Nicholas Watson in Prague -
Palmer Capital, the UK-based real estate fund manager which beefed up its Central European business in 2012 by acquiring Middle Europe Investments, might not be about to build 5,000 apartments in a small town outside Prague as local media were reporting in November, but its plan to build 22 apartments in Uvaly is nevertheless a sign of the uptick in demand for Czech residential property.
“We took over this development project in Uvaly near Prague two and a half years ago and it’s been a millstone around our necks since then. But while the numbers may be another thing, the market is now showing that there is demand for those kind of units there,” says Ben Maudling, managing director of Palmer.
This project, along with many others, have been part of a huge effort by Palmer to restructure the struggling Dutch real estate fund manager that it acquired two and a half years ago, which at the time had €232m of assets under management in various markets of Central and Eastern Europe.
The bulk of that restructuring was to the main fund, the Emerging Europe Property Fund, which is listed on the Amsterdam NYSE Euronext exchange and consists of a variety of Czech and Slovak properties, mostly class-B and class-C office buildings. The financial restructuring is almost complete – “we led a savage attack on costs,” says Guy St John Barker, managing director of Palmer – and in December an extraordinary general meeting was held in the Netherlands to discuss with shareholders the options for the fund going forward.
The choice is basically between liquidating the fund – “we reckon we can get 75% of NAV, but we’re going to have to write off all the costs that were invested in the structure and sell relatively quickly,” says Barker – or taking the necessary first step in getting the share price up from its current roughly €8, which is to pay a dividend.
“To produce a dividend we would have to sell the poor properties – out of the 14 remaining properties we have identified seven as core and seven as non-core. We would sell the non-core, reinvesting the proceeds in new, more modern retail park properties in the Czech Republic and Poland, enabling us to diversify away from secondary offices and Slovakia,” says Barker, adding the goal is to have 40% of the portfolio invested in Poland, 40% in Czech Republic and 20% in Slovakia, with 40% in retail and 60% in office. Hungary, Palmer feels, has "decoupled" from the convergence states of Central Europe – Czech Republic, Poland and Slovakia – and is now more in keeping with Bulgaria, Croatia, Romania and Serbia.
And the shareholders’ views on the options for the fund? “There is some sympathy for liquidation [of the fund], but not overwhelming support,” notes Barker.
New money around
The restructuring effort has also involved the refinancing of the existing funds, the outcome of which illustrates the extent to which most of the real estate markets in the region have recovered over the last few years. “Eighteen months ago we were struggling to get any banks other than existing financing banks to talk to us. But since then we’ve seen a definite recovery in the debt financing market and so we are now in talks with three or four new banks, which is providing some competition in terms,” says Maudling.
On December 18, Palmer refinanced the bigger portfolio of 55 properties with Raiffeisen Bank International, the terms of which Palmer said would not have been possible a year ago. “There’s no doubt the financing has got a lot easier over the last 12 months,” says Barker.
As regards equity finance, Palmer reports seeing a lot more equity coming into real estate from a variety of sources, including sovereign wealth funds, Asia and the Middle East. That flood of money has gone largely into core property and into the established markets of Western Europe, but is also spreading into Spain and the Netherlands, where there are still distressed opportunities, and there is now evidence of that buying pressure pushing other institutions into looking at core Central European property markets.
“The region is not attracting sovereign wealth funds from, say, South Korea, but the next tier down of institutional purchasers are perhaps being encouraged to buy core property in Prague with a yield of 5%, rather than in London where you are now down to about 3.0-3.5%,” says Barker. “You are seeing increasing numbers of deals and increasing prices of core properties across the established markets of Central Europe. The question is, will that then spill out into a general upswing in pricing and demand across the whole region for all types of property?”
“Our view is that it will, but that this process has only just started,” he adds.
To sound a note of caution, Palmer says it is still not easy to raise fresh money from outside the region for new projects and funds in the region. “In our funds what we are finding is that we can raise new debt much more easily than we were able to, we can also raise new equity from our existing investors in our existing funds, and this year we’ve been able to raise new equity from new investors for existing funds, for example we launched a convertible bond for a property fund, a substantial part of which was taken up by new investors,” says Barker. “What we haven’t yet succeeded in doing is to raising new funds with new investors for the region: that’s the next target.”
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