Q&A

At the beginning of the 1990s, Artur Mokrzycki was a project manager for France's state-owned financial institution, Caisse des Dép^ts et Consignations (CDC), where he was involved in €240 million worth of acquisitions in Central Europe's emerging real estate market. A decade later, in 2002, CDC contributed €200 million to a Central European property fund set up by Curzon Global Partners, a subsidiary of IXIS AEW Europe. The fund, PBW I, which is named after the vehicle's target cities of Prague, Budapest and Warsaw, acquired approximately €600 million of core-plus properties. The follow-up fund, PBW II, has recently held a second close on €250 million of commitments. Below, Mokrzycki, who is responsible for both funds, talks about the development of the Polish market, the country's retail sector, and why investors are beating down his door.

What was the market like in Central Europe during the early 1990s?
At the time, Central Europe included Eastern Germany and the Soviet Union and also, of course, Poland, Hungary and Czechoslovakia. These last three countries looked to be the right compromise in terms of the opportunities, the size of the market and the difficulties you face. We found that in these countries there was no industry at all. There was nothing to buy because there were no new buildings, shopping centers or logistics. The only thing you could do was build. That meant you had to team up with someone local. In many cases, we struck joint ventures with the cities—for example, the City of Warsaw.

What was the approach to development?
We wanted to build something to Western European standards because we knew that in a few years' time whoever came to the property would not be satisfied without flooring, tiles or air conditioning. In 1991, all industrial companies were thinking about these new territories with a population of 300 million. Demand for offices from international occupiers was rising, so office property was the asset class of interest. Companies were saying: “If you build a good office building for me in Warsaw with air conditioning, car parking, security and so on, I will lease it.” Demand exploded within three years. Suddenly the demand was so strong and the supply so weak that rents went up very quickly between 1991 and 1996. In those years, whatever you built was pre-let immediately.

How is the shopping center market in Poland different than the office market?
The office market is only developed in capital cities, but the shopping center market is spread out over the whole country. In towns or cities of, say, 80,000 inhabitants, there will be at least one or maybe two shopping centers, and Poland has many large towns. For that reason, the easiest products to invest in are shopping centers.

Does Warsaw have enough retail centers?
In terms of quantity, I would say so, but not in terms of quality. Some of them are leased to weak brands. There is a lot of room for improvement and value creation. This is our strategy for Central Europe: As we don't want to develop anything more, we will concentrate on our key competitive advantage, which is quality of management. In many cases, significant upside exists through re-leasing, optimizing tenant mix, improving technical specifications, identifying the right positioning on the market, and matching demand with the offer.

What is the current strategy for Fund I?
The fund is fully invested with an asset value of around €620 million. The temptation today is to sell out. Every day we are approached. The portfolio in the fund is 100 percent leased so it is like a bond and there is no lack of opportunities in terms of exit strategy. We can securitize, sell individual assets or packs of assets or sell the fund with a premium. But we recommend to our investors that we keep the assets for a while as we have identified opportunities to continue the value-creation process. think there is another three years or so before we exit.

What kind of investor is contacting you?
All kinds, including small local investors who say they like the properties.

Are there any local institutional investors?
The investment market in Central Europe is completely dominated by foreigners, but over the last few years new local financial institutions such as pension funds and life insurance companies have set up. They are collecting a lot of money and will allocate significant money to real estate very soon—I think within the next three or five years. We believe there will be a great opportunity for investment managers in three or five years when this demand will explode. They will want to invest in the real estate asset class just as other funds in the rest of Europe did over the last 20 years.

Fund II is following the same strategy as Fund I, but are there any new regions?
We are looking at 11 countries. We can invest from Tallinn in Estonia up to Sofia in Bulgaria or Ljubljana in Slovenia. But realistically, the largest markets offer us the biggest opportunities.