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The Warsaw Voice » Real Estate » September 24, 2008
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Investment Funds and Real Estate
September 24, 2008   
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As recently as mid-2007 the residential market in Poland was experiencing rocketing demand. People were lining up to snap up every square meter of housing planned or built by developers. That level of demand is now a thing of the past, and apartment prices are going down, with some analysts estimating a drop at 10-12 percent. These forecasts and trends are followed very carefully by institutional investors, as shown by the trends on the market involving investment funds that invest in the real estate sector.

Rocketing prices on the housing market were largely propelled by the speculative activity of foreign investors. Buying an apartment was not only a good investment but also a way to a quick and hefty profit. The housing construction market was ruled by suppliers-developers who dictated prices that some described as outrageous. The price increases were evident and 2006 and the first half of 2007 stood out for especially strong growth-average apartment prices jumped several dozen percent during this time. A correction was inevitable because slowly, fewer and fewer people were able to afford to buy one square meter of home for several times the average monthly wage, despite the availability of a broad range of mortgage loans.

In the second half of 2007 and the early months of 2008, demand weakened visibly, the supply of homes increased and consequently prices stopped growing so fast and a correction began. This correction was reflected very quickly in the mood and policies of funds investing in the Polish real estate market. Whereas in previous years they were most interested in developer projects involving residential space, today some investment funds are considering exchanging residential projects for office projects that might offer a better rate of return. The signals coming from the commercial real estate market are optimistic. Demand for office space is not flagging in large cities and saturation indices are still high. The same positive tendency is observed for retail centers; most projects from this segment are being located in smaller towns. Good prospects are offered by hotel projects as well.

Łukasz Urban, deputy head and financial director of PZU Asset Management says, "Even in previous years, apart from an interest in the residential market, the larger institutional funds, both foreign and Polish, focused significantly on the commercial market. Today even fewer funds are willing to invest in residential real estate: commercial projects are definitely in first place due to the good prospects of these segments. Funds are investing in offices and shopping centers as well as warehouses. The Polish hotel segment is also perceived as interesting, partly because of the approaching Euro 2012 soccer championship finals, but chiefly due to the low saturation with hotel accommodation. Poland has about 30 hotel beds per 10,000 residents, while Slovakia has over 100, not to mention the Czech Republic where the index exceeds 200," says Urban.

Foreign funds and transactions
The Polish market includes a dozen or so investment funds specializing in real estate. According to www.analizyonline.pl, at the end of May real estate funds had zl.1.7 billion in net assets, giving them a 1.6-percent share in the Polish investment fund market and ninth place among the 13 different fund groups analyzed. Most of these institutions are foreign funds, from Germany, Britain or the United States. Funds from Switzerland, Scandinavia, Ireland and Australia are also investing in Polish real estate. Most of the market transactions are concluded by foreign institutions. Jones Lang LaSalle reports that a major role on this market was played by German investment funds Deka and Oppenheim, which closed transactions to the tune of more than zl.260 million. The largest transaction was an agreement between Whitehall Funds and the Casino Group under which the fund will invest at least 500 million euros over the next five years.

Polish funds modest but dynamic
The opportunity for good investments in the real estate market has also been noticed by Polish investment funds, especially in view of the perturbations on international financial markets and tendencies for withdrawal of savings from investment funds. Estimates say that since the start of the bear trend Poles have already withdrawn more than zl.20 billion (zl.18.4 billion between October 2007 and May 2008 alone). That is why new funds investing in the real estate sector are springing up all the time. Recently PZU formed one, and before that-Arka (BZ WBK) and TFI BPH. Skarbiec TFI has announced plans to establish a real estate fund after the vacation season.

Arka started its first such fund (Arka BZ WBK Fundusz Rynku Nieruchomości) at the end of 2004. Its portfolio is practically closed now and includes 19 commercial properties (four developer projects in the residential segment will be completed soon). Over the past 3.5 years the average annual rate of return achieved by Arka was 16.05 percent. Over the past 12 months, it was 39.34 percent. A minimum half of the fund's portfolio is office real estate. The rest is retail, warehouse and residential space. The share of the latter segment is limited to a maximum 25 percent. The fund's net asset value is zl.622.7 million.

BPH TFI set up its first real estate fund, BPH FIZ Sektora Nieruchomości, in mid-2005. It includes seven projects and the average annual rate of return from August 2005 has been about 8.75 percent. The rate of return for the previous year was 16.76 percent. The fund invests capital in two portfolios. The aim of the liquid assets portfolio (securities, financial market instruments, deposits, currencies) is to ensure the fund's liquidity. The other portfolio is made up mainly of office (45 percent), retail (35 percent) and warehouse real estate (15 percent). The fund has assets worth almost zl.420 million.

TFI PZU received the consent of the Financial Supervision Commission to establish its Fundusz Inwestycyjny Zamknięty Sektora Nieruchomości in mid-May. This is the PZU group's first fund investing in the real estate market. Like the other 10 TFI PZU funds, this fund will be managed by PZU Asset Management SA. It will invest mainly in the commercial real estate market, in the office, retail and warehouse as well as hotel segments in Poland. Its equity capital, obtained from the issue of PZU FIZ Sektora Nieruchomości certificates, is about zl.300 million, which should allow the fund to pursue an active investment policy.

For now, the scale of Polish investment funds' commitment on the real estate market is not huge: last year Polish funds accounted for less than 1 percent of the total transaction value. The activity of Polish funds was restricted mainly by subscription capacity and the scale of their operations has never been great due to difficulties with obtaining large enough capital. Interestingly, though, one of the most profitable investment funds between September 2005 and June 2008 was Inwestor FIZ, with 153.5 percent growth in profit (excluding fees and taxes), followed by Arka BZ WBK Fundusz Rynku Nieruchomości FIZ (76.08 percent) and Opera FIZ (68.58 percent).

Real estate-good business
Most real estate funds invest in shares of companies providing construction services, building materials producers and developers. Many funds are interested in specific projects on the commercial property market, with a special focus on office space.

Last year, real estate funds bought commercial properties in Poland worth a total of 3.2 billion euros. Most of the deals were on the market for shopping space-59 percent, or 1.9 billion euros. Office space came in second with 35 percent and was followed by warehouse and industrial space (4 percent ) and mixed projects and hotels (2 percent).

Office space in good locations in any of the large Polish cities is attractive to investors. Experts say Katowice and Cracow should see a rapid increase in office projects in the coming years, with more than 150,000 sq m to be built in Katowice and more than 100,000 sq m in Cracow within two years. Other cities expected to see new office development are Wrocław, Poznań and Łódź.

Warsaw will traditionally remain a good location for office projects. According to Maciej Gołębiewski, director of the department for corporate clients at real estate services company CB Richard Ellis, the Polish commercial property market has big potential for growth. It has grown considerably in recent years. Funds tend to invest in buildings that have already been rented out and generate monthly income from rents under long-term contracts with tenants. In Poland such contracts are signed for five or seven years or even as long as 10 years. For the investor, this means a guarantee of stable income over many years, regardless of the situation on the stock market, which has caused a headache to investors in recent months.

Another good investment opportunity is existing shopping malls and logistics parks along the most important transport routes. Although the market for shopping space in large cities is quite saturated, it remains attractive to investors. A new trend is the development of shopping centers combined with office space. The Blue City and Złote Tarasy malls in Warsaw are two examples of such projects. A growing number of projects is under way or planned in cities with populations of under 100,000. Shopping malls have recently been built in Puławy, Konin and other small cities. RE Development, which builds Ferio shopping centers, is the leading developer on this market.

Hotels are another promising sector, thanks to a number of major international events that Poland is preparing to host. In connection with preparations for the Euro 2012 soccer tournament, some local governments offer special privileges to investors building hotels and tourist facilities. There is still room for new hotels in Warsaw. The city has 18,000 hotel beds, while Cracow, which is less than half the size of Warsaw, has 11,000 beds.

Investors more cautious
Although real estate is a better investment option these days than volatile stocks, the Polish real estate market has not escaped a correction. Even though the U.S. mortgage crisis and bearish trends on the U.S. stock market have had little direct impact on Poland's commercial property market, foreign investment funds have showed less interest in the Polish market in recent months. This trend has been reflected by investment in office space. In 2006 there were 50 such deals on the Polish market, worth 2.2 billion euros in total, and in 2007 there were only 34 deals worth 1.1 billion euros. They involved projects such as Europolis, Focus Filtrowa, Prosta Office Center, Trinity Park II and Millennium Plaza in Warsaw. The average value of a deal decreased considerably-from 45 million euros in 2006 to 32 million euros in 2007. Investors also showed more interest in locations outside Warsaw. These accounted for around 20 percent of all purchases, compared with 16 percent in 2006.

Analysts at Cushman & Wakefield Polska say it now takes longer to complete a transaction because deals are analyzed for a longer time, especially when funding from banks is needed. Some buyers have delayed investment decisions waiting for a general drop in prices. As a result, the transaction volume has shrunk recently. In the first half of this year, many investors delayed decisions to buy or sell and tried to predict at what price level the markets would finally stabilize.

Where to invest
Most analysts say the latest slowdown caused by adverse impacts from the U.S. market is temporary and the Polish market will remain immune to these shocks in the long run. Its prospects are stable for at least several reasons. First of all, demand for office space in large cities is not weakening. In anticipation of increased activity on the transport infrastructure market ahead of the Euro 2012 soccer tournament and the continued inflow of business process outsourcing (BPO) projects, investors are starting new office projects in both large and smaller cities, like Rzeszów, Lublin and Szczecin.

Last year, interest in commercial land was the highest in the Gdańsk-Sopot-Gdynia Tricity area, Łódź and Katowice. Around 2 million sq m of new office space is expected to be built in the six largest urban centers by 2010. In Warsaw, high demand for modern office space is still being driven mainly by foreign investors. At the end of the first quarter of this year, vacant space accounted for only 2.4 percent of the total office stock, down by 0.7 percentage points from the end of the fourth quarter of last year.

The Polish warehouse space market has also withstood the fallout of the U.S. mortgage crisis. Both demand and the number of rental contracts are on the rise. Since the beginning of last year supply on the Polish warehouse market has increased by 1.2 million sq m, reaching 4.2 million sq m in April this year. Most of the warehouse space has been built in central Poland (around 306,000 sq m), Warsaw (289,000 sq m), Upper Silesia (150,000 sq m) and Poznań (141,000 sq m). "The most developed markets-Warsaw, central Poland and Upper Silesia-will continue to grow throughout 2008, but new projects will also appear in locations such as Bydgoszcz, Opole, Lublin, Radom, Rzeszów, Szczecin, Toruń, and Zielona Góra," said Marzena Pobojewska of real estate consultants King Sturge.

Shopping centers and hotels
At the end of last year, Poland had 7.5 million sq m of modern retail space, with a further 600,000 sq m under construction and preparations to build another 1 million sq m, mainly in small and medium-sized cities. It is expected that cities with populations ranging from 50,000 to 100,000 will account for 12 percent of the total supply of shopping space in Poland by the end of 2009, up from 6 percent in April this year. This year and next only 43 percent of the new space will be built in the eight largest cities. The rest will be built in medium-sized and smaller cities. Shopping centers whose construction will be completed in 2008 and 2009 in Cracow, Lublin, Łódź, Gdańsk, Poznań, Koszalin, Gliwice and Rzeszów will range from 49,000 sq m to 100,000 sq m in area.

Both foreign and domestic hotel chains consider Poland to be a good location for their brands, especially because of the Euro 2012 tournament to be hosted by Poland and Ukraine. According to Cushman & Wakefield, around 200 hotels are now being built or modernized in Poland and scheduled for completion in 2008-2012. The total number of new hotel rooms in these projects will reach around 10,000. Additionally, 200 hotel projects to be completed by 2012 are in the planning phase. They will provide 20,000 rooms in total.

The strong fundamentals of the Polish economy and expectations of a further increase in rents encourage real estate funds to continue investing in the Polish market. As a result, new funds are likely to emerge in the near future.

Agnieszka Domańska
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