Foto: Gemini

While Czech and regional investment levels are expected to remain relatively subdued in 2010 interest is clearly on the rise.

While 2009 will not be remembered fondly by anyone involved in property investment in Central and Eastern Europe (CEE), the rise in deals that took place in the fourth quarter—particularly in the region’s core markets—has improved the outlook considerably. Among the deals that took place were the sale of the Marynarska Point office project in Warsaw by Skanska to Luxembourg-based Investec GLL Special Global Opportunities Real Estate Fund for almost €70.8 million (Kč 1.85 billion), the sale of Cristal Park office building in Warsaw by Yareal Polska to Spanish private equity company Azora and a sale-and-leaseback deal that saw German open-ended real estate fund Deka Immobilien acquire the Tesco Distribution Center in the Prague metropolitan area from Tesco for €36 million to add to the portfolio of its Deka-ImmobilienEuropa fund. In summer 2009 the fund acquired a Tesco logistics facility in the Warsaw metropolitan area for €34 million.

“There is more optimism and enthusiasm on the part of investors to enter into transactions across Europe. Currently in CEE the focus is on Poland and the Czech Republic. All investors are, however, being highly selective with regards to which opportunities they will consider, with the majority of the interest at the core end of the market. There is, however, limited stock that is readily tradeable, and we therefore anticipate strong competition to secure the realistically priced assets,” said George Lewis, head of capital markets at consultancy Jones Lang LaSalle.

First mover

Deka’s latest acquisition capped off a year in which its investments made up a majority of deals carried out on the Czech market. In November Deka purchased the Gemini office plan in Prague from Austria’s Sparkassen Immobilien for €110 million and in spring it acquired Jungmannova Plaza for €40.6 million. While Deka was one of a small handful of German institutional investors that continued to invest during the global financial crisis; as others exited the market, it was singular in continuing to look for opportunities on CEE markets.

According to James Chapman, partner and head of capital markets group at the Prague office of consultancy Cushman & Wakefield, there were a number of reasons for Deka’s going against the grain. “At the beginning of 2009 Deka already had Jungmannova Plaza on offer so they had the market in focus when others were standing. This led to them being given more opportunities from sellers and agents,” Chapman said, adding that the other major funds investing last year remained more cautious in the region, largely due to concerns about pricing and waiting for a benchmark to be set. “Commerz [Real] were keen on Gemini, for example, but weren’t comfortable with the pricing. If you asked them today they might have a different opinion,” he added. Commerz Real is the real estate arm of Germany-based Commerzbank group.

Czechs appeal

The establishment of the Warsaw and Prague markets as the core real estate investment markets in the region was largely a result of market fundamentals and economic stability well-above the regional norm.

“Although the Czech Market, as in many other countries, was hit by the worldwide crisis that led to rent reductions, increased vacancy rates and a reduction of pre-lettings, we evaluated the general market conditions as quite resistant,” Thomas Schmengler, managing director of Deka Immobilien, told CBW. Other features cited by Schmengler were the country’s reliable legal system and favorable tax legislation. Ultimately, though investment deals require the availability of attractive product, and while the amount of prime property on Prague’s small market remains minimal it was nevertheless there for the taking.

“For Deka Immobilien, the Czech Republic is an interesting investment location. As an institutional investor the availability of good quality properties with high technical standards accompanied by a long secured rental income are essential aspects for us to make investment decisions. Those kinds of property were available in the Czech Republic in 2009,” Schmengler said. “The fact that there was less investment interest in the market gave Deka the opportunity to identify some interesting investment opportunities on a more reasonable pricing level [compared with] the years 2007–08. Therefore, we were glad to acquire buildings like Gemini, Tesco Logistics and Jungmannova Plaza.”

Competitive horizon

With market recovery very much an ongoing process, no one expects dramatic changes in 2010. According to Chapman 2010 investment volume could reach €500 million–€700 million, although in small markets such as Prague there is high volatility due to individual deals skewing the overall figures. Nevertheless, Chapman sees a “moderate increase in the investor pool” having already taken place and said he thinks that Deka’s singular position on the market will be challenged in the future. “I’m absolutely sure they won’t have it all to themselves this year,” he said.

In the Market View report that CEE Property Investment issued in January, property consultancy CB Richard Ellis indicated some factors leading toward the return of “more normal investment market conditions” in the region. These include economic growth in most CEE countries, rising investment volumes across Europe and “expiring funds and strategies to free up cash.”

For Cushman & Wakefield’s Chapman, there have been lessons learned over the past 18 months of downturn as investors waited for a wave of distressed property sales that never materialized. “People forgot you have to come up with a win-win situation. Investors thought of themselves as knights in shining armor coming to rescue distressed sellers.”

Another change Chapman foresees is a loosening of the definition of prime properties from the top five in an asset class to perhaps the top 15. “Investors will be more flexible,” he said, although he still considers the secondary market as out of play. “There’s more opportunity to structure development deals rather than going into secondary assets. There’s just more confidence in good future developments because of the lack of supply from 2012 on,” Chapman added. 

Deals ahead

Schmengler insists that Deka is continuing to keep its eyes on the market. “After our successful investments in 2009, Deka is already strongly invested and well connected in the Czech Republic. But we are still interested in doing more deals. We are monitoring the market, analyzing possible investment opportunities mainly in commercial Grade A office buildings as well as in retail, logistics and hotel properties. We are keeping track of the Slovak market, which could be an interesting supplement within the CEE region for 2010, due to some market and investment reasons,” he said.

The sector of choice for investors should continue to be offices. According to Chapman the Tesco deal was somewhat of an anomaly due to the long lease with a covenant tenant. “Logistics is at the bottom of the priority list,” he said.

Schmengler said that Deka is looking for retail and logistics investments outside the capitals. “But anyway, we still see potential opportunities in the capitals as well, resulting both from upcoming developments and existing stock. With this wide spectrum building the basis of our investment decisions, 2010 should also become an interesting year from an investment perspective,” Schmengler said.

Polish core

Along with Prague, Warsaw ranks as another core Central European market that many believe has bottomed out and which will show an increase in transactions depending on the availability of prime properties. Having acquired the Deloitte House in Warsaw from Skanska for €117 million and Grzybowska Park from developer AIG/Lincoln Polska in 2009 Deka has made its mark on the Polish market as well.

“In comparison to the Polish market the Czech Republic is different purely because of its size. Poland has nearly four times more inhabitants. This fact opens more possibilities, not only for investments in the capital but in other regional cities of around 500,000 inhabitants as well. This leads to higher product availability in comparison to the Czech Republic. There are other investment factors which may be comparable, but they differ in one or the other country. In principal, we see further interesting investment chances in both countries,” Schmengler said.