Palaces of prosperity

The Palace of Culture and Science, a 754-foot tall neo-Gothic skyscraper in the center of Warsaw, is the tallest building in Poland and the most visible landmark on the city's skyline. Yet it is also one of its most loathed. Completed in 1955 and originally named in honor of Joseph Stalin—it was called a “gift” to the Polish people—the building is viewed by many as a symbol of oppression and the brutalities of the country's communist past.

Yet, ironically, the Palace of Culture and Science also represents the country's promising future. Today, the building houses cinemas, restaurants and bars, as well as university classrooms and an 80-foot swimming pool. Despite calls for its demolition, the Palace of Culture and Science was officially named a historic monument earlier this year.

A country of 40 million people, Poland may still be struggling with its recent history, but it is nevertheless quickly moving into the modern era. Admitted to the European Union in 2004, the country has the biggest and most advanced economy in Central and Eastern Europe. Its large population and relatively strong economic growth, combined with a well-trained and mobile work force, has encouraged foreign multinationals to set up offices in the country and precipitated a flood of foreign direct investment. Meanwhile, as consumer incomes have risen, international retailers have flocked to Poland and luxury residential developments have begun to sprout up across its major urban areas.

Ironically, the Palace of Culture and Science, which is viewed by many as a symbol of oppression and the brutalities of the country's communist past, may also herald the country's future.

Private equity firms have been investing in the country since the late 1980s, when the European Bank for Reconstruction and Development played a vital part in providing capital to new projects. In one of the earliest and most visible private equity-backed developments in the country, Chicago-based real estate investment firm Heitman helped finance the construction of the Warsaw Financial Center, a 32-story office building, in 1996.

Now the Polish property sector is arguably entering a new phase of maturity. In some cases, yields are approaching levels seen in the more established markets of Western Europe, and core investors are purchasing the Class-A office buildings first developed by private equity real estate firms years ago.

In the pages that follow, we analyze how opportunistic investors are dealing with the new reality. First, we look at the retail sector, which has generated intense interest among private equity real estate firms in recent years. As shiny new shopping centers spring up in Warsaw, where competition is heated, opportunistic investors are branching out into smaller niche developments in secondary cities or pursuing mixed-use projects in a variety of locations. Next, we turn our attention to the office market, which is experiencing strong rental growth as demand for office space takes off and new supply becomes increasingly limited. And finally, we talk with Artur Mokrzycki, managing director of Central Europe for IXIS AEW Europe/ Curzon, which recently held a second close on a fund targeting Warsaw, Budapest and Prague.

Despite all the economic progress that has been achieved in Poland, the country is still coming to grips with its past. A new law requiring all civil servants to certify they never worked with the communist government has met with mixed views and resulted in the resignation of several high-profile politicians. And with the country's former military ruler, Wojciech Jaruzelski, set to go on trial, charged with illegally declaring martial law in 1981 to put down protests by the opposition group Solidiary, old passions have been inflamed.

Yet the inexorable march of Poland, politically, economically and socially, seems to be towards the future. If the actions of private equity real estate firms are any indications, it is a future that looks very bright indeed.