An office grows in Warsaw

It may be only a coincidence but three months after the S&L bailout package was signed into law, foreshadowing the development of the US private equity real estate industry, another historic occasion took place halfway around the world: the toppling of the Berlin Wall. That opened up the markets of Eastern and Central Europe to social, political and economic reform, to say nothing of eager real estate investors. Today, the countries of the former Soviet Bloc are some of the most dynamic (and crowded) property markets in the world, but seven years after the wall came down, the region was still a risky proposition.

Nevertheless, a few intrepid investors made the journey east, among them the Chicago-based real estate investment advisor and fund manger Heitman, one of the pioneers in private equity real estate investment in Eastern Europe. In 1996, Heitman, along with its development partners, broke ground on the Warsaw Financial Center, its first investment in the region and, at 32 stories tall, also the largest building in Eastern Europe. Though the building was one of the most prominent developments in the early days of the region's emergence, there was still plenty of uncertainty surrounding the investment, not the least of which was its physical location. According to one person who worked on the transaction, the Warsaw Financial Center was built at a time when “no one even knew where the central business district of Warsaw was going to be located.”

Nevertheless, Heitman's experience with the building, as well as its investment history in the region, allowed it to raise $525 million for Heitman Central European Property Partners, one of the first private equity real estate funds targeting Eastern and Central Europe, in 2000.

As the markets of the region developed and more institutional capital came to find their fortunes in the region, Heitman and its operating partners were able to sell their stake in the Warsaw Financial Center. In 2005, an 80 percent stake in the building was sold to Austrian real estate group CA Immobilien Anlagen and German real estate fund TMW Pramerica for approximately $120 million.

Every silver lining, however, has a cloud. While Heitman laid the groundwork for investing in Eastern Europe, it now faces much greater competition—and much lower returns.

“The returns [in the 1990s] were so much more significant [in Eastern Europe] than they are today,” notes one investor who worked on the Warsaw Financial Center deal. “Today, the returns are commensurate with what you're seeing in the US.”