Madison’s co-CIO: ‘Not all CEE is created equal’

International investors increasingly like Central and Eastern European real estate, but funds raised for the region have failed to see the same uptick as investment volumes.

Madison International Realty is the latest international investment manager interested in Central and Eastern Europe. Data suggests the New York-based firm will not be the last this year.

“With Warsaw as the capital and the economic driver, it fits much more into the mold of a traditional western European city, sometimes outpacing it in terms of macro-level data and demographics.”


– Derek Jacobson

Last week, the New York-based firm made its first CEE deal, purchasing a 50 percent stake in Warsaw Spire, among the tallest office buildings in Central Europe. The deal valued the 49-floor tower at €350 million. Structured as a joint venture, developer Ghelamco retained its 50 percent interest in the office building, according to an announcement.

Madison liked its strong tenant base in the 95-percent leased building, with companies including Samsung, JLL and Goldman Sachs all in resident, co-chief investment officer Derek Jacobson said.

The deal was capitalized through Madison International Real Estate Liquidity Fund VI, which closed in 2016 on $1.39 billion and carries what the firm calls a direct secondaries investment strategy targeting ownership stakes in prime commercial properties and portfolios in capital cities of the US, UK and Europe.

“Not all CEE is created equal,” Jacobson told PERE. “Poland is the best example. With Warsaw as the capital and the economic driver, it fits much more into the mold of a traditional western European city, sometimes outpacing it in terms of macro-level data and demographics.”

Poland is the eighth-largest economy in the European Union and continues to lead in growth metrics. GDP increased by 4.6 percent last year, and the International Monetary Fund predicts a 4.1 percent expansion this year. Europe overall saw a 2.4 percent GDP increase last year, with the same growth rate forecasted this year.

Warsaw in particular has seen strong office growth, with vacancy rates steadily declining in the last 18 months, down to 11.7 percent at the end of 2017, according to Knight Frank. The office market saw a record 8.8 million square feet of take-up last year.

Nevertheless, Jacobson said Madison researched the area for years before investing in what he deemed the right combination of asset, sponsor and return profile.

“What we noticed in our years of looking at the Polish market, albeit from a distance, was that there was a significant trend away from a purely domestic economy, with Polish companies serving Polish consumers, to strong internationalization,” he said. The relatively inexpensive cost of living, combined with a well-educated workforce, has attracted multinational companies to the country’s capital.

More investment managers are making similar observations. Ex-CEE investors accounted for $14.2 billion in investment in the year ending March 31, up 16 percent from the year prior, according to data provider Real Capital Analytics. Poland was the most popular foreign capital destination within CEE, accounting for $5.5 billion in investing last year, a figure that has steadily risen since 2008. By country of origin, South Africans liked the region the most, investing $3 billion. Germany was next, at $1.7 billion, followed by the US, at $1.7 billion. Property services company Colliers expects further positive sentiment in the region.

“The story really is one of rental growth in most of the capital city markets,” Colliers said in its 2018 CEE report, noting that retail rents continue to climb. “What is perhaps more of note is a cyclical pick-up in office rents, noticeable particularly towards the end of 2017, meaning that this larger, broader representation of the economy is finally showing signs of boom times. This is most apparent in Budapest, Sofia, Bucharest and Prague.”

Jacobson said Poland has attracted a wide variety of capital sources, from pension funds to private equity to insurance companies.

“You’ll see the whole slew of institutional investors that you would see in any other European market,” he said. “The prime properties over the last five to 10 years have been well-diversified into the hands of the Dekas, the Blackstones and various other entities.”

CEE-focused funds, however, have picked up little steam. Capital raised for the region peaked in 2013, with $1.7 billion raised for two funds, and dropped to just $68 million for one fund last year, according to PERE data. Three Poland-specific funds closed on $1.6 billion in 2017, down from five Polish funds that corralled $2.4 billion in 2016.