Growing exponentially

Demand for warehouse and logistics real estate in Central Europe among international investors and tenants shows no signs of stopping.

Last year set another record for the sector in Poland. According to Colliers International, 2017 take-up was more than 4.6m sqm, 1.2m higher than the previous year. The country’s stock of modern industrial space stands at 13.5m. Over 2.3m was delivered to the market last year compared to 1.3m coming to market in 2016. At the moment, around 1.3m of space is under construction in Poland. Robert Dobrzycki, CEO of industrial property developer Panattoni Europe, says, “It’s an amazing boom everywhere in Europe but specifically in central Europe, whose economies are growing, and the region can also serve western European bases from facilities close to the German border. And central Europe has the advantage of lower labour costs.”

A whole new dimension

Central and eastern Europe’s economies are themselves growing, which is boosting domestic demand for logistics facilities. Moreover, new infrastructure and roads are speeding delivery times, further enabling growth. E-commerce is the principal driver of the surge in new development and investor interest. “Three years ago our initial thoughts were that this was a game-changer. But now it has entered a whole new dimension and investors have fundamentally shifted how they view the sector. These are very exciting times, especially for the central European logistics agency” says Dobrzycki. The supply in the three Warsaw zones alone is over sqm 3.5m. Last year new deals made up over half (54%) of demand, while renegotiations amounted to 39%. The majority of space was leased within zone II (788,800 sqm), which is the second-best result in Poland and means that interest in this location has held up (662,800 sqm in 2016). A total of 11 projects totalling 227,000 sqm were under construction in 2017. The vacancy rate remains at a relatively stable level. At the end of 2017, it stood at 6.1% compared to 6.4% recorded last year. The vacancy rate in all three zones reached 9.3% in zone I, 5.9% in zone II and 2.9% in zone III, says Colliers International. Polish broker and manager AXI IMMO points to rising rents in “selected locations” due to higher land costs, construction materials and investment-related costs. According to JLL, however, in general there were no “major changes” in rental levels last year. The highest prices for warehouse space were in Warsaw Inner City and Kraków, where headline rents ranged from €4.1 to €5.1 sqm per month and €3.8 to €4.5 sqm per month, respectively.

Record high occupancy

Meanwhile in Czech Republic, 2017 net take-up amounted to 937,300 sqm representing an annual increase of 3%. The leading sector, both in gross and net demand, during Q4 2017, were logistics companies who accounted for 46% of gross and 43% of net take-up. Distribution, retail and e-commerce companies ranked second with 26% of gross and 27% of net demand, according to JLL’s latest figures. Tenant demand throughout the region is strong with occupancy holding up well. CEO of P3 Logistics Parks, Ian Worboys, reports a record high occupancy rate across the European developer’s central Europe portfolio of 98%. “Because there is no oversupply of space tenants have less choice to move on so we can keep our portfolio very full, also enabling us to push rents higher. Net effective rents are growing as incentives fall and there is yield compression due to the weight of investment money chasing assets; the warehouse sector is the best performing asset out of all the real estate classes,” says Worboys. Jeff Alson, Cushman & Wakefield’s international partner, CEE markets, is equally positive about tenant demand: “The average deal and shed size is getting bigger. Five years ago a big shed was 20,000 sqm; today a big one is 100,000 sqm,” he says. Logistics property company Prologis affirms that tenant demand is growing most in the Czech and Polish markets. Martin Polak, the company’s regional head of CEE, says: “Rents are growing sometimes in double digits in Czech Republic; Polish levels are growing too, although in some sub-markets they remain stable.” In February, pan-European ecommerce operator Zalando revealed that that US-based investor Hillwood Europe is to build a 130,000-sqm warehouse in Olsztynek, about 200 km north of Warsaw for the company. The retailer already has two Polish ‘fulfilment centres’, one near Szczecin and one planned close to Łódź.

High yields, low vacancy in Romania

Further east, according to Tomasz Kasperowicz, director of logistics agency at Colliers International, the Romanian market is “growing like crazy.” The economy expanded 5.7% year-on-year in the second quarter of 2017, the fastest rate in the EU; GDP rose 4.8% in 2016, while last year the EU estimates GDP grew by 6.7% year on year. “But whether market growth is sustainable is another question,” he says. JLL’s statistics reveal that Bucharest last year set a record for leasing activity in and around the capital, where more than 700,000 sqm of space transacted, 54% of which was in the city itself; activity was driven by pre-leases and build-to suit-transactions. The vacancy rate rose a little to reach 4% nationally; however, prime rents climbed during the second half of last year, reaching euro 4.1 per sqm per month, reports CBRE. This was largely driven by the logistics and retail industries.  Around 420,000 sqm of space is being built across the country, some half of which is located in Bucharest. Prime yields stand at around 8.25%.

Polak says that the Czech Republic seems to be the first “really European” market as the sector is very liquid and transparent. “Yields for core product are around 5.75% for Czech Republic, while for Poland they stand at about 6% to 6.25%. Buyers are typical European institutions, such as the large German, UK or French funds, while we are seeing Asian purchasers more and more,” says Polak. Prologis is keen to expand in Poland, Czech Republic, Hungary and Slovakia in the sub markets around these capital cities. In Poland the 2017 investment volumes set a record high, amounting to almost €940 m, according to JLL.  Last year’s figures were dominated by one large transaction, namely the acquisition of the pan-European Logicor platform by China’s sovereign wealth fund, China Investment Corporation. A total of €750 m of this is made up of Polish assets.

2018 to prove transactional

The firm expects much stronger volumes for 2018 with large scale transactions on the horizon in the office investment sector for both Warsaw and the regional cities. Some assets, albeit those with exceptional, long leases, have traded below 6%. Properties are expected to continue changing hands at a very strong pace with both portfolios and large single assets expected to transact this year. According to Philip Wood, CEE transactions manager for Munich-based GLL Real Estate Partners: “The market is continuing to evolve into a mature marketplace and to attract significant volumes of capital from across the globe.  We see growing interest in CEE from the Far East and South Africa, alongside traditional experienced CEE investors from geographies including Germany, Austria, the US and UK.” Other investors include South Korean funds, reportedly represented by GLL, also Canada’s PSP Investments has teamed up with UK developer SEGRO to build logistics space.  Compared with western Europe, CEE assets are becoming increasingly efficient for foreign buyers for a particular reason: Janusz Dzianachowski, a real estate partner at Linklaters, explains that international investors who buy various assets at very low yields of 3-4% in Western Europe are now looking at Poland and other central European markets, where they can buy at higher yields and increase their investment incomes.

Meanwhile, the rising demand for logistics assets is attracting interest from international banks eager to take a slice of the boom. Robert Sztemberg, the head of Warsaw’s office at German bank Berlin Hyp, is keen to diversify his retail and office-dominated lending portfolio.  “We are active in the French and German logistics markets and are looking to expand our portfolio in Poland. Schemes here are modern, with good technology and well-located. Many assets serve the German as well as the Polish economy, which spreads our risks,” says Sztemberg. “Up to now our portfolio has been no more than 10% logistics but from last year this is growing and we are willing to increase it further.” He favours lending on a 65% loan-to-value basis and claims that on a 50% LTV deal, Berlin Hyp has the most competitive pricing. As yet, development finance is underwritten mainly by Polish banks.

David Sands has been writing about European commercial real estate for over 20 years for UK magazine Estates Gazette, where he was news editor, and most recently for EuroProperty as deputy editor. During 1994 to 1996 he had a weekly half-hour slot on LBC Radio commentating on the London commercial real estate market. He is based in London.

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