A good year for capital in Poland says Del Chandler

Del Chandler, managing director capital markets CEE at BNP Paribas Real Estate, talks to Poland Today about the year ahead in Polish investment and development. 

How would you summarise the real estate market in Poland & CEE over the last year, and what is your outlook for the year ahead?

Investment volume in Poland and the CEE region was extremely robust in 2015. Many countries are approaching pre-crisis levels of investment volume, with Hungary even exceeding it. It was a very good year for capital invested, with nearly €9 billion spent, the third highest CEE regional investment volume on record. In Poland, total annual investment volume amounted to €4.1 billion, the highest figure noted since the record year of 2006, which saw €5.05 billion invested. No market sector evidenced a slowdown or even a pause. As a result of 70 investment transactions concluded on the Polish market, total volume increased by 30 percent compared to 2014. Retail was the most sought after sector, accounting for 55 percent of all deals closed, while the office sector had a 33 percent market share. Prime yields declined by 0.25– 0.5 percentage points and are now valued at 5.5–5.75 percent for the best assets in primary locations. In 2015, Czech Republic saw the second highest volume of investment deals on record, providing an annual figure of €2.65 billion, and in 2016, there will be more office and retail investment transactions, while hotels will be popular, despite limited amounts for sale. In Hungary, the office sector was by far the most sought after and demand for industrial real estate dominated the Romanian market in 2015, making up 40 percent of investment volume. In 2016, demand in Romania is expected to return to office and retail, but industrial will also be sought after. Having analysed the scope of ongoing deals in the pipeline, we expect 2016 to remain a strong year for the CEE. The Polish office market in regional cities, mid-size office market in central Warsaw and high-street properties in CEE capitals will be busy sectors for investors.

What is your assessment of the office development pipeline in Warsaw?

Warsaw has managed to maintain consistent net office letting uptake, except for during the last world finan cial crisis. When developers exceed this net level with large volumes of new buildings, pricing pressure is a foregone conclusion. The vacancy rate oscillates around 12.5 percent and is increasing because of several hundred thousand square metres in the pipeline. Pressure on pricing and the vacancy rate will not subside until the net letting uptake is fully amortised with the current development pipeline.

How is the climate under the new government affecting the investment appetite? Are investors concerned?

Over the last few years, Poland has developed a very diverse manufacturing and service sector and this has made it very resilient in growth, irrespective of how well run the government is. Poland did really well in 2015 and this should continue into next year, but there are clouds on the horizon onwards from 2017. There may be major fiscal imbalances after the introduction of new laws, like the 500+ grant or the increased tax-free allowance, which may lead Poland to enter Excessive Deficit Procedure. There is also potential banking sector instability expected when the CHF loans are converted into in PLN for Polish home owners who purchased their home using CHF loans prior to a steep devaluation of the PLN /CHF exchange rate. This will be addressed by the Government at the earliest in 2017 and the cost of conversion for banks could be much lower than had been estimated. Nevertheless, the banking sector remains very stable with a tier 1 capital ratio (CET 1) at 14 percent. Poland’s budget projections may prove too optimistic, with real GDP growth and inflation expected at 3.8 percent and 1.7 percent respectively. Should Poland’s economy fare worse than expected, the prospects for next year’s budget revenue would worsen and we are currently projecting 3.1 percent GNP growth for 2016/17 and inflation at 1.6 percent in 2016.

What long-term fundamental drivers are you looking at for development in Poland?

We look at different growth engines for different countries. There are strong market fundamentals across finanall CEE and we are expecting good results for 2015, but GDP forecasts for 2016-2017 are moderate across the CEE , and while there are different reasons depending on the country, they are all struggling with very marginal inflation or deflation. Investment vehicles, especially ones already familiar with the market, are looking to allocate their funds in the region and the cost of bank financing remains at record lows, but there are questions of for how long. The Polish banking sector, although under threat with the new banking tax, is much stronger than in any other country in the region. Nevertheless, higher margins are now translated into the market because of the tax. While liquidity has moved out in some smaller banks, larger banks are interested in lending in the real estate market and liquidity is still fairly strong. Unless the government introduces anything additional for the banking sector, the system should continue to support the market for the foreseeable future.

How does this year and the future look in terms of investment deals for Poland and CEE?

In 2016, Poland should continue to show robust growth but it depends on high value products being available, since there were large share deals and retail transactions last year. If you look at 2015, major shopping centres like Riviera and Stary Browar came to the market and, with major share acquisition deals, were large platforms for the industry. These won’t be available on a year by year basis so, even if demand is strong, the product line may not be able to match demand. In the next two to three years, investments cycles within CEE will depend on stronger growth in Western Europe. In return for increased growth and steady inflation, there will be a steady flow of capital into the CEE, encouraging more investments and deals. Following growth and higher inflation, we will also see rising interest rates which will keep investors motivated and looking for higher yields in CEE. With Eurozone growth steady but unspectacular, it’s unlikely we will see much change to current investment trends until 2017.

Del Chandler is the managing director capital markets CEE at BNP Paribas Real Estate.

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