An open door to redefining the commercial real estate market in Poland

The investment slowdown in the commercial real estate sector that we have been observing in Poland for over a year is primarily the result of the tightening of monetary policy around the world. This strategy mainly affects international players, but not private equity investors. Perhaps this is a great time to re-evaluate the financing system in the real estate sector in Poland and to finally introduce REITs, which function very well in the Czech Republic and the Baltic countries.

Introduction of appropriate legal regulations, including REIT funds, which has been discussed a lot lately, or the involvement of family foundations in long-term creation of market demand would increase the negligible, approximately 2 pct share of Polish capital in investments. It would open up the opportunity for individual investors in our country to invest in commercial real estate.

A market of many possibilities

I believe that the current conditions create a unique opportunity to return the market to its true values, such as location and the quality of tenants, as well as standard of workmanship. They offer special opportunities to investors who can think outside the box, seek opportunities and see the hidden potential of real estate. Despite the challenging geopolitical and economic landscape, the sector presents numerous opportunities, with Poland emerging as a distinguished market for sustained economic expansion within Europe.

Similar to other Central and Eastern European nations, commercial real estate transactions in Poland predominantly involve capital participation from investors within the CEE region. The lack of appropriate regulations deprives Polish individual investors of such an opportunity. The initiative of local business is also limited by the delay in introducing changes to local development plans, issuing planning and building permissions and approving new building regulations.

More affordable financing is a chance for the largest players to return

Market participants are awaiting recovery, predicting its arrival this year or the next. There are numerous indications supporting this assertion. Thus far, the recorded declines in GDP, alongside the elevated levels of inflation and interest rates, have significantly impacted the costs associated with financing investments. These factors, which have primarily hindered the transaction market, are now showing signs of moving in a direction conducive to investments.

Hopes for improvement are raised by greater predictability of monetary policy and the anticipated decline in interest rates in Western Europe and the US, which presents an opportunity to improve investment financing conditions and attract leading investors to the Polish market. However, enthusiasm remains tempered by the relative stability of the geopolitical situation. Nevertheless, until the introduction of REITs in the country, which would facilitate the activation of Polish capital, investors from the CEE region are likely to continue playing a key role in acquisitions, filling the void of international investors.

ESG is a big challenge

The market is gradually starting to adapt to higher interest rates, and the prospect of spending on implementing the ESG program and solutions that reduce the emission of buildings that are not adapted to future requirements, gives buyers a better negotiating position.

Adapting some real estate in Poland to EU standards in terms of CO2 emissions, which is already an integral part of the strategies of leading investment entities, will be a big challenge for owners. Optimizing selected older buildings, especially office buildings, to comply with the new regulations will likely prove unviable and will result in a wave of demolitions and changes of building functions in the upcoming years. This perspective increases the activity of value add and opportunistic entities that aim at properties with growth potential and double-digit rates of return on investments.

Decrease in transaction volumes

Last year brought a much lower value of investments in the commercial real estate sector in Poland compared to the average volumes in recent years. The downward trend concerned all asset classes. We could observe it on a global scale. The total value of transactions on the Polish market decreased to one third compared to the result from 2022, slightly exceeding EUR 2 bln. However, Poland maintained its position as a clear leader in the Central and Eastern European region.

In 2023, there were no prime transactions in traditionally leading real estate sectors. Investment volumes were generated mainly by smaller and medium-sized transactions. The high value of the transaction continues to be a challenge for investors in the context of investment financing costs, which increased unprecedentedly last year. The lack of reference transactions also complicates the real estate valuation process.

Warehouses and production are an investment favorite

Unlike the countries of the CEE region, where offices are still one of the largest investment drivers, the largest number of transactions concluded in Poland was in the warehouse real estate sector, which enjoyed the largest interest of investors. Warehouse properties accounted for almost half of the value of the final transaction volume, with a result of almost EUR 1 bln. Smaller transactions dominated, but two out of three acquisitions took place in this sector. Their value exceeded the threshold of EUR 100 mln.

Polish warehouse and industrial real estate sector, despite the general deterioration of economic conditions, is doing very well. In 2023, it recorded some of the best results in history, both in terms of demand (5.6 mln sqm of space) and new supply (3.7 mln sqm). The warehouse segment remains on a regular growth path of several per cent annually. There is 2.8 mln sqm of space under construction.

It is expected that logistics and industry will continue to be an investment favorite and will attract the most attention of investment entities out of all real estate segments this year. The domestic warehouse market offers as much as 31.7 mln sqm of modern space, including a large number of facilities with environmental certificates that meet high emission and energy efficiency standards. The process of deglobalization of production and shortening of supply chains brings prospects for further sector growth in Poland and Europe.

Offices are awaiting better times

The office sector saw a significant decline in investments last year. The total value of office transactions, amounting to approximately EUR 430 mln, was five times lower than a year earlier. Financiers mostly invested capital opportunistically, in value-add assets. Many of the transactions are acquisitions of older buildings intended for changing their function or modernization. Only 2 out of 18 office transactions last year concerned properties located outside Warsaw.

The value of transactions in the commercial sector reached EUR 440 mln last year, slightly outperforming offices. Two-thirds of acquisitions involving commercial assets did not exceed EUR 20 mln. Investors focused their attention on smaller retail formats located in regional cities. The greatest interest was in commercial properties offering GLA 5-10,000 sqm with chain tenants, located in cities with over 20,000 residents and rents denominated in euro. This segment saw one transaction worth over EUR 100 mln.

Primarily retail parks

It is expected that in the near future, the sector will continue to attract investors with retail parks and convenience assets, which generated the majority of the value of transactions in the retail segment last year. Rental rates in the best projects of this type have increased over the last two years, as have the costs of construction and investment financing, which resulted in an increase in capitalization rates.

The PRS sector in Poland is still developing, but it has great potential. In 2023, the value of closed residential transactions amounted to approximately EUR 150 mln. The further development of the sector will be influenced by, among others, legal changes related to spatial planning and amended technical conditions for new buildings.

It is worth noting the first transactions on the hotel market, which happened last year. In October, we saw a transaction worth over PLN 300 mln. Ghelamco sold the hotel part of The Warsaw Hub - Crown Plaza and Holiday Inn Express hotels - to the French investment fund Corum. One acquisition does not make a summer in this sector, but it confirms the return of investors' interest, which is supported by very good operational results achieved by hotels. The year 2024 will probably end with several more significant transactions on this market.

Investors are also leaning towards projects previously perceived as niche, such as investments in student housing or senior homes. Last mile logistics is also gaining importance.

This year, core warehouse and industrial properties will continue to be the most desirable investment assets, especially those that have the potential to increase rents. In the retail sector, retail parks will attract capital. A larger number of transactions can also be expected in the office sector, especially on the Warsaw market, which has the lowest vacancy rate in Poland and high tenant activity combined with a shortage of new supply.