In search of security

Around the table:
Karol Pilniewicz
the head of CEE at Valad Europe. Karol has been employed by Valad since 2012. He is responsible for the Central European Investment Fund (CEIF) and the development of Valad’s business in the CEE region.

Robert Dobrzycki
the CEE managing partner of Panattoni Europe. Robert started his career at Panattoni in July 2005 as the managing director responsible for Poland. A year later he became a partner of the group for the CEE region.

Michał Ptaszyński
the land and development manager of Prologis. Michał joined the Prologis team in 2011. He is responsible for sourcing new investment possibilities through purchasing or selling the land or finished projects of the company, as well as acquiring new clients.

Bożena Krawczyk
the CE investment director of Segro. Bożena joined Segro in 2006. Responsible for investment process management for the purchase and sale of Polish, Czech and Hungarian facilities and investment areas.

Tomasz Kasperowicz
a partner and head of the warehouse department at Colliers International. Tomasz has been working as the director of the logistics and industrial area department at Colliers International Poland since June 2008. He has 16 years of professional experience.

Hubert Michalak
a partner at AIG/Lincoln. Hubert has worked with AIG/Lincoln for over ten years – since April 2003. Prior to this he was employed by Viterra Development Polska for nearly four years.

Radosław Górecki, ‘Eurobuild CEE’: The economy is still dormant. Warehouse developers are not willing to start speculative projects. What is the atmosphere like in the industrial sector?
Tomasz Kasperowicz, partner and head of the warehouse department, Colliers International: The warehouse market is currently in the phase of calm and well-balanced development. The lack of financing for the construction of speculative projects is of course an obstacle. We are still experiencing an economic slowdown but, interestingly, it is not having an impact on the demand, which is stable and even slightly on the increase in some sectors. This has resulted in a decrease in vacancy and, on the other hand, the end of new speculative projects. Because of this the rents are growing slightly in some areas.

Do the developers agree with this view?
Bożena Krawczyk, Central Europe investment director at Segro: Yes, we do. We are indeed experiencing well-balanced development and are looking to the future with moderate optimism. Developers are not building any speculative space at this time due to the potential vacancies, which is positive from the point of view of the statistics. The fact that the net demand – or how many new tenants are appearing on the market – is hard to predict can be worrying, as this is what developers are mostly interested in. We are all wondering whether new tenants are going to make an appearance in the next few months. Or perhaps we will all concentrate on those which are already leasing in the existing area of 7 mln sqm.

The net demand is probably one of the factors taken into consideration by the funds that are potentially interested in the purchase of warehouse and production halls...
Karol Pilniewicz, CEE head of Valad Europe: Institutional investors who are interested in this market look at it from the angle of the length of lease periods. If we assume that the vast majority of contracts are concluded for 3 to 5 years today, this is not very interesting for a potential buyer. This is why it seems to me that built-to-suit facilities are the most interesting from the point of view of buyers. In such a case the developer has a lease agreement even before they build a facility and the bank has the loan repayment secured – because the revenue is secured. Institutional investors view such investments somewhat more favourably.

And what are they avoiding? What is at the other extreme?
Karol Pilniewicz: Speculative projects, of course. I think that today we will not find an investor who is able to buy such a project and rely on the fact that in two or three years’ time they will find some tenants. On the other hand, we can see that there is quite a lot of interest in the logistics market. The improved infrastructure has contributed to the fact that logistics projects in the south of Poland are now enjoying the interest of developers and investors. The road links that have already been built guarantee the fast delivery of goods from that region to the whole of Central and Eastern Europe. Furthermore, rent levels in Poland are relatively low compared to other CEE countries. In such cases an investor may even become interested in a project with a short lease period. However, the rate of return must be high, which automatically signifies an attractive price.

Robert Dobrzycki, CEE managing partner of Panattoni Europe: I believe that the net demand is a significant issue for investors. You need to answer the question of where it comes from. Is it generated by local tenants or foreign ones? Locations in north and central Poland are doing much worse today because the demand there is mainly generated by Polish companies. Unfortunately the growth of retail in Poland is not sufficient at the moment. But projects in the west and southwest of Poland are doing much better. This is where we have external demand – from Holland, Germany and France. And this is where all the transactions connected with production and logistics companies that flow in from the West can be found. But I would personally like the internal demand to grow in importance.

Michał Ptaszyński, land and development manager of Prologis: We view Poland from the perspective of its five main markets: Warsaw, Central Poland, Upper and Lower Silesia and Poznań. Looking at the situation in Poland I fully agree with Tomasz that well-balanced growth is evident. It can, however, be seen that the so-called western wall of Poland is the pearl of the market – which has already been pointed out by Robert. Some of these locations indeed work for the western market. One example is Szczecin, which was plagued by vacancy not long ago but is now 100 pct leased. This has come about because tenants operating on the German market have located there. They came to Szczecin because of the cost of labour. Meanwhile Wrocław is a location that is developing thanks to clients that we can include in the external demand that was mentioned earlier. These are mainly e-commerce and FMCG companies.

Still, apart from the net demand there is a fierce fight between developers over tenants who are already leasing on this market...
Robert Dobrzycki: This is true. But the fact that tenants are moving from one warehouse to another is only affecting the rent levels and consequently developers’ situations. This is not leading to any new space being built. Of course, it also affects the revenue of brokers...

Tomasz Kasperowicz: It feels like I’ve been called before the board. Of course tenants who move from one project to another do not create any net demand. But what about those who move from a logistics operator to a developer? If logistics operators who have their own properties lose a client at some point, the vacancies that arise are not included in their statistics. How should we view this?

Robert Dobrzycki: If someone leaves a logistics operator, the statistics will temporarily show more net demand. And yet, it does not actually exist.

Hubert Michalak, partner at AIG/Lincoln: Vacated areas in logistics operators’ own warehouses will sooner or later be offered to the market. Consequently, a developer could lose a tenant because a logistics operator will try to fill its warehouse.

Tomasz Kasperowicz: So first the logistics operator loses because their tenant moves to a developer. Then the market grows for a short period of time. However, the logistics operator who has a vacancy can lower its price and in this way attract a tenant who’s been using a warehouse building from the 1960s. In this way the market can gain new users of modern warehouses.

Robert Dobrzycki: This could happen. But it’s not a situation an investor might be interested in. The investor wants to have a clear situation – they want to be sure that the market will expand and that this will translate into good rent levels. The situation where logistics operators lease their areas at low prices will ultimately result in a price war among developers as well as investors. And you need to remember that investors are weaker at asset management. This does not develop the market in the long run.

So investors are afraid of war breaking out between developers?
Robert Dobrzycki: Yes they are, which is why I agree with Karol that the length of the lease is of great significance to investors.
They are afraid of vacancy and battles among developers; they are afraid of the land supply and they are weaker operators at the same time. If they were strong at the last of these, they would have large operations platforms and then even two- or five-year leases would not be a problem. But there are no such investors nowadays.

Michał Ptaszyński: When it comes to funds, there is the fact that they have a large volume of office buildings and retail
properties in their portfolios. As far as warehouse properties are concerned there is a lot of room for manoeuvre. Considering today’s estimated yields of just under 8 pct and financing in euros at the level of 4 pct, this provides better prospects in terms of earnings compared to offices. But the low number of good products available for the funds is a big problem. This has been changing though...

Wait a minute. Who built all these bad projects? After all, this is what your job is supposed to be.
(laughter)
Bożena Krawczyk: No, no. That’s a slight over-interpretation.

Michał Ptaszyński: It is not the case that the finished facilities are weak investment products. The question here is: Do we, developers, want to sell them? In the case of Prologis, apart from the fact that we are a developer, we are also an owner and operator. We have profitable properties in our portfolio and we are not interested in getting rid of them at any cost.

Hubert Michalak: At this point we arrive at the issue of what a good investment product is in terms of warehouses. It has been said that funds are interested in long-term leases, preferably eight-year contracts as a minimum. Funds are actually looking for maintenance-free products that generate secure cash flow. However, there are very few such products. It seems to me that diversified industrial properties are much safer in terms of investing, that is, such projects where the revenue from leasing is generated by a lot of contracts with different expiry dates. Such a product guarantees long-term stability, even though the price is more work for the investor. Professional management and contact with tenants as well as other market participants is also a key aspect. It is difficult to effectively manage such relations from headquarters a few or even several thousand kilometres away. Even the best property manager cannot effectively replace an owner.

According to what you are saying, even a hall with one large tenant who signed a long-term contract could turn out to be a risky product.
Hubert Michalak: Of course. Theoretically such a tenant guarantees stable and long-term revenue, but what would happen if they go bankrupt? Recommercialising such a facility could pose a problem. The larger the facility, the longer the
process will last, and adjusting it to new users incurs heavy costs. Besides, BTS facilities are often built in secondary locations...
(some coughing and gentle laughter)

The future of the investment market for warehousing is in the hands of the funds who will create suitably large local teams to successfully compete with developers that already have well-established positions – or that will join forces with them.
Karol Pilniewicz: I agree in principle. But there are few institutional investors who would invest their money in many small projects with a lot of leases Because managing such a portfolio is hard work. That’s why funds prefer entering projects that guarantee long-term cash flow. Still, I agree that this will change. In the next two years it could turn out that BTS projects will not be so prominent, as we have noticed more and more new ‘small business unit’ projects. These are the result of the situation on the retail market. E-commerce has been growing in Poland – internet sales currently generate as much as 3.1 pct of the total turnover of the retail industry – so it might happen that retail companies do not want to lease large areas in secondary retail locations and so will choose ‘small business units’ instead. The problem is that this involves work that will have to be done from scratch – to find suitable locations and convince agents that they are worth leasing, because it is clear that you do not work as hard for a 400 sqm contract as for a 5,000 sqm one.

Hubert Michalak: I wouldn’t worry about that. I am convinced that there are a lot of excellent agents who already specialise in such transactions.

Piotr Kuczyński, the chief analyst of consultancy Xelion, said in one of his interviews that Poland needs to stop being the assembly shop for Western Europe. He pointed out that such business can be quickly closed down and moved to Asia or Africa or wherever the salaries and taxes are lower. Is this not the very core of the weakness of the Polish warehouse market? After all, funds are aware of this.
Hubert Michalak: Last year the European Commission published a declaration calling on governments to support increasing industry’s share in the GDP of Europe. The United States is already trying to bring production back. About 25 years ago every fifth American worked in industry, nowadays it is only every eleventh, whereas average salaries in retail are only 50 pct of those in a factory. In my opinion Asia has already burnt itself out – firstly due to growing production costs, the relatively low product quality and an increasing awareness in the States and Europe of the importance of industry, which can provide steady employment and drive the demand for an already bloated service sector. I hope that the plan works out, in Poland in particular. This is a task not only for developers, because we just provide the premises – there is also the matter of infrastructure, which is getting better and better, and political factors.

Robert Dobrzycki: It is not possible to build a strong economy from scratch based on the salaries in the West. You need to take the first step – bring in simple production and money to build up the purchasing power in Poland. You need to start from somewhere. All the production halls that have been built here are much more beneficial for our economy than all the hypermarkets.

Michał Ptaszyński: It seems to me that we are excellent at operating in this niche. This can be seen by looking at office outsourcing. In the early days only the simplest invoicing services were moved to Poland. Large global companies have now located their research and development departments in our country. I think it will be a similar story with production. I wouldn’t worry about losing it.

Bożena Krawczyk: The idea that the only asset of the warehouse market in Poland is a lower hourly rate is an over-simplification. I think that there are many more factors contributing to the fact that the warehouse and production market will continue developing here. After all, there are over 7 mln sqm of warehouses in Poland and the number is growing. This is not just the result of low employment costs...

Michał Ptaszyński: Exactly. We can take Romania as an example. It is considerably cheaper there but the Romanian market is not developing as well.

Hubert Michalak: The demand for warehouses in Poland will continue to grow. The only question is over the speed of this development. But it will still be growth. And this is the assumption we should stick to. From what you are saying warehouse and industrial space is an excellent investment product. So what is your strategy? Will you keep these assets? Sell them? Or perhaps buy them?

Bożena Krawczyk: We will continue development operations on the main markets. Together with attending to our organic growth, we have been looking at finished products for two years and developing our property portfolio by means of purchases.

Robert Dobrzycki: We are a developer. Our main aim is the growth of our development business. If the value of facilities is to increase, we will try to keep them in our portfolio. However, we will sell them at the appropriate time. If the market is not good for selling warehouses, we might become a buyer. Everything will depend on the price.

Karol Pilniewicz: Our task involves taking advantage of opportunities. We do not have a top-down strategy. The time is approaching for closing one of our funds, which includes properties in Poland, the Czech Republic, Romania and Hungary, so we will be selling. At the same time we are looking at logistics portfolios we can invest our investors’ money in. These are portfolios with values starting from EUR 50 mln. We also work for private investors who are able to make quick decisions – if there are interesting properties with the potential for growth, we will buy them.

Michał Ptaszyński: We focus on organic growth. We are a large international platform. Our activities stem from our global
strategy, which involves strengthening our position on the strongest markets. This is why we will be strengthening our position on the five main markets, mainly using the land bank we already own.

Hubert Michalak: We are a company that has the most extensive experience in terms of project development and management – from residential projects, to offices, to shopping centres, warehouses and industrial facilities. We will for sure be carrying out projects that generate profits. Importantly, we are not obligated to sell the assets we hold. However, if an attractive purchase offer comes along, we will certainly consider it.

And finally, let’s imagine that it is H2 2014. We have investment transactions on the warehouse market. The product is a warehouse on the primary market with a lease agreement for 3–5 years, a few tenants and a rent rate that is not inflated. What will be the yield?
Bożena Krawczyk: Perhaps the agent should give his opinion because it is they who ‘work the magic’ on the market.
(laughter)
Tomasz Kasperowicz: A year is not a long time on this market. Fundamentally there will be no major changes. It seems to me that the market will be...
Robert Dobrzycki: Go on, say the number.
Tomasz Kasperowicz: The land will not get more expensive, rents are stable...
Robert Dobrzycki: The number! The number!
Tomasz Kasperowicz: Well... between 7 and 8 pct. Let’s say 7.75.

And what do the developers think?
Hubert Michalak: 7.75
Michał Ptaszyński: 7.75.
Karol Pilniewicz: I will be more sceptical and say about 8 pct, or perhaps slightly below 8 pct.
Robert Dobrzycki: I believe that in 2014 it will be 7 pct.

Anyone prepared to go lower?
Bożena Krawczyk: I will not outbid Robert. It seems to me that 7.75 is a safe forecast. I think that if things are a little better, we should all be happy.