects or purchase them in order to operate them, financial investors may have no long-term interest in a property. They are not necessarily keen to deal with leasing, managing and the day-to-day operations of an office or shopping mall. Indeed, they may not be qualified to do it.
Instead, they seek solid investments that promise the same qualities that would be attractive in any other sector: Profitability, predictability both in income and in the quality of the project, and a good chance at making money when the time comes to sell the property. So if they do choose to invest in real estate, these factors will determine whether it will be office, retail or logistics.
"When you look at the sequence of targets," Grodek points out, "first came the office space sector. The trend started in 1997 or 1998 and it began in that sector because it was easier to predict yields there. The properties complied with Western standards." After that, financial investors became active in the retail sector and finally in warehouses.
According to Grodek, developers and property owners who hope to attract these kinds of investors should understand what it is these funds are looking for. "It's always a question of risk for the financial investor who is investing in real property," he says. For that reason, they tend to come in toward the end of a project, letting the initial investors sweat out the construction process and the leasing.
Even then, only certain types of arrangements might attract their interest. Grodek gives leases as an example. "When you're structuring deals, lease agreements need to comply with the needs of institutional investors, who are risk-averse." Specifically, triple-net leases, which have a clear stream of income, are "absolutely necessary" from the viewpoint of an institutional investor. These leases are potentially more of a risk for tenants, who under the arrangement can see costs rise depending upon, among other factors, taxes. But for the investor, they mean security. The income stream, while not guaranteed, is at least much more predictable than it is under other types of leases.
Perhaps this year's most visible entrance into the arena of institutional investors in the country's real estate market was AIB Capital Markets' Polonia Property Fund. With committed equity funds of zł.465 million (€100 million), the Fund will be able to use debt to purchase up to zł.1.8 billion (€400 million) in property in emerging markets, and later be capped with a debt and equity limit of zł.2.3 billion (€500 million.) And while it may make investments in Hungary and the Czech Republic, 80 percent of its investments will be conducted in Poland.
In September, when the Polonia Property Fund announced its first closing, General Manager Patrick Cunneen said that one of the hopes of the people behind the fund was that more Polish investors, including pension funds, would begin participating in a market generally weighted with foreign capital. The Fund itself is supported by both institutional and private investors from several European countries, as well as Polish banks.
Picking and choosing
"There are quite a few potential investors ready to buy properties, but there is a shortage of commercial space available," according to Hanna Piskorek, business manager at the Warsaw office of Adgar, an international real estate company.
Adgar, like many other companies, prefers to hold on to its acquisitions. They have two buildings in their Polish portfolio, one on Konstruktorska and the other on Postępu Street. In many ways, though, what Piskorek says applies equally to both categories of companies - those interested solely in the financial prospects of a real estate investment and those who stay involved in the operation of a project.
"Over the past three years, we have looked at several other properties and are still looking, but we haven't been able to finalize a deal," says Piskorek. One of the principal problems, she says, is the issue of reprivatization claims by a property's previous owner. Though a company's due diligence research is usually able to unearth any problems before larger financial commitments can be made, the research itself can be costly, especially when a property's seller does not know about or does not want to reveal the existence of a reprivatization claim. "Investors," says Piskorek, "need to buy clean property."
"There are no easy projects," observes Piotr Kroenke, general director of Globe Trade Centre S.A., whose Galeria Mokotów shopping center is one of the bright spots on Warsaw's retail scene. "The risks are different in each country," Kroenke says, and dealing with reprivatization claims is just a fact of life here.
Kroenke says that GTC prefers to stay involved in their projects. "We usually want to stay on as owners and work on the value of the company," rather than focusing on a quick profit. But he agrees that institutional investors who may not be involved in a property are on the rise. "We see more and more investors interested in buying property," he says, and there is no reason yet that the trend should reverse.
The total amount of money from that fund which could come into Poland is probably quite small; it has a total real estate portfolio of only zł.139.5 million ($30 million) in all emerging markets. But what the fund's decision represents is huge: A whole new class of investors who were previously either barred from, or simply not interested in, putting their money on the country's real estate developments.
"It's a sign that the Polish real estate market is maturing and becoming predictable," says SALANS attorney Marek Grodek of the general trend of increased participation by institutional investors in Polish real estate.
Grodek is convinced that we have seen only the beginning of this trend, and that the next couple of years, in particular, will prove him right. "The next two years will be aggressive ones. Institutional investors will be betting on the future of Poland. After that period, the market should stabilize, because by then you will know what demands there are. Now, though, we still aren't quite sure what the market wants and it's more exciting."
Unlike many of the big investors who finance projects or purchase them in order to operate them, financial investors may have no long-term interest in a property. They are not necessarily keen to deal with leasing, managing and the day-to-day operations of an office or shopping mall. Indeed, they may not be qualified to do it.
Instead, they seek solid investments that promise the same qualities that would be attractive in any other sector: Profitability, predictability both in income and in the quality of the project, and a good chance at making money when the time comes to sell the property. So if they do choose to invest in real estate, these factors will determine whether it will be office, retail or logistics.
"When you look at the sequence of targets," Grodek points out, "first came the office space sector. The trend started in 1997 or 1998 and it began in that sector because it was easier to predict yields there. The properties complied with Western standards." After that, financial investors became active in the retail sector and finally in warehouses.
According to Grodek, developers and property owners who hope to attract these kinds of investors should understand what it is these funds are looking for. "It's always a question of risk for the financial investor who is investing in real property," he says. For that reason, they tend to come in toward the end of a project, letting the initial investors sweat out the construction process and the leasing.
Even then, only certain types of arrangements might attract their interest. Grodek gives leases as an example. "When you're structuring deals, lease agreements need to comply with the needs of institutional investors, who are risk-averse." Specifically, triple-net leases, which have a clear stream of income, are "absolutely necessary" from the viewpoint of an institutional investor. These leases are potentially more of a risk for tenants, who under the arrangement can see costs rise depending upon, among other factors, taxes. But for the investor, they mean security. The income stream, while not guaranteed, is at least much more predictable than it is under other types of leases.
Perhaps this year's most visible entrance into the arena of institutional investors in the country's real estate market was AIB Capital Markets' Polonia Property Fund. With committed equity funds of zł.465 million (€100 million), the Fund will be able to use debt to purchase up to zł.1.8 billion (€400 million) in property in emerging markets, and later be capped with a debt and equity limit of zł.2.3 billion (€500 million.) And while it may make investments in Hungary and the Czech Republic, 80 percent of its investments will be conducted in Poland.
In September, when the Polonia Property Fund announced its first closing, General Manager Patrick Cunneen said that one of the hopes of the people behind the fund was that more Polish investors, including pension funds, would begin participating in a market generally weighted with foreign capital. The Fund itself is supported by both institutional and private investors from several European countries, as well as Polish banks.
Picking and choosing
"There are quite a few potential investors ready to buy properties, but there is a shortage of commercial space available," according to Hanna Piskorek, business manager at the Warsaw office of Adgar, an international real estate company.
Adgar, like many other companies, prefers to hold on to its acquisitions. They have two buildings in their Polish portfolio, one on Konstruktorska and the other on Postępu Street. In many ways, though, what Piskorek says applies equally to both categories of companies - those interested solely in the financial prospects of a real estate investment and those who stay involved in the operation of a project.
"Over the past three years, we have looked at several other properties and are still looking, but we haven't been able to finalize a deal," says Piskorek. One of the principal problems, she says, is the issue of reprivatization claims by a property's previous owner. Though a company's due diligence research is usually able to unearth any problems before larger financial commitments can be made, the research itself can be costly, especially when a property's seller does not know about or does not want to reveal the existence of a reprivatization claim. "Investors," says Piskorek, "need to buy clean property."
"There are no easy projects," observes Piotr Kroenke, general director of Globe Trade Centre S.A., whose Galeria Mokotów shopping center is one of the bright spots on Warsaw's retail scene. "The risks are different in each country," Kroenke says, and dealing with reprivatization claims is just a fact of life here.
Kroenke says that GTC prefers to stay involved in their projects. "We usually want to stay on as owners and work on the value of the company," rather than focusing on a quick profit. But he agrees that institutional investors who may not be involved in a property are on the rise. "We see more and more investors interested in buying property," he says, and there is no reason yet that the trend should reverse.
