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edition 1 (227)
January 2018

In an acquisitive mood

Mergers and acquisitions are becoming all the rage on the Polish real estate investment market

Tomasz Szpyt-Grzegórski

In an acquisitive mood
Piotr Mirowski, a partner at Colliers International and the director of its investment consultancy department in Poland

Cheap loans, an economy that continues to grow and some good prospects for the future – these are among the factors that are encouraging investors to buy out companies. Doing so allows them to quickly achieve a greater scale without the hard slog of building a team and a portfolio. And the trend is set to continue in 2018

They say that in business there are no free lunches. But why should you pay for lunch if you can buy an entire restaurant? The activity on the acquisition market seems to confirm that many parties are interested in doing this – that is, buying companies instead of properties – and there is no shortage of such ‘restaurants’ for sale. “According to the mid-December data there had been a total of 204 merger and acquisition transactions in Poland up to that point last year, which is app. 9 pct more than the whole of 2016. We expect that by the end of that year the number of transactions will have increased by 5 pct,” predicts Alicja Kukla -Kowalska, a key account manager at Fordata, which provides technical support for transactions. “There is still a long way to go to break the 2015 record of 247 transactions, but the trend is stable. The investment transactions in our local market are being encouraged by the low interest rates, while the economic insecurity felt by businesses in early 2017 has disappeared too,” adds the Fordata manager.

Strong in the region

This data is admittedly for the entire economy and not just real estate, but it shows that acquisitions in this sector are in line with a broader trend that can be seen across this part of Europe. According to EY’s data, there was a transaction value of USD 19.9 bln from a total of 473 mergers and acquisitions concluded across both the CEE and SEE regions in Q1 2017 representing a 27.8 pct fall in the number of transactions from 655 in the same period in 2016. According to the ‘EY Merger and Acquisition Barometer’ survey, the countries that had the most active acquisitions market in H1 2017 were: the Czech Republic with 113 transactions, Poland (107) and Hungary (66). The figure only grew in four countries in the region – Croatia, Greece, Hungary and Slovenia.

However, EY emphasises that there has been an increase in the size of the transactions in the real estate sector. “We have been seeing a deepening trend on the investment market for an increase in the volume of M&A transactions involving the acquisition of majority holdings or shares in development companies,” reveals Paweł Nowakowski, a senior manager in the real estate market group at EY. “So far such transactions have been the preserve of huge investment funds and international developers calibrating their businesses through the purchase of new investment funds. However, increased activity from local development companies has been observed recently, the best proof of which is the acquisition of the residential division of Euro-Styl by Dom Development and the purchase of the majority holding in MLocum. Most of this investment activity can be seen in the residential segment and is the result of changes in the strategies of developers on the one hand and in the market conditions on the other,” adds Paweł Nowakowski.

The strong activity from buying parties is not the exclusive domain of the residential market. A lot is also happening in commercial real estate. “It is mostly large international players who are active here as well as investment funds and developers. The largest transactions in 2017 in Poland and Europe include the purchase of a majority stake in Griffin Premium Real Estate by Globalworth Real Estate Investments, the acquisition of Rockcastle Real Estate Company’s portfolio by NEPI and the purchase of Logicor’s portfolio of warehouse facilities by CCC from the Blackstone fund,” says EY’s expert. Poland is attracting foreign investors mostly because of the scale and stability of the market. “We chose the Polish market as our basic expansion direction due to its size, liquidity, strong foundations and extensive possibilities,” explained Dimitris Raptis, Globalworth’s vice-president responsible for investment after the announcement of the Griffin Premium RE acquisition.

On the left:

Paweł Nowakowski, a senior manager in the real estate market group at EY

On the right:

Tavis Cannell, a partner of Goldman Sachs’s European special situations group

Nothing new except the scale

The acquisition of companies is nothing new in the real estate sector. However, the scale of the phenomenon is genuinely novel. “This is not a new interest. The appetite for platforms in Poland has been in evidence in Poland for a few years and the recent acquisitions are the result of the greater availability of companies for sale recently,” explains Tomasz Trzósło, the managing director of JLL in Poland.

Investors are currently inclined to buy entire entities because this is a fast-track for increasing the scale of their business rather than building one up from scratch in a new market. “The demand for the acquisition of real estate companies is a positive symptom of greater development and the degree of market maturity. Acquiring an entire business smoothes the passage for companies entering a new market, allowing them to continue operations based on an existing management platform and then to gradually adjust its strategy to fit in with their own goals,” argues Piotr Mirowski, a partner at Colliers International and the director of its investment consultancy department in Poland. “Purchasing portfolios that exclusively comprise real estate usually requires a close familiarity with the market and a local partner to deal with the asset management, which is why financial investors often prefer the acquisition of entire companies, so that they can employ their existing human resources straight away. The largest global funds are targeting Poland; however, the supply of platforms or companies of a suitable value, particularly following the series of recent transactions, is limited,” adds the expert from Colliers.

Confirmation for all this comes from the interested parties themselves. “The acquisition of Robyg provides Goldman Sachs with the opportunity to invest in a high quality real estate market platform that has been built based on local and global experience,” declared Tavis Cannell, a partner of Goldman Sachs’s European special situations group, after the December announcement of a public call to purchase 100 pct of the developer. The value of the acquisition is estimated to exceed PLN 1 bln.

At least a year

There is much to suggest that the speed of events on the acquisitions market will continue to accelerate. “We expect that the situation will be maintained until 2018. However, experts are pointing to a possible increase in interest rates in 2019, and thus the availability of loans should decrease, which will have a negative impact on corporate investment,” believes Alicja Kukla-Kowalska. The real estate sector might also have some nice surprises up its sleeve for us this year. “Many of the international developers we talk to have been closely monitoring the Polish market and are considering expanding into it in their investment strategies, by buying companies with a strong position on the local market, with skilful and effective management and a land bank that would ensure the continuing growth of the company’s value. We expect that the value of transactions on the M&A market could amount to app. PLN 2.7 bln in the residential segment in 2017. In the near future we also expect two or three very large transactions in this market segment. And along with the residential segment, we can expect such a consolidation process to also get underway on the commercial market with an increasing number of M&A transactions,” predicts Paweł Nowakowski.

Market still going strong

Future acquisitions should be encouraged by the expected continuing strength of the Polish real estate market, even though it has fallen back down the rankings. Warsaw was rated 23rd in the 15th edition of the ‘Emerging Trends in Real Estate’ report prepared by PwC and the Urban Land Institute. According to those surveyed, Prague (15th position) and Budapest (19th) have better prospects than the Polish capital. However, this does not signify a retreat by investors from Poland. “Warsaw is still perceived by investors as an attractive place to invest their capital; however, it has dropped three positions since last year’s ranking,” points out Kinga Barchoń, a partner at PwC and the leader of its real estate team. In her opinion investors remain positive about the strong economic growth of the country and can see the growing potential of its BPO/SSC market. Its slipping down the rankings is partly down to the current legislative insecurity due to the tax reforms in progress as well as the intimidating pipeline of Warsaw office projects. However, the investor anxiety engendered by Brexit has pushed London down into 27th position, which could represent a huge opportunity for the financial sector and the office market in Warsaw. The perception of the city’s market across Europe is quite positive. Almost half of all the respondents of the survey expect economic growth to speed up in the next three to five years. The potential consequences of Brexit may be a worry for investors in the UK, particularly those who are focused on office investment in London; but at the same time this has lifted the mood in a few continental European capital cities,” adds the partner from PwC.

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