A perfect storm
The real estate market in Poland, both commercial and residential, appears to be booming. How sustainable is this?
When everything seems to be plain sailing and there are few clouds on the horizon, it can be human nature to ask: “When will it all go wrong?” The same could be said of the real estate market in Poland. With negative interest rates and high end-user demand fuelling strong development in the office and warehouse sectors – although less so in retail – and underpinning impressive sales in the residential market, not to mention a dynamism in the hotel sector only recently seen in Poland, real estate professionals are asking themselves how long this can last. “I’m looking for signs of what could affect the positive situation, but I can’t see any,” says Arkadiusz Rudzki, Managing Director of Skanska Property Poland. “Of course there’s geopolitics, but we can’t influence that.”
“There is a global hunt for yield,” says Przemysław Krych, Founder & CEO of Griffin Real Estate. “Alternative engagements of capital are not attractive. The government pays you nothing, banks pay you nothing, public equities are overpriced or volatile. Private equity is a very small portion in overall asset allocation. So where do you put your money? You put it in real estate because it’s yielding. And it’s over 6% in Poland, which is quite a nice differential compared to 3% in London or 4% in Germany. The context for Poland is still relatively good. Politically, the BRICS are gone – except for India, but it was never a real property market. Turkey is off the map. The US is overpriced. Poland has a competitive edge over other countries,” asserts Krych. “There’s too much money on the global markets,” claims Marek Koziarek, Managing Director of Commercial Real Estate at Bank PEKAO. “So there is a natural demand for the money to be invested, and this demand is visible in Polish realestate. The check, of course, is that funds won’t buy empty buildings.”
According to those active in the market, the incredible growth in business services in cities across the country is a guarantee that well-located new offices, especially in the main regional cities, certainly won’t be standing empty. “The business service sector is absolutely the driver of the regional office market in Poland,” states Peter Chatfield, Commercial Manager at developer Vastint. “Every lease we do with business service clients, they say they want to grow strongly in the next three to four – even seven – years. Requests range from room for 30 – 100 percent growth. It shows long-term commitment.” According to Krych, Poland has innate strengths which help sustain this phenomenon. “It really boils down to education, skills and languages,” he says. “When you look at global trends, Poland was no. 3 in the world and no. 1 in Europe for shared services and BPO locations. This proves that Poland can provide a very good quality workforce.”
“The business services sector is the fastest-growing sector in Poland with around 210k employees,” says Skanska’s Rudzki. Furthermore, he claims, there’s no sign it will stop any time soon. “There’s more to come in terms of serious operations from US and western Europe – they’re moving their businesses to Poland.” This is good for office developers not only because it fuels the need for new office space, market analysts say, but because it also drives quality in the buildings. “There is a lot of competition between these companies to employ the best people,” says Chatfield. “(The business services companies’) biggest concerns are always on HR rather than real estate.” This, according to Rudzki, means employers have to create as attractive an office as possible. “Employee rotation in business services is high, so you need tools to keep your employees. After salary, the working environment is most important.”
Business by the sea
One city which is clearly benefiting from the growth in business services is Gdańsk, a major regional city which has in the past been somewhat in the shadow of Kraków, Wrocław and Poznań in terms of economic development. “Gdańsk is the fastest-developing city after Kraków,” says Rudzki, adding that Skanska has recently bought plots there. One local developer which has long been aware of the city’s potential is Olivia Business Centre, the company behind the successful office project of the same name. Their belief in the market has given the company the confidence to start construction of a high-rise office tower in excess of 150m, according to the company’s founder and CEO, Maciej Grabski. “The overall business climate in Gdańsk, plus the success that we have seen at Olivia Business Centre so far, gives us the momentum and confidence to build Olivia Star. With its view over the sea on one side and the forest on the other, tenants want to go as high up as possible and take advantage of the beauty that we are fortunate to have all around us,” he enthuses. The city, he claims, has the right ingredients to be a successful commercial centre. “It’s a desirable place to live and work. There are students fresh out of university as well as experienced professionals. And don’t forget we are actually three cities with a population of over 1 million.”
While the business services sector is driving an office development boom in the regional cities, how do things look in the nation’s capital? “Vacancy is currently at around 15-17 percent,” says Koziarek, “but this is an average in the whole market. There are some buildings which are substantially empty. And there are some projects – those with a flexible approach – which rent out better than average. So some segments of the market are growing faster than others. There remains a demand for good product and this demand will stay.” What’s needed is perspective, says Stanislav Frnka, CEO of HB Reavis Poland. “If you compare (Warsaw) to Vienna, there’s something like 10 million sqm of office space there, for a population of around 2 million. Now, when (the company’s office project) West Station 1 is handed to the market, it will pop to just over 5 million sqm. So you see that there is still a lot of potential.”
“It’s true that there’s a lot of space planned and coming online,” says Chatfield, “but take up is at record levels. It’s the speed of development that is an issue. However, developers don’t make money if they don’t build – they can’t stand still.” Przemysław Krych also references the strong take up. “There was around half a million square metres of net take up in Warsaw last year. Some parts of Warsaw are under-invested when it comes to transportation infrastructure and therefore challenging for both tenants and landlords. There willbe winners and losers, so you’re back to basics – location, location, location. And of course pricing. The times when everyone was happy are over.” Koziarek agrees that there will be those who don’t succeed, and says that there is a basic underlying reason for this. “The market is more mature now,” he claims. “Recently every developer and every owner has to fight for the market. There has always been competition, but in the past it was easier to build a professional project and for it to be accepted by the market. But it’s important to stress that the net absorption is very high and we’ll probably see record absorption this year again. The main reason is the strong competition from completely new buildings. The life cycle of the product is getting shorter – buildings are aging faster.”
Two high profile projects that have leased successfully in the current climate are Echo Investment’s Q22 building and Ghelamco’s Warsaw Spire. It’s fair to say that 3-4 years ago the market was sceptical that the city’s office market could absorb such large projects at one time. “But we believed in the success of Warsaw Spire from the beginning,” says Jeroen van der Toolen, Managing Director CEE of Ghelamco, the project’s developer. “We focused on the Rondo Daszynskiego area (in Wola district of Warsaw) long before anyone else. We had an ambitious vision for this part of Warsaw as we had seen the potential for building a business hub here. But we knew we had to build more than just an office, so we created Plac Europejski, which serves as a town square, an urban park and an art gallery.” The area around Rondo Daszynskiego is rapidly taking off as an office location, with developers Karimpol, Skanska, Capital Park, Golub Gethouse, Hines and the afore-mentioned Echo Investment all developing in the vicinity. Stiff competition, but some don’t see it that way. “We don’t view (the other developers) as competition, we see them as good neighbours. Together we’re building a strong neighbourhood,” says Marcin Juszczyk, Member of the Management Board of Capital Park,which is in the early stages of transforming the industrial site of the former Norblin Factory on Zelazna street into a multi-use scheme.
Another company which is transforming a former industrial site into a project of many facets, but on a far larger scale, is Liebrecht & wooD. The company, in partnership with BBI Development, is breathing new life into a whole former industrial swathe of Warsaw’s Praga district on the east side of the river, turning it into a major destination called Koneser Centrum Praskie. “This is much more than a commercial enterprise, it’s a lifestyle project,” says Liebrecht & wooD’s Managing Director, Mariusz Kozłowski. The office part of the scheme, says Kozłowski, is naturally attracting an increasingly prominent type of tenant on the Warsaw office market. “We’re not choosing them, but IT and tech-related companies are naturally being drawn here,” he says.
Retail market a mixed picture
While there appears to be good prospects for further development of new office buildings in several cities across Poland, albeit at the expense of not-so-old older office schemes, the retail market is facing a more uncertain future. After 15 or so years of turbo development, there only remain a handful of opportunities for new ‘big box’ retail centres in Poland, according to Marek Koziarek. “There are few remaining locations for big shopping centres. Developers and asset managers need to be much more creative – it’s not enough just to deliver the retail space. Shopping centres are becoming destinations to meet and be entertained, as well catering to your day-to-day needs.” Marcin Klammer, CEO of design and consultancy company Arcadis, concurs. “Retail malls need to reposition themselves as entertainment leisure destinations, a trend which has been growing abroad.” Klammer also points to an increasingly important dynamic in Poland’s retail sector. “A major trend is going to be older schemes that need to be re-modelled and upgraded. It’s going to be a big wave as most need to go through a refurbishment.”
In an increasingly competitive market, say experts, the tenant mix of a centre is going to play a more crucial role thanat any time to date. This is somewhat of an issue in Poland. “The pool of retailers here – especially in the fashion segment – is still shallow compared to the UK, France, Germany and other mature markets, often leading to a ‘copy and paste’ experience from one shopping centre to another,” says Anna Wysocka from JLL. “We estimate that there is a group of maximum 300 “shopping centre compatible” brands in Poland at present,” says Leszek Sikora, Managing Director of ECE Projektmanagement Polska. “This seems strong, but some of them are quite picky and won’t go outside the big cities. In this tough environment, the efficiency of the project is the key thing and this is what we’re focusing on now and in the future.” The competition for tenants will become increasingly tough, he says. “On the operation side there will be more and more differentiation between top assets, and the differentiation will be in the tenant mix of the centres. The competition for tenants will be fierce, just as they are increasingly optimizing their chains. Some centres will struggle to get their tenants in place.” Attracting tenants is at least within the control of the company which develops or owns the scheme. Other important factors affecting the retail market, however, are not. “The Polish retail market has been experiencing some uncertainty in recent months,” says Tomasz Lisiecki, Chief Investment Officer of TriGranit. “A proposed tax on retail stores based on turnover has been blocked by the European Commission but it’s likely to return in some form which will continue to suppress retailers’ expansion in the near term. Additionally, the proposed legislation banning Sunday trading is currently making its way through parliament, further adding uncertainty to a nervous industry. The continued economic expansion, however, and generous social programmes implemented by the new government should, in theory, eventually contribute to growth in the retail markets.”
As is often the case, the investment view offers a wider perspective. “Retail assets in CEE are becoming more sought after as institutional investors search for yield amid an increasingly expensive Western Europe,” says Robert Martin, Principal and Head of Central Europe of real estate investor Europa Capital. “The Polish principal cities remain the places where investors want to be, as recent transaction pricing has indicated. Steadily increasing consumer spending should slowly translate into an improving occupational market; however, many of the main cities are close to saturation leading to increasing vacancy and rental decline.”
At the end of H1 2016 modern retail stock in Poland totalled 13.07 million sqm across the following retail formats: 9.30 million sqm (71%) in shopping centres, 3.57 million sqm (27%) in retail parks and warehouses, and 0.21 million sqm (2%) in outlet centres. Source: JLL
1,312,000 sqm of warehouse space was leased in H1 2016, the best half-yearly result in the sector’s history. The vacancy rate reached an historically low level, only 6.1% of existing warehouse supply is available for lease. Source: JLL
Warehouse market flying
The sector which appears to be firing on all cylinders right now is warehouse. “I don’t see any serious problems stopping ongoing development in the warehouse sector,” says Tomek Kasperowicz of Colliers International. “Tenant demand is growing, it’s never been higher historically. Last year was a record year in net take up, and it looks like 2016 will improve on that. Local companies are expanding and there are plenty of companies coming in from abroad, like Zalando setting up in Northwest Poland with Goodman.” “Demand is strong, net absorption is positive, new tenants are coming in, construction costs are low,” says Robert Dobrzycki, CEO of Panattoni Europe. “Warsaw, Łódź, Poznań, Wrocław and Silesia are very strong. Recently Szczecin, and western Poland in general, including Żielona Góra, is becoming more attractive. Companies, especially from Germany and the Nordics, are benefitting from a low labour and real estate cost base, so there’s a growing market there. Several Scandinavian companies are relocating whole or part of their business.”
Poland, it turns out, is not an isolated case in terms of the boom. “All markets across Europe are performing, with the UK leading the way, delivering the strongest performance we have seen in the warehouse sector since the down-turn in 2008,” says Ben Bannatyne, Europe President of Prologis. “Poland remains one of the big four markets alongside UK, France & Germany. Occupancy in Poland stands at 94% and we are witnessing a huge amount of activity across the market, both in logistics and light manufacturing or production. This is being driven mainly by continued supply chain reconfiguration, E-commerce and the automotive sector.” But Bannatyne adds a note of caution. “However the lack of trans-parency does mean that detailed due diligence is required particularly as it relates to market rents and capital values.” The all-important issue of rents is one that comes up in almost every conversation with a warehouse professional. Magdalena Szulc, Business Unit Director for SEGRO in Central Europe, is no different. “In my opinion, the biggest issue we face, is that on a very active market, there should be big pressure on rents. On the mature markets, with a low vacancy level, the rent increase is visible. This is not the case in Poland where rents are still low. The main reason for this situation is the high level of competitiveness on the market, but we do expect rents to go up in due course.” Szulc also highlights the importance of Poland’s skilled labour in attracting business. “Poland is perceived as the place where the investors can find high-potential, skilled and qualified employees. We are also seen as a big internal market, so providing companies with high potential for business growth. Observing our clients we can see that entrepreneurs are moving their operations to Poland – when they think about their European production, they have Poland at the top of their minds.”
The final word on the warehouse sector goes to Maciej Madejak, Head of Business Development for Goodman in Poland. “Many companies in Germany are looking to establish in Poland. This is not because we are cheap, but due to the quality and quantity of the labour. Every time I ask customers if they are happy with the quality of the service, they say yes – that it’s beyond expectations. Poland as a country has huge market potential for e-commerce, serving domestic and international markets. It’s a matter of time until e-shopping really takes off in Poland.”
Increased number of visitors drives hotel sector
The hotel sector in Poland is not far behind warehouse in dynamism. “Poland is experiencing a growing number of international visitors, stronger domestic demand and the rise of the MICE market,” says Adam Konieczny, Country Head of consultancy Christie & Co. in Poland. “With one of Europe’s lowest ratio of hotel beds per 10 000 people, limited number of good quality branded hotels and strong interest from international funds the country is perceived as a land of opportunities. But you need to take into account the changes in guest behaviour.” Like in the office and retail sectors, people are now looking for more than a functional building. “People want more than just accommodation, they also want an experience. This is the reason why operations such as Air BnB are growing and competing with hotels. Hotels have to adapt to customers’ needs, offering more personal attitude, attractive public space, good local food specialities and flexible check-in/out options.” A hallmark of Poland’s hotel market is its balance, according to Dominik Sołtysik, member of the board of Orbis S.A. responsible for asset management and development. “Poland is a large country with important domestic demand, having a mix of leisure travellers in the Baltic Sea or in the Southern part of the country and business in main cities like Warsaw, Poznań, Gdańsk, Wrocław, Szczecin, Kraków and Katowice. Overall, the market offers a good balance between leisure and the MICE segment.” The hotel sector has caught the attention of investors as well. “Poland’s tourism industry is growing, particularly in Warsaw. Kraków has always been a successful tourist destination but Warsaw is now becoming an attractive and safe destination. The dynamics are really quite interesting. The hotel sector in Warsaw needs improvement in many of the various sub-sectors but there are a number of opportunities to be considered.”
Residential sector– peak demand falling off
The residential market, which has also been growing fast of late, is set for a measured slowdown in the next few years, according to Paweł Sztejter, Managing Partner of residential consultancy REAS. “The market has seen record development and sales in the last couple of years. In Warsaw the current annual level of transactions has reached 20,000 primary market apartments per annum, which is comparable to the peak of the 2006-2007 boom. But it may change in the next few years. First of all, the MDM subsidy, introduced to help first-time buyers, will disappear in 2018. At the same time the amount of equity a buyer must put in to the apartment purchase has been gradually increased since 2014 to reach 20% as of the beginning of 2017. Both factors will have an impact on sales.” Interest rates and the appearance of institutional investors are both factors which will influence the future of the market, claims Sztejter. “At the moment, buying an apartment as an investment makes good sense and drives the demand, especially in the in the middle market segment. However, if and when interest rates go up, the demand from individual investors will decline. So the market right now is at the peak of the cycle, with stable prices as supply meets demand. But we expect both transactions and supply to go down, reach the bottom in 2019 and then rise again. A significant emerging trend in the market is the rise of the institutional rental market. The safety on the rental market in Poland is low at present because rental stock is in hands of individual owners and the grey zone is substantial. The entry of institutional owners, pension or investment funds, will introduce proper standards and significantly increase attractiveness and safety of renting.”
The advent of REITs to bring local investment into play
The Polish market has long talked about the benefits the introduction of REITs would bring, and now if finally looks as though there will be movement here. “REITs offer a big opportunity for the industry,” says Capital Park’s Marcin Juszczyk, “and it seems the government is taking the issue seriously and wants to pass legislation enabling REITs to be created. The new head of the Warsaw Stock Exchange, Małgorzata Zaleska, says it is a priority. Hopefully it will come into force next year or the year after.” Joseph Borowski, Managing Director of consultancy Knight Frank in Poland, says REITs will balance out the sources of investment funding. “If you look at developed western real estate markets, as a general rule roughly 50% of capital investment in property is domestic and 50% is foreign in a given country. In Poland, the average proportions over the last say five years are less than 10% domestic and greater than 90% foreign. REITS would unleash domestic capital and provide additional liquidity to the Polish commercial real estate market,” he states. “Investment in REITs,” he continues, “are an important element of pension fund planning for individuals in developed markets because commercial property can provide long-term stabilized cash flow for them. Foreign institutional investors purchasing investment stock in Poland are often funded by pension funds from their home country, such as Germany or UK. But while German or British citizens are able to invest in Polish commercial property, Polish citizens do not have this option at present.”
Demand for office space in Poland continues to be strong as companies leased 628,200 sqm in H1 2016. Currently, there is approx. 1.44 million sqm under development, with Kraków claiming a record-breaking share of 303,000 sqm. Source: JLL
South Africa- a source of capital
Arguably the biggest single event on the Polish real estate market in 2016, and one linked strongly to REITs as a major factor in the market going forward, was the investment in Echo Investment by Johannesburg-listed Redefine Properties, one of South Africa’s largest REITs, leading to the creation of a new company, Echo Polska Properties. Both Echo Investment and EPP are now managed by Griffin Real Estate. CEE developer GTC soon followed suit in accessing funding from South Africa by listing on the Johannesburg Stock Exchange (JSE). Erez Boniel, CFO and Member of the Board of GTC, explains why it made sense for them. “South African investors are looking for hard assets in SEE and CEE as a hedge for the volatile Rand. We are a ready-made working platform with over 20 years of track record, and we want to enhance our shareholder base as we grow.”
While REIT’s – and the JSE – can be a source of funding in the future, the market still relies on traditional sources, German banks prominent among them. Although many market players now say that domestic political factors are less of a concern now than they appeared to be at the beginning of the year, for Martin Erbe, Head of International Real Estate Finance Continental Europe at Helaba Landesbank Hessen-Thüringen, the political climate is still an issue. “The biggest risk the Polish real estate market is facing at the moment is the political situation. Investors need reliable partners and politicians setting a positive framework for business is one of them. The opposite is a government announcing new laws – some becoming legally relevant, others being challenged by the EU – and a politics which is turning away from Europe.” How much of a factor is political risk for investors? “We have not currently stopped investing in Poland due to the political environment,” says Robert Martin, “but it is a growing concern. There are certain investments we would currently avoid. For example, transactions involving state institutions would not be attractive for us due to the uncertainty of direction within these institutions.”
Context is everything and, as Poland Today goes to print, we hear the sad news of the passing of an absolute rock of the Polish real estate market, David Mitzner, at the age of 101. Mitzner, who founded Apollo Rida development and investment company, was born in Warsaw’s Wola district. He lived through times of turmoil and change inconceivable to us today, but let nothing stop him from achieving his dreams. It is not an exaggeration to say that the present success enjoyed by so many professionals in Poland’s property market is owed in large part to him because he believed – and invested – in the future of the Polish real estate market when almost no-one else did. The vibrancy of today’s market is his fitting legacy.