Economists push legislators to allow creation of real estate funds
Looking to spur the property market and encourage savings, a lobby group comprised of economists is pushing for legislative changes that would pave the way for the creation of real estate investment funds.
The group, which consists of economists from the Gdansk Academy of Banking and the Institution for Market Economics, led by Eugeniusz Gostomski and Leszek Pawlowicz, is lobbying parliamentarians to amend the law on investment funds to allow them to invest in real estate. While pension and investment funds are currently prohibited from investing in property as it is seen as too risky, economists said that special funds dedicated to real estate could actually encourage individuals to save as that market is subject to different economic cycles than the fixed-income securities and equities most funds invest in.
The creation of such funds, economists said, would allow increasing the liquidity of the real estate market by giving developers more buyers for their property. That could in turn stabilize land and property prices, economists said.
"It's a great economic policy instrument completely unused in Poland," said Leszek Pawlowicz, director of the Gdansk Academy of Banking and co-author of the project. "It can easily stimulate the willingness to save without any additional costs for the budget."
Because pension and investment funds are barred from investing in real estate and the law on funds does not allow for the creation of new funds, legislators would either have to pass new legislation or amend existing guidelines for real estate funds to be born, Pawlowicz said.
Individuals in the property sector said that they fully supported the idea of creating real estate funds. "Excellent, it's a very good idea," said Brian Burgess, country manager with Henry Butcher real estate agency. "It would give them (developers) an investment exit."
He said that by allowing such funds to exist, Poland's real estate market would become more in line with that of Western European countries. "It's a logical move," he said.
In addition, asset management firms said that they would be interested in investing in such new funds. "Pension funds and investment funds are very interested in increasing available securities," said Dorota Winczewska, president of ING BSK Asset Management.
She said that real estate funds, which are already very developed in Western Europe, would likely be attractive for ING in Poland. While ING wouldn't invest in properties themselves because they are not liquid, publicly traded real estate securities would be viable.
While fund managers and real estate executives obviously support the proposal, Pawlowicz said that the creation of such funds could actually stabilize the entire economy as it would give individuals an additional impetus to save. He pointed out that a strong base of savings is necessary for an emerging economy such as Poland to be able to sustain its growth in the longer term.
As many as 14 fund companies now operate in Poland and manage 62 different investment funds. At the end of 1999 their total assets came to zl. 3.2 billion ($914 million), up 77% from the figure at the end of 1998.
That savings level is fairly small, however, compared to the amount of individual deposits at banks, Pawlowicz said. According to the National Bank of Poland (NBP), the total amount of individual deposits in the banking system at the end of February was zl. 132.5 billion ($32.32 million).
Increasing domestic savings would help provide the Polish economy with capital it needs to continue expanding and would also bode well for the country's problematic current account deficit, Pawlowicz said. In 1999 the current account deficit came to 7.5% of the gross domestic product (GDP). While that high a level could have prompted a currency crisis in other markets, Poland avoided such a fate because it had substantial hard currency reserves and had also attracted $9 billion in foreign direct investment last year. And much of that money came from the privatization of key industries such as banking.
"But in a few years' time the income from privatization will stop and it will be difficult to stabilize the economy based on foreign savings," Pawlowicz said.
He said that in markets such as Germany and Switzerland, the amount of money in real estate funds outpaces the level of bank deposits.
But other economists hesitated to condone real estate as the safest instrument for savings. "It's true that the business cycle in real estate is different from in other sectors of economy," said Jaroslaw Malkowski, deputy president at LG Petrobank. "But here everything is based on the assumption that real estate prices in Poland will go up to the European Union level."
But this isn't a given. He also said that one hindrance to the property sector is not lack of investors, but rather unsettled ownership issues.
"That's the main problem," Malkowski said. "Investors are afraid to buy real estate because the previous owner might show up."
Right now much of the liquidity on the property market stems from subsidiaries of investment funds or insurance companies that have been set up to specifically invest in real estate. For example, in 1998 Commercial Union, an insurance company that manages assets raised from Polish retail investors, purchased the Wisniowy Business Park in Warsaw.
Foreign funds also have been known to buy developments. For example, last year Pricoa Property Investment Management, a subsidiary of the United States' Prudential Insurance Company, paid $40 million to acquire 100% of the Atrium Business Center. German insurance company Hamburg-Mannheimer's property investment arm last month signed a preliminary agreement to buy the Focus Filtrowa building in Warsaw for about $100 million.
But those insurance companies or foreign funds do not give the Polish retail investors a chance to get in on the game. Retail investors here are stuck with being exposed primarily either to fixed-income securities or equities.
Pawlowicz also pointed out, though, that the real estate market in Poland is not transparent. Land prices and rental rates are often closely held secrets. If publicly traded funds were to get in on the action, he said, it would shed light on the entire market as they would have to disclose their activities and the prices paid for buildings.
But executives working in fund management said that they did not think real estate funds would be launched anytime soon. Nor are pension funds are likely to be allowed to invest in real estate in the near future. And even if pension funds were allowed, right now they do not have the capital base to play with property. With fewer resources, the funds are better off sticking to the easily exitable Warsaw Stock Exchange (WSE).
"To invest in real estate you need to be rich," said Ewa Kucharska-Stasiuk, a professor at Lodz University.
Henry Butcher's Burgess agreed that pension funds probably shouldn't be allowed to invest in real estate in the early stages. They should probably focus on relatively safer equities and fixed-income securities, he said. "It's sensible to keep them liquid," he said.
Kucharska-Stasiuk also said that it is unwise for pension funds to become involved in such a non-transparent industry as real estate at this stage.
"In Asia, speculative investment in real estate put many funds and banks in trouble," said Mateusz Szczurek, economist with ING Barings.
However, in the longer term, pension funds should not necessarily be barred from the industry, particularly if it offers good returns, Burgess said. "They shouldn't be stopped artificially by the law," he said.
