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Why German pension funds buy skyscrapers in Warsaw

Why German pension funds buy skyscrapers in Warsaw

When Goldman Sachs opened its office at the top of the 220m Warsaw Spire, web searches for the phrase ‘Goldman Sachs Warszawa’ in the city surged. According to Google Trends, this news beat the previous record set in August last year, after Goldman announced it was going to recruit several hundred people for its IT operations centre in Warsaw.

It’s no wonder that Varsovians hit the browsers as the American bank is commonly perceived as one of the most desirable employers for ambitious graduates.

But Goldman Sachs is not alone. According to career website efinancialcareers, international banks are on a hiring spree in the Polish capital: Credit Suisse’s business process job openings are there, as well as every single one of Goldman’s European technology jobs.

Although a few years ago the southern cities of Krakow and Wroclaw were attracting top employers, today Warsaw is the draw and the pace is accelerating. The fact that Poland is the only economy in the world, with the exeption of China, that has experienced GDP growth for 25 consecutive years, has not been lost on the new investors. And they, together with local firms, are driving the demand for high-quality and prominent offices in the capital (as JLL, a real estate expert, puts it: ‘The sentiment in the Warsaw office market is incredibly strong’). Therefore, new skyscrapers, which arguably are the most high-profile type of offices, now pierce the city’s skyline.

Pension funds on board

With four new 100m+ office towers being built and at least five more on the horizon, Warsaw’s rapidly changing landscape has attracted a variety of property investors, with German pension funds leaving a noticeable footprint.

At the beginning of last year, Invesco bought a mixed-use building, Plac Unii, in Warsaw for €226 million on behalf of Bayerische Versorgungskammer (BVK), which is Germany’s largest pension fund, as well as Nordrheinische Ärzteversorgung (NAEV). In April this year, four unnamed pension funds bought another high-rise called Prime Corporate Center (pictured below) in a deal executed by Warburg-HIH Invest Real Estate. The €90 million transaction has been the third largest in the Polish real estate market so far this year.

The €13 billion Warburg-HIH, whose clients are primarily German institutional investors, says the skyscraper’s location in the up-andcoming Wola district, which is near Warsaw’s core city centre, was a really important factor in its decision.

‘Wola is becoming more and more part of the CBD (central business district). If you look in terms of public transportation, quality of stock, amenities to be created there and future projects, we think that Wola is the most interesting location in the city. And with the erection of Warsaw Spire a landmark has been created and we are also profiting from that,’ Matthias Brodeßer, head of transaction management international at Warburg-HIH, tells Modern Investor.

He adds that another factor behind the decision to buy the building was a deal with Raiffeisen Bank, which leased 95% of the building for 10 years. Brodeßer, who highlights how impressed he is with Poland’s growth figures, thinks this is more than a spurt, which will give an additional push to the already buoyant office market.

‘When it comes to BPO, you can see how much Credit Suisse is expanding in Warsaw and other Polish cities at the moment. Poland is a top location worldwide for BPO and a lot of companies are repatriating operations from Asia to Europe, and in BPO business, Europe means Poland. What they like here is that you get exceptional quality and low costs in terms of labour. On this sector I’m very bullish and will remain so.’

Too much supply

After a record-breaking first two quarters, 2016 is set for a surge of new office completion in Warsaw, Cushman & Wakefield, a real estate specialist, said in its latest report. But for investors, this is not necessarily great news: Warburg-HIH admits that the market might be overheating.

‘The negative aspect of Warsaw is high levels of construction. We have seen results in decreasing prime rents and decreasing average rents.

‘Despite the fact that net absorption is growing, since 2011 vacancy rate has doubled to Frankfurt levels, at roughly 14%. This is of concern, and although we are a long-term believer in Poland and Warsaw, we think the next couple of years will be difficult with many professional developers building more new great stock, adding more density.’

The German pension fund Bayerische Versorgungskammer, which co-owns one of the skyscrapers in Warsaw, points to similar risks.

However, despite some hurdles, Brodeßer does not think it is too late to enter the market.

‘You need to understand the market dynamics, what is going to be developed, local laws, and so forth. You also need to carefully choose your location and also, what I constantly preach to my colleagues, you must always think about the exit when you buy a property.

‘I wouldn’t also say that it is too late when you compare Warsaw yield for properties with other markets.’

As anti-cyclical investors, Brodeßer points to fundamentals, such as very strong economic growth, as well as the relatively small size of Warsaw’s office market compared with its population (similar to Hamburg has three times more office space), both of which will help to create substantial demand in the future.

Buyers' comment

The €66 billion Bayerische Versorgungskammer (BVK) was one of the institutions that in 2015, bought Plac Unii, the mixed-use skyscraper, whose design was inspired by the iconic Flatiron in New York (pictured above). ‘As part of the global diversified real estate strategy of BVK, investments in central Europe have been made,’ Thomas Köhler, who works in the real estate funds and asset management unit of BVK, tells Modern Investor. ‘Poland is by far the largest economy among the central European countries and shows positive economic fundamentals. Within Poland, Warsaw is the political, economic and cultural centre; a variety of national institutions and authorities as well as national and international companies are based here and give the city a high economic potential. In addition, Warsaw has a well-educated workforce and a low unemployment rate. All of these factors have a positive effect on the Warsaw office market.

‘However, high-construction activity and, consequently, increasing vacancy rates, are a risk. Therefore, it is very important for BVK and its fund managers to invest in objects that are affected by these risks as little as possible.

‘It remains to be seen what effect the current political situation in Poland will have on the economic development in the long term. This might have an impact on further investments of BVK.’

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