Market will absorb new supply

Del Chandler, Managing Director for Capital Markets in the CEE Region for BNP Paribas Real Estate, gives his take on Poland’s investment markets following Brexit and for the future.
Has Brexit had any noticeable effects on the Polish or CEE real estate markets?

The immediate impact of Brexit was uncertainty in the investment markets. A lot of investors paused to see how investment yields would react in Poland and other CEE countries but this phase is now over and core investment products are strongly sought after. Prime office products, regional shopping centres and well anchored logistics products have shown very strong demand from investors familiar with Poland and CEE. For the most part, new investors looking to enter the market have remained on the sidelines reviewing each market with care. Prior to Brexit, a lot of new investors from Scandinavia were ready to step into the Polish market because of low yields back home, but they have yet to enter the market as expected. With the exception of core assets, we are also seeing less interest in a lot of the regional cities following the referendum. Opportunistic buyers have remained in Poland and CEE but investors in middle-market, non-core products have had less of an appetite following Brexit. The market has become more selective for non-core products, and vendor’s yields are often not a good match for the remaining opportunistic investors. Despite these concerns, we believe that because the Polish economy continues to maintain a resilient three percent GDP growth, Brexit should have a diminishing impact in the coming months.

How do investors perceive the large amount of activity on the Warsaw office market?

The major concerns of investors today are the volume of office space delivered and the pipeline projects. This year, the total stock of modern office space in Warsaw exceeded five million sqm and there are clear signs of a development spree underway: 650,000 sqm is currently under construction and approximately one million sqm is in the initial stages of planning. This large supply will definitely have an impact on rent levels, but this will be a short-term phenomenon. Rents are expected to decrease and bottom out over Q4 2016/ Q1 2017 period, leading to stability in the second half of next year. The marketwill eventually absorb the new supply as Warsaw still has enough space for the current and planned office stock. In the long-term, I would not expect any major turbulence regarding rent level. Prime yields remain under pressure due to the general availability of financing and lack of core products, but a significant spread of pricing on value-add and opportunistic assets is evident. Financing remains high, even with an increase of interest rates by an average of 0.50 bps, caused by the new banking tax.

In terms of investment activity, which sectors are hottest at the moment and which have slowed down?

Investors are constantly looking for prime assets located in the largest Polish cities with Warsaw as the most preferable location. Due to the limited supply, they have to search for alternative market sectors and asset types previously seen as niche. More and more, investors are eagerly looking at the regional cities where good core retail projects, office buildings and warehouses can be found. Outlet centres enjoy increasing popularity among investors thanks to their advantages as an investment product: in terms of yields and rents, they are more resilient to market fluctuations than other types of assets. Due to the booming logistics market, this kind of product is growing in importance. Quality class industrial and logistic products are expected to trade at around 6-6.25 percent with exceptional cases closing at 5.5 percent.

Can we expect more investment deals in the hotel sector in the years ahead?

First of all, the last two years have been excellent for the hotel business in Poland. The number of tourists visiting Poland is increasing, and in 2015 Warsaw recorded 4.2 million visitors. This summer, the hotel occupancy in the Tri-City region was close to 100 percent and Zakopane saw record high occupancy rates. The last two years have been the best the industry has seen in living memory. In the future, projections show at least ten new hotels being delivered per year. Future growth looks like it will be sustained under the current economic conditions and will continue to be robust.

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Written by: Del Chandler

Managing Director for Capital Markets in the CEE Region for BNP Paribas Real Estate