European real-estate investors are lining up to do deals in a market where they can find better returns than in London, Paris or Berlin: Warsaw.
Commercial-property sales in Poland almost quadrupled in the first nine months of 2010 from a year earlier to 1.45 billion euros ($2 billion), according to New York-based Real Capital Analytics. The former communist country was the only European Union economy to avoid a recession last year.
“If I had only one country in Europe in which to put my money, it would be Poland,” said Martyn McCarthy, chief executive officer in Europe for Sydney-based Valad Property Group. Valad manages a fund owning six Polish industrial sites.
Property investors fled what were perceived as more risky countries in the former Soviet bloc, including Poland, during the financial crisis. While that led to lower prices in Warsaw, the scale of the decline was closer to western European cities than those in the East, encouraging investors to return.
Prime Warsaw office values fell 25 percent to 30 percent from mid-2007 to a year ago, Jones Lang LaSalle Inc. estimates. They have since rebounded more than 10 percent. In parts of central London, prices have recovered about 22 percent since August 2009, following a 50 percent slump in the previous two years, according to Investment Property Databank Ltd.
“Poland has behaved more as a core market than in the past, when it was like any other fragile east European country,” said John Duckworth, managing director for central and eastern Europe at Chicago-based Jones Lang.
Overseas investors drive Poland’s real estate market, since local pension funds are prohibited from owning property and domestic money managers lack the money to purchase large, new office complexes and malls. Property sales in the country fell to 770 million euros last year from more than 5 billion euros in 2006, Real Capital Analytics data show.
Unibail-Rodamco SE and Commerz Real AG are among companies that have bought in Poland this year as the country’s growth prospects boost optimism that rents and building values will increase. Poland accounted for more than half the investment in central and eastern Europe in the third quarter, according to property broker CB Richard Ellis Group Inc.
Poland’s economic expansion may almost double this year to 3.4 percent, or twice the rate for the 16-nation euro region, according to European Commission estimates. Annual growth averaged 4.6 percent since 2003. Spending by Poland’s 38 million inhabitants increased 3 percent in the second quarter.
‘Probably Do More’
“If there are opportunities, we will probably do more” in Poland, Hans-Joachim Kuehl, head of acquisitions at Commerz Real, said in an interview at Munich’s Expo Real trade fair earlier this month. His company, Germany’s third-largest property mutual-fund manager, bought the Harmony Office Center in Warsaw in June for 56 million euros.
First Property Group Plc, a U.K. commercial property fund manager, announced earlier this month that it plans to raise a 100 million-pound ($159 million) fund to invest mainly in Poland.
Unibail-Rodamco, Europe’s largest real estate investment trust, bought the Arkadia and Wilenska shopping malls in Warsaw in February. Union Investment Real Estate AG purchased the Lipinski Passage office and shopping center for about 35 million euros and the Horizon Plaza business complex for 103 million euros this year.
Weaker property values lifted capitalization rates for prime Warsaw offices, or rental income as a proportion of a building’s purchase price, to about 7.5 percent a year ago from 5.5 percent at the peak in early 2007, Jones Lang estimates.
Better Than London
The increased investment demand in Warsaw, an office market that’s a fifth the size of Stockholm’s, helped drive the rate down 1 percentage point in the past year to about 6.5 percent. At 1 to 2 percentage points more than for prime properties in London, Paris or Berlin, Poland’s rate is still attractive, buyers said.
“Everyone looks to Poland for better yields,” said Barbara Knoflach, CEO of Frankfurt-based SEB Asset Management AG, which paid 93 million euros in March for the Trinity Park III office building in Warsaw. “The Poland story is a mixture of its size and the belief that it will become one of the more important countries in Europe.”
With all the recent deals, investors looking to profit from substantial gains in Warsaw property prices may have already missed the boat, according to Lars Ohnemus, CEO of Copenhagen- based BPT Asset Management A/S. His fund’s last purchase in Poland was in 2008.
Warsaw ‘Is Over’
“The Polish story is over as such” in Warsaw, he said at a seminar at the Expo Real fair. “Going into the smaller cities, there’s a significant risk down the road.”
Stefan Brendgen, head of Allianz SE’s German and central Europe real estate investment arm, said he’s now considering looking in larger regional cities such as Krakow, Lodz and Wroclaw after losing out in bids for several Warsaw properties.
More investors are looking further afield in Poland as multinational companies set up offices and factories in regional cities, drawn by a cheaper, skilled workforce. Poznan, Katowice, the Tricity area and Lodz have become hubs for outsourcing, service centers and research and development, JLL’s Duckworth said.
Deutsche Bank AG’s RREEF bought the Grunwaldzki Center in Wroclaw, Poland’s fourth-largest city, for 77 million euros in July. Tenants include Banco Santander SA, Credit Suisse Group AG and Hewlett-Packard Co.
Beyond the Capital
Resolution Property Plc bought the Galeria Pomorska, a shopping center in Bydgoszcz, in May for 51 million euros.
The government is improving the country’s rail and highway network, partly in anticipation of the increase in tourism in 2012, when Poland co-hosts the European soccer championships.
His company opened a four-star hotel in Katowice in March and wants to expand into budget hotels. It’s also building the Le Palais office building in Warsaw and a shopping center in Bialystok and refurbishing a building in central Krakow.
There are still lingering concerns about the risk of owning too much property in Poland.
“When the zloty is exchanged for the euro will be the true test of when Poland is a core market,” said SEB Asset Management’s Knoflach.
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