The cautious search for opportunities
Daniel Harris: Definitely. In Europe we have four main areas of focus - the UK, France, Germany and CEE, and within CEE, Poland is our core investment market. All of our investments so far in the region - Rondo 1, Wilanów One and Angel Wings - have been in Poland, and we expect the majority of our future investments to be in Poland. It has become the business and financial capital of the region.
How about Wrocław? Why did you choose to invest in this particular city, given the choice of other secondary Polish cities?
We made an investment in Angel Wings in the summer of 2007. Wrocław attracted us because of what it was doing as a city. It is very forward-looking, the mayor is very progressive in his planning, he wants Wrocław to become a major city. It has a large population, a very large student population, a lot of ongoing investment and its proximity to Germany makes it attractive. Those fundamentals haven't changed today, and we are still extremely positive about the forecast for Wrocław.
We feel that our position is very strong with the Angel Wings project. While other developers have stopped construction due to financing issues, we are in a fortunate position. We have a strong bank behind us that supports us and we are actually starting construction this week.
Have you considered investing in Romania or Bulgaria?
Our other focus beside Poland will be Romania, there is no question. Just the basic fact that this country has a larger population than its neighbours mean that there will be a significant amount of investment opportunities. We are looking at investing in Romania cautiously, I would say. We have spent a lot of time to understand Romania, so when we do make an investment there, we will make the right one. We will definitely make an investment there within the next few years, most likely in the retail sector. But it is a challenging market. And Bulgaria remains on our radar, but as a less populous country it is not a main focus.
If real estate is a safe bet for investing nowadays, what is the best sector to invest in at the moment?
It is very hard to be sector specific, the key is to find and use the right opportunity. The fundamentals of the economy still make a residential property a very attractive sector. But all sectors present opportunities really, you just need to be aware of the caution you need to take.
Is this MGPA's unofficial strategy?
I don't think it is unofficial. We are
definitely looking to make investments, and we think at the moment there are a
lot of exceptional opportunities, but you need to be cautious. And that is one
of the reasons we are focused very much on Poland, because we think Poland will
be least affected by the current financial crisis which seems to be taking hold
in more and more of Europe. We are excited about making investments within the
next 12 months. I cannot say when exactly they will take place, but they will.
Your assets in Poland include office and residential projects. How about investing in the retail sector, which seems to be booming?
There is still a lot of potential for retail in Poland. Fundamentally the retail growth, the retail spending, the earnings potential in Poland are set to rise over the course of five to ten years. I think there will be some rationalization in the retail market, but ultimately there is room for more new modern shopping centers. There is no need for some secondary cities to have as much shopping center space as is currently in the pipeline, while in some cities there is need for more. But there need to be some caution about investing.
How likely is the financial crisis to affect office space rents in Warsaw in the near future?
From what we are seeing demand is affected slightly, but what is falling at much faster pace is supply. Developers in this market were able to build without pre-leases and gaining those pre-leases during the construction. Pure pre-lease signing before construction is very rare, but right now it is difficult to secure bank financing without a pure pre-lease. As a result supply is falling far quicker than demand. Therefore we do not expect rents to decline significantly or decline at all in the CBD.
We think rents may be susceptible to slow decline in Mokotów, where there is a large supply with funding already in the pipeline, but a limited supply in the future. While in the CBD there is no supply for the next three years, and due to difficulty in funding it is unlikely you will see a building within the next 12 months getting finance. Therefore we see CBD rents holding strongly, and there is a potential that if a demand doesn't fall too much you can actually see a slight rental increase in the CBD, whereas in Mokotów I expect rents to fall slightly.
How about vacancy rates?
Vacancy rates now are unrealistically low. You shouldn't have vacancy rates between one and three percent. It is inappropriate for developed market. I don't see CBD vacancy rates affected significantly, because there is a shortage of supply. I see vacancy rates in Mokotów going up slightly, but to a more appropriate average, five to seven percent, which is probably where vacancy rates should be in that sort of market. I don't expect them to blow up to fifteen percent, which would be a worrying sign for the market.
MGPA is a private equity real estate investment advisory company. MGPA Fund III, focused on investing in Asia and Europe, closed in June 2008 with equity commitments of approximately $5.2 (zł.14.4) billion, which makes it the third largest fund ever raised. $1.3 billion of equity commitments in Fund III will be allocated for investment in Europe (MGPA Europe Fund III). MGPA assets in Poland are the Rondo 1 office tower, and two residential projects under construction - Angel Wings in Wrocław and Wilanów One in Warsaw.
