Market for risk-lovers
15:48
Until recently, prime properties were readily snatched up as soon as they had risen from the ground. However, times when new office and retail schemes were sold on the block may be coming to an end.
Conversely, value-add and core-plus asset classes seem to be in
by Beata Socha
There is and always will be investor interest in a core product. Take TriGranit’s Poznań City Center, delivered in late 2013 and sold in early 2014, or Skanska’s Atrium 1 in Warsaw, bought by Deka Immobilien for €94 million even before it was completed. But the allure of core properties seems to be slowly fading.
Consider Warsaw’s office market. On the one hand, prime office projects currently available for sale are getting increasingly scarce. “The biggest interest we have seen over the past 12 months has been in core assets, which means properties in Warsaw’s CBD. There aren’t many such schemes available,” says Soren Rodian Olsen, head of Office & Industrial Investments at Capital Markets of Cushman & Wakefield in Poland.
On the other hand, all the new supply that is to be completed by 2016 (700,000 sqm is currently under construction, according to Cushman & Wakefield) could prove difficult to commercialize, making investors wary of the most recent developments. “There is too much supply coming online, creating pressure on rents. Currently, yields are at 6 percent for the office segment, but that may be just on paper. As the supply of offices increases, these yields could prove to be lower in reality,” explains Ben Habib, CEO of First Property Group.
Scarcity of prime assets is even more pronounced in the retail segment. There aren’t many schemes the likes of Manufaktura in Łódź (central Poland), Poznań City Center (western Poland), Silesia City Center in Katowice or Galeria Dominikańska in Wrocław (the latter are both located in southern Poland) – all of which have changed hands in recent years.
The shabbier, the better
While the core segment is getting tougher, the other asset classes seem to be doing increasingly well. The huge office supply pipeline over the next two years will put even more pressure on B and C class properties, whose tenants will likely move to newer stock. “This may be attractive to sources of opportunistic capital, targeting standing office projects for refurbishment, re-letting and repositioning. We are certainly experiencing a much increased interest in Warsaw from such sources of capital,” said Olsen.
Value-add retail properties have been rather popular for quite some time now. “We have seen growth of interest in value-add properties since 2010, as the global crisis prompted some investors to rethink their investment strategies,” said Agnieszka Kołat, JLL’s national director, Retail Investment CEE.
Distressed retail assets are in no short supply. “The lifetime of the first and second generation shopping centers built in the 1990s was supposed to be 20 years. There are 5 million sqm of shopping centers that were built before 2005. For some of them the 20-year shelf life has already expired.” said Agnieszka Mielcarz, head of Retail Asset Management at Knight Frank.
[caption id="attachment_62115" align="alignleft" width="191"] "There are 5 million sqm of shopping centers that were built before 2005. For some of them the 20-year shelf life has already expired.
Agnieszka Mielcarz, head of Retail Asset Management at Knight Frank[/caption] First and second generation shopping malls do have some advantages over newly built schemes. Their location is usually very convenient and they have long been established as dominant retail destinations. However, they are also increasingly obsolete and losing ground to more recent and versatile schemes. If they are not refurbished soon, their next appraisal may be a pretty rude awakening for their owners. “If they want to sell their properties, the owners of these shopping centers will have to increase the value of their properties by improving revenue from leasing,” said Mielcarz. Even core-plus properties could benefit from some retouching. These are schemes that are “conveniently located, with a large catchment area and a loyal client base but not necessarily of the most modern standard,” said JLL’s Kołat. “These schemes could greatly increase in value through refurbishing, refreshing their tenant mix and thus boost their quality.” However, repositioning is not something that can be done overnight. “In order to successfully implement a repositioning strategy, you need at least a few years and a long-term asset management plan for the scheme based on a thorough business analysis. The average time frame for such an endeavor is three, five or even up to seven years,” she explained. In search of potential The core-plus segment, which has thus far been discounted by most international investors, is also finally picking up. This category encompasses a broad spectrum of real estate: good quality Warsaw office schemes in less central locations, such as Mokotów, as well as in regional cities. “Over the past 18 months, we have experienced increasing investor interest in Polish regional cities ... When you look at investment volumes for Polish regional offices in 2013, there was a 680 percent increase year-on-year,” Olsen said. Warsaw’s non-central locations are also on the radar. “Considering the number of new and existing quality office buildings in the Mokotów district, a typical location for core-plus assets, we are confident to see more transactions happening in this segment,” he added. Similar changes can be expected in retail investment. “Due to the dearth of prime assets in the largest Polish cities, investors are very likely to turn their focus in the forthcoming months to cities with a population of 100,000 to 400,000 offering a number of modern and successful retail properties,” claims the latest Cushman & Wakefield report.
Seeking home further east Interview with Ben Habib, CEO of First Property Group What kind of property is on the investors’ radar this year? As far as offices are concerned, it is still major cities that mainly attract investor interest: Warsaw, Wrocław, Kraków and possibly Poznań and the Tri-City. In Warsaw, institutional investors are still looking at class-A buildings in CBD, Mokotów and Wola. The issue with Warsaw though is that the vacancy rate has risen markedly since 2009-2010 when it was at 5 percent. Now it is pushing 12 or even 13 percent. In Kraków, the vacancy rate is still low, but it is a much smaller market than Warsaw. I personally don’t see much attraction in investing in new class-A office buildings in Warsaw. There is too much supply coming online, creating pressure on rents. Currently, yields are at 6 percent for the office segment, but that may be just on paper. As the supply of offices increases, these yields could prove to be lower in reality. I think existing office buildings with less impressive specifications are more interesting, especially those that are let at lower rent levels. They can be managed intensively to increase rents, cut costs and improve the asset’s income profile and value. Despite the fact that the core segment offers ever decreasing yields, it still dominates the investment market. Why is that? One of the problems with the Polish commercial property investment market is that 90 percent of turnover is due to international investors and many of these funds invest to gain exposure in Poland. Their default position is to buy prime properties. Quite a number of international funds have mandates to invest in CEE or in Europe as a whole. They will generally not look for risk, they are looking to buy safe properties in their chosen geographies. Buying more management-intensive properties is really for private equity-type investors. Over time, as the Polish economy grows and the market becomes larger and more stable, this should change. Another driver of interest in more asset management intensive properties in Poland is likely to be rising markets in Western Europe. As money finds it more difficult to earn respectable returns in Western Europe, investors are likely to seek homes further east, such as in Poland.
Agnieszka Mielcarz, head of Retail Asset Management at Knight Frank[/caption] First and second generation shopping malls do have some advantages over newly built schemes. Their location is usually very convenient and they have long been established as dominant retail destinations. However, they are also increasingly obsolete and losing ground to more recent and versatile schemes. If they are not refurbished soon, their next appraisal may be a pretty rude awakening for their owners. “If they want to sell their properties, the owners of these shopping centers will have to increase the value of their properties by improving revenue from leasing,” said Mielcarz. Even core-plus properties could benefit from some retouching. These are schemes that are “conveniently located, with a large catchment area and a loyal client base but not necessarily of the most modern standard,” said JLL’s Kołat. “These schemes could greatly increase in value through refurbishing, refreshing their tenant mix and thus boost their quality.” However, repositioning is not something that can be done overnight. “In order to successfully implement a repositioning strategy, you need at least a few years and a long-term asset management plan for the scheme based on a thorough business analysis. The average time frame for such an endeavor is three, five or even up to seven years,” she explained. In search of potential The core-plus segment, which has thus far been discounted by most international investors, is also finally picking up. This category encompasses a broad spectrum of real estate: good quality Warsaw office schemes in less central locations, such as Mokotów, as well as in regional cities. “Over the past 18 months, we have experienced increasing investor interest in Polish regional cities ... When you look at investment volumes for Polish regional offices in 2013, there was a 680 percent increase year-on-year,” Olsen said. Warsaw’s non-central locations are also on the radar. “Considering the number of new and existing quality office buildings in the Mokotów district, a typical location for core-plus assets, we are confident to see more transactions happening in this segment,” he added. Similar changes can be expected in retail investment. “Due to the dearth of prime assets in the largest Polish cities, investors are very likely to turn their focus in the forthcoming months to cities with a population of 100,000 to 400,000 offering a number of modern and successful retail properties,” claims the latest Cushman & Wakefield report.
Seeking home further east Interview with Ben Habib, CEO of First Property Group What kind of property is on the investors’ radar this year? As far as offices are concerned, it is still major cities that mainly attract investor interest: Warsaw, Wrocław, Kraków and possibly Poznań and the Tri-City. In Warsaw, institutional investors are still looking at class-A buildings in CBD, Mokotów and Wola. The issue with Warsaw though is that the vacancy rate has risen markedly since 2009-2010 when it was at 5 percent. Now it is pushing 12 or even 13 percent. In Kraków, the vacancy rate is still low, but it is a much smaller market than Warsaw. I personally don’t see much attraction in investing in new class-A office buildings in Warsaw. There is too much supply coming online, creating pressure on rents. Currently, yields are at 6 percent for the office segment, but that may be just on paper. As the supply of offices increases, these yields could prove to be lower in reality. I think existing office buildings with less impressive specifications are more interesting, especially those that are let at lower rent levels. They can be managed intensively to increase rents, cut costs and improve the asset’s income profile and value. Despite the fact that the core segment offers ever decreasing yields, it still dominates the investment market. Why is that? One of the problems with the Polish commercial property investment market is that 90 percent of turnover is due to international investors and many of these funds invest to gain exposure in Poland. Their default position is to buy prime properties. Quite a number of international funds have mandates to invest in CEE or in Europe as a whole. They will generally not look for risk, they are looking to buy safe properties in their chosen geographies. Buying more management-intensive properties is really for private equity-type investors. Over time, as the Polish economy grows and the market becomes larger and more stable, this should change. Another driver of interest in more asset management intensive properties in Poland is likely to be rising markets in Western Europe. As money finds it more difficult to earn respectable returns in Western Europe, investors are likely to seek homes further east, such as in Poland.
