First Property Group established subsidiary First Property Asset Management (FPAM) in 2002 and now manages five funds. Between 2005 and 2007, FPAM shifted its investment focus to central Europe, notably Poland. The company established an office in Warsaw in March 2005 and made its first Polish acquisition in August of that year – a 950 m2 retail complex, consisting of a supermarket and pharmacy, in a residential area of Warsaw, for which it paid £1.1m (€1.33bn).
By the end of its 2009 financial year, FPAM had £310m of assets under management, 88% of which were in Poland, in such cities as in Warsaw, Krakow, Lublin, Poznan, Szczecin and Gdynia.
In September 2005, the Universities Superannuation Scheme (USS) had given FPAM the job of investing £50m in the UK and central and eastern Europe with a brief that specified offices, retail and industrial in lot sizes of between £3m and £30m. In May 2007, USS put a further £50m in FPAM’s hands which, with permitted gearing, gave it £200m to spend in total.
First Property reported in May that it had held on to its first place in the IPD CEE ranking, a position that it has now held for the four years to the end of 2009. Ben Habib, chief executive of FPAM, explains that the focus on Poland occurred in response to yields having fallen in the UK during 2004 and 2005 to levels at which rent would no longer service the loans used to buy property. Investing in UK property could then no longer be justified, Habib says. And the situation was largely the same throughout most of western Europe. In response, FPAM started to look further for a country where yields were higher and began to do macroeconomic analyses of countries in central and eastern Europe.
“It is dangerous to lump the countries of central and eastern Europe together because the economic characteristics of each are very different. However, most of these economies are quite small except those of Poland, Hungary and Romania. Poland is the largest with a population of 40m,” Habib says.
“Fantastic statistics”
In 2005, Poland had “fantastic economic statistics”, says Habib. In addition to a low budget deficit, it had a low current account deficit, its economy was growing at a rate of 6%, unemployment was high but falling and inflation stood at around 1.5%. “In short, it had capacity, low inflation, economic growth and was fiscally prudent,” says Habib.
Then on closer inspection of the property market, yields were revealed to be higher too. Along with the prospect of further growth resulting from the country’s accession to the European Union in 2004, which also resulted in an influx of investment money, FPAM could see that it would not be long before rents started to rise.
“With all things, there is a degree of luck,” says Habib. “I wouldn’t suggest that we had identified Poland as the strongest market in Europe, but it has stood the test.”
He says that there were several reasons why Poland passed the credit crunch test that so many other economies failed. First and foremost was its prudent fiscal behaviour, with a good ratio of debt to GDP. Similarly, its consumers were not indebted, nor was there much corporate gearing.
And it had a balanced economy, with exports only accounting for 40% of GDP. So, while most emerging companies were hit hard because they had been relying on exports to survive – exports represented 80% of GDP for the Czech Republic, for instance – in Poland’s case consumers came to the rescue. By the second half of 2009 Polish exports were back on track anyway. And there is Poland’s young workforce; the country has the right demographics for 10 years of growth, he says.
Yields have dropped and capital values have risen since 2007 but the fact that a Polish hypermarket will yield 7.5% while its equivalent in the UK will make only 5% is a compelling gap, he says.
But Habib points out that the country is very dependent on international capital for development and, because international investors are not too adventurous now, the choice of stock for investment is limited.
Meanwhile, in February FPAM was given the task of investing £106m in UK commercial property for pension clients of investment consultancy Stamford Associates. Once invested, this will boost FPAM’s assets under management by about 30%.
