ANALYSIS: Polish resi development trades for bargain price

Eight years after receiving the green light from local authorities, Warsaw’s flagship Zlota 44 tower development has been sold – unfinished – for one third of its developer’s total investment volume.

US-based real estate investment manager Amstar has joined forces with Poland's BBI Development to acquire the Zlota 44 residential tower development from previous landlord and developer Orco Property Group for €63 mln in cash. The deal marks a 65% drop on the total investment of more than €180 mln which has been spent on the project. It also marks the entry by Denver, Colorado-based Amstar into the Polish real estate market, and represents the first partnership between Amstar and BBI.

'After in-depth analysis of market trends and potential partners, we are happy to join forces with BBI Development, and we look forward to working with them to apply our hands-on development capabilities to ensure a successful completion,' said Jason Lucas, president of Amstar Global Advisers.
In Warsaw, BBI has already developed major projects including Plac Unii - a retail and office complex providing 56,000 m2 of space and the 75,000 m2 mixed-use Centrum Praskie Koneser project.

ROCKY HISTORY
Bought by Central European developer Orco Property Group in 2004, Zlota 44 is a case study of what can go wrong with an investment. Orco received the building permit for Zlota 44 in 2007 and effectively pre-sold 90 of the 266 apartments at the time but protests by a group of local residents resulted in the cancellation of the zoning plan and the building permit.

The owner won the appeal case in 2010 to get the residential zoning plan reinstated but the onset of the financial crisis and the difficult economic situation resulted in further delays in the development of the tower. In the fall of 2013, Orco announced that the project was a ‘major financial failure’. Due to the slow construction progress, a weakening of the Polish zloty and the unsuccessful sales re-launch on the local Warsaw residential market, the asset suffered a major writedown with its market value dropping from €113 mln at year-end 2012 to just over €30 mln. The €60 mln loan on the asset defaulted in December last year, and three months later Orco received a termination notice by the lender, Bank Pekao, calling for the repayment of the loan within 30 days.

To stave off bankruptcy, Orco decided to buy back the loan, suspend construction work and put the project on the market in its unfinished state. A binding letter of intent was signed with Amstar and BBI in July, with the deal closed at end-August for a total of €63 mln, €50 mln of which was paid immediately while the rest was deferred upon the realisation of certain conditions relating to the construction of the tower. The sale represents a total cash loss of some €80 mln for Orco, the company said. In total, the developer spent more than €180 mln on the project.

'We are pleased that this investment has put its setbacks - caused mainly by external factors, resulting from the financial crisis - behind it,' commented Tomas Salajka, CEO at Orco Property Group, which was advised by Dentons’ real estate team on the sale. ‘We entrust Zlota 44 to an experienced consortium composed of local and global partners, so they can jointly complete this prestigious work and turn it into a commercial success.’

Michal Skotnicki, president of BBI Development, stressed the speed at which the transaction was closed. ‘We were able to close in two months the acquisition of a project that has lasted nearly 10 years,’ he said.

At 192 meters high, with 52 floors and 266 luxury apartments, Zlota 44 is the tallest residential tower in the European Union and one of the most prominent buildings in Warsaw. It was designed by Polish-born American architect Daniel Libeskind and is located in the centre of Warsaw, adjacent to the Palace of Culture, the Intercontinental Hotel as well as the Rondo I and Warsaw Financial Center office towers. The 37,000 m2 project is currently 90% completed and 20% pre-sold. The apartment owners will enjoy five-star amenities, including a fitness centre, spa, a 25-meter swimming pool, private cinema, meeting rooms and wine cellars.

NEW MARKET
The acquisition marks Amstar’s first foray into Poland after having previously carried out successful ventures in Turkey and Russia. ‘Amstar has been monitoring the Polish market for the past three years, attracted by the country’s strong demographics, well-balanced growth and economic stability. We identified BBI as a potential local partner about a year ago and they introduced us to this investment opportunity,’ commented Amstar Global’s president, Jason Lucas.
Headquartered in Denver, Colorado, Amstar is a real estate investment manager that acquires, develops and manages office, multifamily, retail, hotel and industrial properties in the US as well as internationally. Originally formed to invest and manage the real estate allocation of a large family office client, Amstar began expanding its capital strategy nearly a decade ago and has grown to $2.6 bn in assets under management.

Typically, the company focuses on core-plus and value-add investments at home while internationally it has a more opportunistic scope where it can generate higher returns by executing ground-up development or extensive redevelopment projects. In Turkey the company has developed five large-scale shopping centres while in Russia it recently sold a 61,000 m2 mall it has developed in Novosibirsk.
Lucas said the company decided to re-invest the proceeds from the sale in Russia into Poland, where it is looking to expand its platform in the near future. ‘We spent a lot of time researching the Polish market before deciding to make an entry and we are now looking to grow our presence in this country and also in other Central European markets. We hope for further joint investments together with BBI, which we regard as a very reliable and experienced development partner,’ noted Lucas.

DEVELOPMENT RISK
The Polish market, however, does not offer many distressed opportunities unless an investor is prepared to take on development risk, he added. ‘Few institutional fund managers are willing to go into development projects but our investment mandate is to underwrite and mitigate those risks in order to capture the development profit component. We partner with best-in-class local operators who co-invest their own capital, providing an alignment of interests. Our strategy is to go where there is a scarcity of capital for projects like Zlota 44.’

The asset, which was acquired off-market, represented ‘the ideal opportunity to take control of a high-quality building at a significant discount to replacement cost’, Lucas said. ‘We love the fact that the building is 90% complete, which means the investment thesis can be executed in a short time horizon,’ he added.

To oversee the Polish business, Amstar recently relocated vice-president Jeff Stonger from the head office to Warsaw. ‘Having Mr. Stonger in Poland will allow us to expand our platform in the region,’ explained Lucas.

Amstar has taken the largest share in Zlota 44 while BBI participated in the equity investment as a minority shareholder but will be in charge of the day-to-day execution of the project.

BBI Development’s Skotnicki said he expects to restart construction work in the first quarter of 2015 with residents moving into the luxury apartments in 2016. ‘We need to choose a general contract which hopefully will be the same as before, then we will re-launch the sales of the apartments. The units are currently 20% pre-sold and we would like to maintain the contracts already in place. The residential market, especially the luxury part, is good in Warsaw and we expect to sell the apartments quickly,’ commented Skotnicki.

By Virna Asara
Correspondent Southern Europe