Why is Poland so sexy?
“Stop looking for a crisis,” urged one of the speakers during the 3rd Invested Interest Investment Market Conference organised by Eurobuild Conferences. And indeed, the panellists seemed to balance between enthusiasm for the bullish Polish real estate market and worry about how long this market is going to last.
With 4 pct y-o-y GDP growth in the first quarter of the year, the lowest ever unemployment since the economic transition of 1989, and the recent change of Moody’s A2 issuer rating from negative to stable, Poland seems to be more than in a good position to attract investment. These facts were acknowledged by investors, developers and market specialists, who came on May 17th to hotel Intercontinental in Warsaw to discuss the state of Polish real state. Yet, the speakers didn’t fail to name its weaknesses. The factors that seem to cool investors’ appetite for investment include recent changes to VAT on real estate, with the application of an anti-tax avoidance rule to closed investment funds and the introduction of a bank tax.
Sexy with scars
The question “Why is Poland so sexy for investors?” that was asked by Przemysław Felicki, the director of investment properties in CBRE, while he was moderating the first panel discussion, was clearly loaded, but provoked no opposition. On the contrary Maciej Dyjas, the co-managing partner and co-CEO of Griffin Real Estate began explaining why all Polish real estate sectors are so attractive to developers and investors. Offices are benefiting from the rapidly growing outsourcing sector, the redistribution of wealth in the 500+ government programme is good for the further development of the retail sector, while residential rental projects are practically non-existent, but present great potential.
Although Bożena Krawczyk, the investment director for Central Europe at Segro, added a rosy picture of logistics, which showed exceptional performance on the local market in 2016, the next panel was to concentrate on the downsides. These included inconsistent interpretation by the tax office of VAT rules resulting in a refusal to return tax, which seemed to have scared off a number of investors at the end of the last year. “The wait-and-see strategy among investors is a clearly visible reaction to the changes,” commented Michał Sawicki, a senior manager for real estate tax at EY. Marcin Dackiewicz, the vice president of Bergold Group stressed that this undermining of confidence will be difficult to repair. Tomasz Trzósło, the moderator, described the changes as repressive and too sudden. The optimists however included Justyna Bauta-Szostak, a legal counsel, tax advisor and partner at MDDP, who said that this was not the first change to VAT, that there had been many tax inspections over the last decade and that things should eventually settle. “Investors will find ways to cope. People generally don’t like change,” explained another speaker, who declared himself a cautious optimist.
Expensive but worth the cost?
The question of whether Polish real estate is cheap or expensive was the topic of the next panel discussion, which had been set up as a sparring context between developers and investors. Beata Kokieli, the head of asset management at Trigranit Corporation plainly stated that she believed the Polish market was “as expensive as hell”, while Robert Dobrzycki, said this was relative – for someone investing in Florida Poland would seem cheap. Dominik Sołtysik, the chief investment and development officer for Eastern Europe at Orbis, said slyly that his assessment of pricing depended on whether he was buying or selling. However, what worried the panellists was the large spread between the headline and effective rents on some office, retail and logistics markets. “Investors know about the spread. But the point is that they should also know about what is happening during lease renewals” said Karol Pilniewicz, the head of CEE at Cromwell Property Group, suggesting that tenants will not renew their leases at headline prices but at rates that may even be 60 pct lower. Another worry for the panellists was the lack of Polish investors on the market. As Dorota Latkowska-Diniejko, a partner at Reino partner pointed out, they are practically non-existent. She stated that: “95 pct of investors are foreign.” The panellists all agreed that expected REIT legislation might open up new possibilities for investing in real estate.
The residential sector is also seeing a lot of activity, which is now driving up land prices. Some investors prefer to wait till the market cools to buy land cheaper while others see no point in waiting “We have to buy, because otherwise we’ll have to close our business and nobody wants to do that. It’s just the opposite; everybody wants to grow” said Mikołaj Martynuska, the managing director for investment and development at Echo Investment. Wiesław Jan Prusiecki from Konkret group advised other developers to stop looking for crises, because it would stop them from developing great new projects and areas. Tomasz Konarski, the CEO of YIT Poland pointed out that the smartest investors buy land in periods of crisis in preparation for better times, but paradoxically most investors prefer to do their shopping, when the market is hot.
Where to invest?
After a coffee break two local authority representatives did their best to convince the audience that their cities were great for investment. Katarzyna Włodek-Makos, the director of the City of Warsaw’s economic development department, pointed out that 85 pct of foreign visitors say they want to return to Warsaw, and as many as 95 pct say they would recommend Warsaw to their friends. Kornelia Bargielska, a member of the board of InvestGDA, a company owned by the City of Gdańsk, which has supported investors in such projects as the Forum Gdańsk mixed-use centre and the redevelopment of Wyspa Spichrzów island on the Mołtawa river in the centre of the city.
“It is becoming more and more difficult to invest, yields are ever lower”, stated Wojciech Koczara, the moderator of the panel on alternative investment opportunities. A number of representatives of various businesses talked about condo hotels, senior and student housing, data-centres, co-working spaces and even apartments for rent, which still represent a niche on the Polish market. “Apartments for rent are no different to commercial properties,” said Michał Sapota, the president of the board of Murapol, which has plans to build 4,000 to 5,000 apartments for rent over the coming three years. Piotr Krawczyński, the managing partner of Synerium investment consultancy, warned that nobody really knows what the yields will be in different alternative sectors and that some will have to pay the price of being the first to invest. “I would be worried about growth that’s too fast,” he said.
Investment without end
The next panel, which was dominated by bankers, discussed project financing. “The first rise in European interest rates is expected in the middle of next year,” said Grzegorz Trawiński, a member of the board of mBank Hipoteczny. Michał Sternicki, the general manager of Aareal Bank pointed out that most developers have already factored in this increase into their investments and the question is only when the rates will increase and whether those who still haven’t made adjustments will still be able to do so. The panelists seemed to agree that the investment boom would continue as so much money has been printed that investment opportunities will still be sought out for a long time.
In a very informative presentation Elżbieta Lis, a partner in Dentons, explained the main legal differences in making transactions in various CEE real estate markets including Poland, the Czech Republic, Hungary and Romania.
Those who stayed till the end had the joy of listening to the last panel discussion, which was led by Tomasz Buras, the managing director of Savills. The panelists made their forecasts and apparently those who saw the future in bright colours were in ascendance. These included Kinga Bachroń, a partner at PwC, who talked of the strong economic figures of the Polish economy including low unemployment. This however, as it was pointed out, was a double-edged sword since it could lead to labour shortages. “The skills and specialisations of people will be crucial, not the quantity,” said James Chapman, a partner responsible for capital markets in the CEE at Cushman & Wakefield. This comforting thought came just as the panel was coming to an end and everyone soon headed off for lunch and some less formal discussion.
