Echo and the moneymen

Echo Investment, a public company known for its shopping centres, now has its eye on offices, with plans to develop more than 130,000 sqm of office space within 2 years. An interview with Piotr Gromniak, a board member of Echo Investment

Ewa Andrzejewska, Eurobuild Poland: It would appear that you have previously rather neglected the office space market. Will you be making your presence felt on it to a greater extent?

 Piotr Gromniak, Echo Investment: Up until now we have implemented 9 office projects with almost 100,000 sqm of total space, which means there can be no talk of having \\\\\\\'neglected the market\\\\\\\'. Our portfolio presently includes several new office investments. These are projects in Gdańsk and Poznań, the redevelopment of an office in Kraków and also a business park in the Warsaw district of Mokotów. We are also preparing an investment in Szczecin on a site on ul. Malczewskiego, which we purchased several years ago and which we have earmarked for an office building.

But that would be near the Galaxy shopping centre. Wouldn\\\\\\\'t it be better to enlarge this mall and improve its competitiveness before a rival investment planned by ECE Projektmanagement appears on the scene?

 It must be admitted that when we purchased the land we had a cinema complex in mind. We changed the site\\\\\\\'s designation to an office function, but postponed building it due the rather poor situation on the city\\\\\\\'s office space market. However, the office vacancy rate in Szczecin has fallen from 20 pct to 12 pct in recent years, while modern office buildings are practically nonexistent in the city. Firms can rent offices in older premises in the city centre or in the Pazim building, but this is smply not good enough, while in addition very little is being developed. This does not mean the market is not ready for new investments. We decided this year to start a project with around 10,000 sqm of rentable space and which is currently in the design stage. Since the plot is included in the local development plan permitting investments of this kind, we feel sure that a building permit will be granted before the year ends and work will start.

You mentioned that the situation on the Szczecin office market has improved. Does that mean you have already found tenants for this property?

 We are talking with various companies but contracts have not yet been concluded.

Where are the companies you are negotiating with?

 Szczecin and also other cities apart from Warsaw are locations where office investments are profitable, if only due to the creation of Business Process Outsourcing (BPO) centres. A consistently strong trend to open such centres in cities with less expensive labour costs is still evident, especially for IT and bookkeeping services, as well as those with cheaper, though not necessarily worse or less modern office space. Interest is clearly still being shown in Łódź, Poznań, Kraków, Szczecin and Gdańsk.

When talking about BPO centres you referred to Poznań. Indeed, several years ago Poznań was being heralded as a mecca for foreign investors, but I feel that this did not turn into any great interest in the city. Wrocław and Kraków have had much greater success over the past two years. Is it worth investing there?

 I cannot agree. We recently met one of Poznań\\\\\\\'s vice mayors, and the main topic we discussed was the shopping centre we are developing there, but we were also asked to give details about an office investment. The reason was that foreign investors are, above all, looking for modern offices and stress this issue in talks with the city authorities. We were assured that if we so desired, the city council would find us tenants for several thousand square metres of office space. We have spent much time and energy on drafting the project, but we do feel it was worthwhile. We have great optimism for this market and I am sure the city will at least keep up with Wrocław and Kraków.

When is work to begin on the Poznań office building?

 We are beginning work this month on the Malta Office Park, which will have an area of around 28,000 sqm in 6 buildings. The project is to be built in stages on ul. Baraniaka near Lake Malta, allowing us to react to market demand as it develops. The project is somewhat similar to the Athina complex in Warsaw which was designed with an eye on maximum effectiveness – with only a few common areas. Work on the first stage, comprising 7,000 sqm in 2 buildings, is to last 12 months. We are just putting this project on the market, and though we have not yet signed tenancy contracts we have already started commercialization activities.

In Kraków you have decided to demolish the Lea 210, an operating and fully rented building. A rather unusual situation, surely?

 You are right. Lea 210 is an office building constructed in the 1970s and purchased by Echo Investment in 2002 for its excellent location and with the intention of demolishing it when it proves to be profitable again to invest in a new property. And that time has come. We shall start demolishing the old building this summer and constructing a new office building of around 10,000 sqm space in the autumn.

Will some of the tenants be the same as before?

 We would prefer to look for new ones. We presently have many small companies on our books which occupy 2 or 3 rooms and pay low rents. But in the new building we are counting on larger tenants who will accept market rates in exchange for higher standards.

I recently heard Gdańsk city officials proudly boasting of the high prices paid for land in the city. Mention was made of a plot on ul. Jan z Kolna purchased by Echo Investment for the rather exorbitant sum of almost PLN 3,000 per sqm. This is to be Echo\\\\\\\'s latest investment.

I cannot say we paid over the odds, since investment site prices are rising. We accepted that the price was worth paying for such a fine location, since the plot is situated near the famous Gdańsk Crosses on pl. Solidarności. The project will have around 20,000 sqm class-‘A’ office space on 10 storeys. Work will surely start around a year from now since we still have the whole design stage to get through. We are sure it will prove a success since Gdańsk is a city where growth is proceeding apace and many Polish and foreign companies are looking for modern space. Apart from that I feel the less developed markets, where there is less competition than in Warsaw, are well worth attention.

Even so, you decided to invest in the Warsaw district of Mokotów. Data published by various agencies suggest that as much as 400,000 sqm of office space will appear on the market in this region in 2008/2009. There is much scepticism among agents as regards rent rates which, admittedly, are rising, but – due to the huge supply – may soon start dropping. Is the development of new offices really a good thing?

 Let me say first of all that I do not think all the projects planned in Mokotów will see the light of day. In addition, Mokotów is Warsaw\\\\\\\'s best district just outside the city centre, with the lowest level of unoccupied space – around 5 pct compared with around 8 pct for the whole of Warsaw. There is a lot really being built in the district, but this is no drawback. We want to develop more than 34,000 sqm of offices in 4 buildings at the intersection of ul. Postępu and ul. Domaniewska. The first stage of the investment is to begin this March and end in mid-2008. There will be an excellent parking space index in the Park Postępu complex, which is becoming an issue of increasing importance when deciding where a company head office is to be situated. And that is one factor which we think will attract tenants.

What does \\\\\\\'excellent parking space index\\\\\\\' mean?

 One place per less than 40 sqm office space. That apart, any study of the office market situation in this part of Warsaw reveals that in Mokotów there are several buildings in which 5 and 7–year tenancy contracts are expiring and where the tenants will be looking for new offices, which is why we have nothing to worry about. The statistical data we hold suggests that the contracts held by tenants occupying around 100,000 sqm will expire between 2005 and 2009.

So you are not afraid rents will fall in 2008?

 I don\\\\\\\'t want to play at crystal ball gazing since it is easy to be wrong, but I really see no reason why they should drop, neither due to tenants who take a positive stance and are ready to pay more since the economic situation is good, nor due to the competition which, I feel, will fight for customers offering a high quality product without cutting rents.

Are there still any other cities upon which Echo Investment is casting an eye?

 We have two buildings in the very centre of Łódź with a total 17,000 sqm class-’A\\\\\\\' office space. Both are fully rented and are functioning well, so I know that is where it will be profitable to be and which is why we are looking for a site there for another office building. We are also looking at Silesia, more specifically at Katowice, where we are thinking of purchasing several plots. There will definitely be yet another project in Kraków and we are also looking for possibilities to invest in Wrocław.

How much office space does Echo Investment intend to develop in the next 2–3 years?

 Up until now we have already delivered around 100,000 sqm office space and plan to start the development of a further 130,000 sqm within two years, which means we shall be developing more offices than we have already done. The comibined cost of these investments will amount to around EUR 170 mln, excluding the cost of purchasing the sites.       

Ewa Andrzejewska