Russia and Poland have experienced strong real estate investment activity in recent years. But will it continue? Lynn Strongin Dodds reports
The real estate markets of Russia and Poland have been busy of late, bolstered by strong economic stories, at a time when the euro-zone has suffered. The prospects remain relatively bright, although neither are completely immune to a global economic slowdown.
Activity in the Russian market was also affected by the large scale political protests over the presidential elections in March, which returned Vladmir Putin for a third term. Equally as unsettling for institutions were the arrests by the government of dozens of demonstrators in May, days after it signed a new anti-protest law in the run up to the Russian National Council on Corporate Governance.
Figures from CBRE show that foreign investments accounted for $60m (€46.3m), 4.6% of the total investments volume in the third quarter, with their cumulative share since the beginning of 2012 reaching just 20%. However, Valentin Gavrilov, director in CBRE’s Russian research team, says: “There is already a circle of professional and sophisticated overseas investors who are permanently working in Russia either independently or jointly with a local partner and are actively involved in the development of new investment grade objects. The list of multinational developers includes, among others, Ghelamco, Hines, Immofinanz, PPF Group, Raven Russia, and Radius Group.”
Kim Politzer, director of European Research team at Invesco Real Estate, says: “What we are seeing is a broadening of the market with both domestic and foreign investors. Transparency is still a problem while political risk is difficult to quantify. The foreign investors who are the most active are those that have a track record, are comfortable with the market and have local platforms.”
Figures vary depending on the real estate consultancy and the numbers crunched but overall activity has not been as robust as last year. Research from CBRE shows volumes were down 32% to about $2.85bn in the first nine months from the same period in 2011.
Third quarter levels slipped 11% to $1.32bn from the three months to September last year. Prime yields though have held steady. The office sector, which accounted for almost half of all transactions, yielded 8.75%, while retail with a 29% share of deals returned 9.5%. Industrial property, which represented 9% of investment activity, was 11%.
Moscow captured the lion’s share with the most notable transactions being: Russian real estate investor O1 Properties’ $370m purchase of Ducat Place III, the class-A office tower from US developer Hines; Immofinanz Group’s 50% stake in Zolotoi Vavilon, or Golden Babylon, a 450-store shopping centre for over $500m; Raven Russia’s $49.8m acquisition of the logistics park Sholokhovo.
As for the remainder of the year, “there are a few remarkable deals that can occur in the fourth quarter, says Gavrilov. “For example, there are rumours that the Metropolis shopping centre is to be purchased by Morgan Stanley and, if it closes this year, it would be a landmark deal for the Russian market with an estimated size of $1-1.2bn.
“It would improve the balance between investments in the retail and office sectors and help push 2012 investment volume to $4.5bn, which is above both 2007 and 2008’s volumes. It will still be about 30% below peak 2011 levels but last year’s figures were skewed by the $1.1bn sale of St. Petersburg’s Galeria shopping complex.”
Cushman & Wakefield is more optimistic, forecasting $7.2bn by the year end, slightly above 2011’s final tally of $7.5bn. The firm, which uses Real Capital Analytics data, shows that year-to-date figures are $5.5bn, which is 15% lower than the same period last year when there was $6.39bn of investments. The firm also shows a slowdown in activity in the third quarter with total volumes reaching $1.22bn, 33% down from the same period last year and 50% less than the second quarter of this year.
Tom Cashel, head of capital markets at Cushman & Wakefield, Russia, says: “There is still plenty of debt and equity financing for prime property and for borrowers with a good track record. Prices have also held up but the bid/offer spread gets wider the farther down the food chain you go. We are seeing the most interest in assets that touch the consumer base, such as retail or industrial warehouses, because of the burgeoning middle class in the country.”
The same trends can be seen in Poland, which after Germany, the UK, France, Italy and Spain, is the sixth largest economy in the European Union. The country had more or less weathered the euro-zone and financial crisis but it now seems to be having a delayed reaction. As Richard Petersen, managing partner, retail at Cushman & Wakefield, puts it: “The period between 2009 and 2011 was good relatively speaking but, this year, Poland has felt the full impact of the economic turmoil in Europe, even though most of the problems are external to Poland”. He adds: “Total investment volumes are expected to reach about €2bn of which there are several deals in excess of €200m.”
Prime assets across all sectors remain the most favoured by investors, according to Mike Atwell, head of capital markets for central and eastern Europe at CBRE. “The German funds remain the most active investors but they are primarily only chasing core prime properties and financing is proving more difficult except for the quality prime assets with long-term secure and stable revenue flows.”
According to figures from Jones Lang LaSalle, there were around €877m transactions in the first half of 2012, a drop of 6% over the corresponding period in 2011. The retail market dominated with €460m deals followed by the office sector with €283m and the industrial sector at €133m. The largest transactions during the period was the sale of the 77% stake in the mixed use retail and office scheme Zlote Tarasy in Warsaw by ING Real Estate Development to a consortium of Unibail-Rodamco and CBRE PFCE for a reported €475m.
Other noteworthy deals were in regional cities including the €37m purchase of Galeria Tecza by Blackstone from Rank Progress in Kalisz, and the approximate €84m sale of Alta Centrum to Rockspring Property Investment Managers by the Arka Fund.