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First Property uses local knowledge to grab bargain in Krakow

The acquisition equates to a pre-tax rate of return on equity invested of more than 15% a year.
Krakow market town
Krakow is an intriguing mix of the old and the modern

First Property Group PLC (LON:FPO) is back on the acquisition trail in Poland, snapping up a recently built class A office building in Krakow.

In conjunction with a club of investors, First Property is acquiring Pilot Tower for €23mln,

The net operating income being generated by the property is currently €1.9mln per annum, equating to a net initial yield on purchase of 8.3% per annum.

The acquisition will be partly funded by a bank loan of up to €15.9mln and cash of around €7.5mln.

The cash has been committed by two family offices, a Cambridge college, and other clients of First Property; First Property intends to co-invest €1.5mln on the same basis as other investors.

First Property said it expects the investment to earn a pre-tax profit of €1.16mln a year, of which First Property’s share will be around €230,000 a year. This equates to a pre-tax rate of return on equity invested of more than 15% a year.

The Aim-listed group will also earn ongoing management fees of some €220,000 a year, plus a one-off arrangement fee of €220,000.

Ben Habib, the chief executive officer of First Property, said the “striking building” is in a prime location, boasts state-of-the-art facilities and is fully let at rent levels that offer room for growth in due course.

Speaking to Proactive Investors, Business Development director Jeremy Barkes explained why the yield on the property was so attractive.

While the developer was going through the marketing process, the main tenant entered financial difficulties.

“That put off other buyers,” Barkes suggested. First Property, with its local expertise in Poland, was able to negotiate a good deal and buy the property fully-let.

“It’s a tight office market in Krakow, with a low vacancy rate,” Barkes said.

It is the second largest office market in Poland, amounting to just under one million square metres available at present. Barkes expects it to pass that landmark at some point this year, due to new development, which will raise its profile and make it more of an institutional market.

Barkes pointed out that it is not the first time the company has purchased a property in Poland in conjunction with a third partyies; it did so at the end of March last year (see below).

“That’s our model over there at the moment in Poland, to invest in partnership with third parties, rather than through a blind pool – though we’d like to raise a blind pool,” Barkes revealed.

“We have an excellent track record of making money in CEE, including being ranked No.1 versus  MSCI’s Investment Property Databank (IPD) for CEE, but it’s easier to fund pre identified deals, on a it deal by deal basis, much as we’d like than it is to raise a blind pool,” he concluded.

Shares in First Property were up 5.3% towards the end of the day.

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