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Developers still doing well
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Kazimierz Kirejczyk, FRICS
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6 February 2019
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22 January 2019
Summary of 2018 on the primary residential market
31 December 2018
Kazimierz Kirejczyk, FRICS
In the past days we have seen two groundbreaking investments on the Polish residential market by foreign institutional investors. The start was made with the acquisition of 72 apartments in the iconic Złota 44 tower by Catella Real Estate AG, being the first transaction of such scale in the luxury segment in Warsaw. Another milestone deal followed only a few days later, when Bouwfonds Investment Management signed the forward purchase of an entire residential development project containing 193 apartments. REAS was involved in both deals, providing the market due diligence for Catella and serving as transaction advisor on behalf of Bouwfonds.
In both cases, the two investment management companies represented open-ended public real estate funds under German investment law: Catella Wohnen Europa and Bouwfonds European Residential. These funds are exclusively focused on residential property and are designed for institutional investors, with a minimum investment of EUR 500,000. The investor profile of the funds includes risk averse insurance companies and pension funds. Residential rental property is perceived as a low risk asset class. At the same time, rental housing proved capable to provide relatively high returns across the mature European markets in the past years. Its stable economy and strong performance in the housing sector put Poland on the map of these investors.
The bulk buy in Złota 44 marked the official start of the Catella Wohnen Europa fund. It was already the fourth investments of the fund, after Catella RE secured more than EUR 200 million as start-up capital. No doubt it is a good sign for the Polish residential market to be amongst the first deals for such a serious player. Further transactions worth more than EUR 100 million are currently being prepared by Catella. The target volume of the fund is at EUR 1 billion. Catella states the expected rental yield of its investment in Złota 44 at approximately 6.6% before operating costs. For Catella the deal in Warsaw fits into their diversification strategy into luxury property, while the focus of the fund is on the core segment. For the seller, a consortium made of BBI Development and Amstar, the transaction is a confirmation for the interest of long-term investors in luxury rental in general. The package of apartments, located on entire floors 11 to 19, amounts to nearly 25% of all units in the project.
The transaction by Bouwfonds was the first of its kind by a foreign player in Poland. For the first time, a foreign fund acquired a whole residential development project with rental apartments. The building located at Pereca Street in the CBD of Warsaw will contain a total of approximately 9,500 sqm, including 193 apartments and ground-floor retail space. The negotiations were time-consuming, as both parties entered new territory. With the deal being based on forward funding, the complexity was increased. Yet, the commitment of all participants stayed strong, as the mutual gain was recognized. The seller Matexi Polska stated the strategic value of the deal as an integral element in the company’s business growth model. As the first investment in Poland, the Pereca project will diversify the pan-European residential portfolio of the Bouwfonds European Residential fund. Since its launch in 2007, the fund acquired assets worth around EUR 1 billion in Germany, the Netherlands, Denmark, France and Sweden. Bouwfonds is currently planning a follow on fund, aimed at continuing the successful track record.
What do these transactions mean for the Polish market? The residential development industry for sale matured and showed a great performance over the recent years. Yet, so far there has been no institutionalized transaction sector, as in other mature property markets. The Rental Housing Fund of the state-bank subsidiary BGK Nieruchomości made the first move in this direction. But the two transactions by private players representing large institutional investors is a much stronger confirmation for the potential lying in the Polish residential market. We can compare the momentum with the rise of commercial property investments in Poland in the 1990s. The pioneering investments are there, now other actors are likely to enter the scene. In the past 3-5 years we had numerous meetings and strategic workshops with potential investors interested in a market entry from Germany, Austria, the Netherlands, Denmark, UK and US. Many investors looked for opportunities to purchase running cash-flow assets.
However, due to the widespread privatization in Poland, it is difficult to find a standing investment in the hand of only one landlord and fully rented out with acceptable standard, location and rent levels. Not many investors are willing to go into development risk, even on a forward commitment basis. However, this is chancing across Europe. Firstly, there are too few standing investments to invest in. Secondly, a new built structure has many advantages for the investor. In contrast to many older buildings, the costs of upholding the property are limited and the investor can still have an effect on the quality and energy efficiency of the project. Such a deal is clearly a mutual gain for both investor and developer. For development companies it can be very attractive to establish business relations with an international fund. Instead of negotiation with hundreds of households, it is enough to negotiate with one professional investor who knows what he wants. Earmarking a building in a multi-phased development allows to sell a large project much faster and leads to increased rate of returns. During market downturns, selling to a fund can be a good alternative. Yet, in order to make a deal happen, it is of upmost importance to understand the way of thinking of institutional investors and to speak the same business language. Not everything depends on the price. Knowledge about the local rental market is essential, as is the location, the project and the trustworthiness of the developer. As advisor to the first two deals on behalf of institutional investors, we understand the strategy and needs of our clients for their investments in the Polish private rented sector. And, we continue to search for more appropriate investment opportunities.