No man’s land... or the promised land?

The commercial property investment market in Poland has recently stabilised at annual levels of around EUR 3 bln. However, this figure only relates to the largest transactions, involving the services of the largest agencies. However, as it turns out significant volumes of money is changing hands below the radar of the larger corporations. According to data published by Cenatorium, in 2013 more than 28,000 transactions were concluded in Poland in which commercial property was traded (i.e. small retail facilities as well as single buildings) with individual values of PLN 20 mln or less. This brought the total volume for such deals up the level of PLN 9.5 bln in 2013. According to the 2014 data (which are, however, partial) the turnover on this market exceeded PLN 4.5 bln. As more and more data flows in the number will certainly grow significantly. It might seem that nobody could be indifferent to such amounts; however, the size of the market is not easy to estimate and the experts’ estimations all differ. “The size of the investment market when it comes to properties worth up to PLN 20 mln is very difficult to estimate, since it is highly fragmented. Firstly, information on the transactions is not generally published and accessing it is not an easy task. Furthermore, the players of this market often conclude the transactions among themselves, without the involvement of any agencies. We estimate that scores or even a few hundred transactions could be concluded on this market every year,” says Dariusz Książak, the president of the board of Emmerson Evaluation, speaking of slightly larger properties rather than smaller ones. The lack of access to solid numbers for these transactions is one of the main problems that participants on this very fragmented market have to face. In addition to this, it is not profitable for everyone to be part of it, such as the large agencies, who only deal with some of the biggest transactions and do not monitor the segment. “Small transactions are usually not taken into account by larger agencies. The lack of transparency and information about properties represents a serious problem for this market,” explains Marcin Mędrzecki, the associate director of Colliers International’s CEE investment services department. “It is hard to evaluate such projects or even estimate what the number of transactions on the small properties market might be,” he adds.

No man’s land?

So it is hardly surprising that large players tend to approach this market with some trepidation. Exceptions such as Capital Park, Elbfonds and Portico rather confirm the impression that small properties are the domain of local players. “So far it is sort of no man’s land, but it could become the promised land when the market is finally standardised and the know-how used in large transactions is absorbed by the investors who operate on this market. Large players from abroad could then become interested and attempt to carry out portfolio transactions. Many investors have their minimum investment values, but these could eventually change. The Polish market has been deeply penetrated by them and it could be said that there is more money than interesting properties. Sooner or later investors will be inclined to lower their minimum investment thresholds,” claims Marcin Mędrzecki.

The first of these international trailblazers are already looking around for smaller formats. The market functions quite well in the retail sector, whereas smaller office buildings that require active management are enjoying slightly less interest. Nevertheless something has changed. “The largest international players are not really interested in this segment, even though the first signs of their interest have been observed. We have noticed that investors have emerged, including those from abroad, who are looking at building up portfolios consisting of small properties,” emphasises Dariusz Książak. Robert Korczyński, the director of the commercial evaluation team and real estate appraiser at Emmerson Evaluation concurs: “Investors from abroad are interested in such investment but they often won’t meet sellers halfway. Some sellers set too a high a value on their assets and the market will demonstrate this. The supply is large enough for investors to have plenty to choose from.

Local players call the shots

Even though the Polish investment market suffers from quite a low share of Polish capital in the turnover, which confirms its immaturity, the local capital dominates the small properties market. However, it is still some way from maturity. “The majority of purchases in this segment are made by local entities. Retail properties for are the most popular and many have recently been built,” points out the president of Emmerson Evaluation.
Still, this doesn’t mean that local investors know something that their large competitors are not aware of. They are simply able to risk more, which is reflected in their rates of return. “The rates of return on such investment are higher than in the case of large properties, which often reach 11–12 pct. However, you need to be aware that there is a higher risk involved. Of course this depends on the type of property,” argues Mariusz Kurzac, the general director of Cenatorium. “At the moment the safest properties are chains of shops and warehouses. The market for the latter was particularly interesting last year. This was due to the fact that we have had quite a small offer on the warehouse market until now. Investment in offices was the riskiest. I think that the trend is likely to be maintained this year because we have been seeing a reduction in interest in small office buildings. The situation has come about due to the high supply of significant projects. The high supply of offices of a higher and better standard has resulted in price reductions across the market. This in turn has led to a drop in the popularity of smaller, lower standard offices. Thus fewer investors are interested in purchasing small office areas. It is usually the case that when rents decrease people prefer to lease rather than buy them. This is confirmed by our data, according to which the greatest declines in terms of transactions can be seen in the office and retail sectors (e.g. in the slowdown in the expansion of discount chains). Meanwhile, the interest in residential and useable areas as well as warehouses has been on the rise. The market is more stable for industrial and production facilities,” explains Mariusz Kurzac.

Interestingly, enthusiasts of smaller properties are not dilettantes. They are well aware of the value of individual properties. “The market has been growing, there is a lot of money on it and a large group of investors are looking to invest their funds while accepting a higher risk. However, they are carrying out active due diligence of the properties and choosing the best ones. They are not inclined to overpay. They are also fully aware that the market for such properties is not so liquid and the quality of lease agreements could be worse than in the case of larger properties,” argues Dariusz Książak.

Optimistic forecasts

The majority of the experts we asked do not expect there to be a dramatic increase in the turnover of the smaller properties market. However, they are full of optimism over its potential for organic growth. “The investment market for properties of up to PLN 20 mln is interesting and it certainly is not small. One look at Cenatorium’s database for the last few years shows that it has great potential. Taking into consideration many of the factors that influence its shape and value, the current year looks promising. I must emphasise, though: you need to be aware that it is a highly varied and capricious market,” concludes Mariusz Kurzac.

The crowd knows best?

Crowdfunding, a way of funding various kinds of projects by the general public and wider community, has become increasing popular in recent years. The phenomenon has taken off alongside the growth of the internet. It can be used to raise funds for the most outlandish or extraordinary ideas, and has become so successful on the internet that the method has started to edge into the real world. This includes the efforts now being made to employ this means of capital acquisition in the property sector. The Mzuri CFI 1 initiative, which raised over PLN 1.5 mln from 64 investors for the purchase, renovation and sale of a historic tenement, has been one such success story in Poland. This might not seem like a lot of money, but it does demonstrate that crowdfunding has significant potential. Just how big the potential is was proved by the construction of a 260m skyscraper in Bogota. Thanks to the funds contributed by a few thousand people, BD Bacatá is now installing the faćade of the building, which is being constructed in an investment of a quarter of a billion dollars.