Money on the streets

So far the Polish high street market has lagged far behind the leaders in Europe in terms of the quality of such locations and their popularity among customers, rents and what retailers have to offer. However, this is not discouraging investors from looking for interesting retail projects: outlets or entire buildings that are partly or mostly earmarked for retail. Apart from Warsaw, the main centres with strong high streets are the largest regional cities. For example, in the capital city, Kraków, Poznań and Wrocław the total length of high streets amounts to 15 km. These mainly accommodate 1,800 stores and catering establishments, states Knight Frank in its ‘High Streets 2015’ report. Polish and international funds are looking closely at the purchase of single units or entire retail buildings along the main thoroughfares of the city. These parties vary, of course, in terms of who is the most eager to buy what; however, the first few signals of the building of such retail portfolios can now be seen. “Investors’ decisions are resulting from observations of Western European markets, where retail on the high streets is growing very well. Funds can see a similar potential in the Polish market and they hope that in 10–20 years the high street locations will develop to match the standards of Western European capital cities,” remarks Krzysztof Cipiur, the manager of the capital markets department at Knight Frank.

Interested parties are here, but not the product

Foreign funds are looking for interesting retail projects on high streets, but this does not mean that they will find them. “There are few products on the market that we are interested in. There is a lot of talk about the development of Polish high streets, but in practice there is no clear progress to be seen. There is a shortage of typical high street projects, of an appropriate size and quality,” says Mateusz Siejka, the managing partner of Palmer Capital in Poland. For the UK-based property management fund its entrance onto the Polish market, which took place in 2014, was an important step in its expansion plans in Central Europe. However, the company is still looking all over the country trying to find a product that would correspond to its clients’ needs. “From our point of view, typical retail or retail and office projects on the most important streets in the largest centres such as Warsaw, Gdańsk, Kraków, Wrocław and Poznań are the most attractive. We are interested in buildings, not individual units. The optimal value of these facilities ranges from EUR 10 mln to EUR 50 mln. Of course, we are considering a number of other parameters, such as the length of the lease contracts and the quality of the tenants. Long contracts with strong tenants are always in demand – and this also applies to high streets,” explains Mateusz Siejka. What the funds can see has also been spotted by consultancy firms. The high street market is the best developed in Warsaw. However, it still has a long way to go before it could be called mature. “We have noted the demand from investors, particularly in the case of the capital city. Foreign funds are becoming increasingly interested in the market. However, the properties that might satisfy them are currently unavailable. I am thinking about facilities located on the main high streets, leased to strong brands on an institutional basis. However, the owners of such properties in Warsaw do not want to let go of them, which considerably reduces the investment possibilities,” confirms Krzysztof Cipiur. It seems that even money is no obstacle. “The price per sqm in a location is always the product of the rent rate and the cap rate. Rents range from EUR 20 to EUR 100 per sqm and the expected yields are lower than even 6 pct. So we are potentially talking about more than EUR 10,000 per sqm,” explains Krzysztof Cipiur. The large players are not only sniffing around in the capital, even though this is where the potential is greatest, particularly on ul. Nowy Świat, pl. Trzech Krzyży, ul. Mokotowska and ul. Świętokrzyska – as well as ul. Marszałkowska and sections of Al. Jerozolimskie. Attractive locations in Kraków include the vicinity of the Market Square, ul. Bracka, ul. Grodzka, ul. Floriańska and ul. Szewska. In Wrocław, retail is concentrated around the Market Square and the adjacent Solny square, ul. Świdnicka and ul. Oławska. Meanwhile, Poznań is dominated by the Old Town, ul. Wrocławska, ul. św. Marcin, ul. Półwiejska and its extension – ul. Szkolna.

Building a portfolio

However, not all the market players are focused on high street properties. Some of them concentrate on the acquisition of single retail units in residential and office buildings in good locations. These are smaller-scale investments and are easier to buy. “Investors can choose from quite a broad offer of individual units of 200–400 sqm worth up to a few million euro in places with a large flow of potential customers. Still, there could also be difficulties here. Smaller apartments in Warsaw in attractive locations, such as near the entrance of underground stations, are a tasty morsel for buyers, but their owners are not interested in selling them even at prices of a few dozen thousand złoty per sqm – because they often treat them as security for their retirement,” stresses Krzysztof Cipiur. Funds whose strategies involve the purchase of single outlets in, for example, multifunctional buildings live on the rent revenues. And there is more and more competition in this respect. In 2014 the Agio Nieruchomości Komercyjnych FIZ AN fund was established to purchase existing retail units leased by prestigious tenants and located in the largest Polish cities and the centres of medium-sized towns. In addition to this, the Real Estate Income Assets FIZ AN dividend fund of Capital Park is active as well as Centerscape (formerly Portico Investments), which is constantly looking for new properties for its Centerscape Investments Poland fund. “Our plan envisages the volume and value growth of our fund. We want to buy 5–10 properties per year and if a product is suitable, even more than this. This year we have closed two transactions and signed a number of new letters of intent. We are also planning purchases in the Czech Republic and Germany,” discloses Krzysztof Kosiński, an investment analyst at Centerscape. Continuous growth is also the target of Agio Nieruchomości Komercyjnych FIZ AN. “We assume that we will raise app. PLN 200 mln for the fund over three years, which will make it possible for us to build a strong portfolio of commercial properties on high streets. We are exclusively interested in existing units leased to prestigious tenants, with a unit value in the range of PLN 2–10 mln. The portfolio should eventually comprise 50, 70 or even 100 properties across Poland, with tenants representing a variety of segments: grocery, pharmacy, interior design as well as small local grocery shops,” explains Michał Stanek, the investment communication director of AgioFunds. The representative of Capital Park we contacted did not want to discuss their plans. It is only clear that a new fund of the company will be launched in the autumn. The one that has already been launched – Real Estate Income Assets FIZ AN, which was founded by the Capital Park group, Open Finance TFI and Noble Securities in 2013 – has 39 finished and leased retail and service properties in 26 cities in Poland in its portfolio, which generate stable revenue from leasing. The owner’s strategy involves the sale of the least profitable facilities and the purchase of new and more attractive ones. Real Estate Income Assets FIZ AN reveals that the level of return on their investment is app. 7–8 pct per year. Capital Park is planning to undertake activities aimed at listing on the Warsaw Stock exchange.

What the funds like

Fund managers, even though they work for various clients, are blunt when it comes to the nub of the matter: what counts for their partners is a steady profit (a rate of return on such an investment of around 5–6 pct), as well as the liquidity and the security of the investment. And this is guaranteed by the purchase of single smaller units. A stable, long-term tenant provides a monthly rent, while a good location considerably increases the chance for quick leasing in the case of the possible exit of the current occupier. “We live on the rents paid by the tenants of our properties, which is why we choose only the best locations. Thanks to this, in the case of the termination of a contract by a tenant, it will be easy to find a new one or sell the property at a suitable price,” explains Michał Stanek. The fund focuses on the main Polish cities and currently owns a few units worth a few million złoty each. “We buy finished and leased properties with contracts signed for an average of eight years or more. We look for units with an eventual area ranging from 200 sqm to 1,500 sqm as well as detached facilities with areas of 3,000 sqm. We prefer to buy a portfolio of smaller units than one large facility. Such properties are easier to sell. Besides they provide a larger liquidity of funds,” explains Michał Stanek. The criteria for selecting potential units for purchase are much more sophisticated. The rents should be denominated in złoty and the lease contract should be a long-term one, indexed to the potential inflation and transferring the majority of the costs related to the use and furnishing of the shop onto the tenant. The fund will operate indefinitely. The Centerscape Investments Poland fund, meanwhile, focuses on small convenience shopping centres. These are mostly small formats of grocery chains: supermarkets, discount stores, detached shops or those located on the ground floors of residential buildings. Apart from this the company is interested in small retail parks located near residential estates. “We try to buy facilities with areas of up to 1,500 sqm with one grocery tenant and possibly a few small complementary tenants. We look for large chain grocery operators, such as Biedronka. As far as retail parks are concerned, we usually buy complexes with areas of up to 3,000–4,000 sqm, with a supermarket or a discount store as the anchor tenant providing at least 40 pct of the revenue. We choose finished investment products, which we evaluate in terms of the location, the leasing level and the quality of the lease contracts. We are also inclined to buy buildings that are under construction but only as a forward purchase – we pay only when the facility is put into operation. We buy properties worth a minimum of EUR 0.5 mln. There is no top price,” explains Krzysztof Kosiński. In Poland the company currently has 23 properties and eleven in the Czech Republic (as well as 80 in Germany).

Warsaw’s return and rental rates

Bartosz Pożoga, a real estate agent at Commerson, explains: “In the standard purchase deal for an already prepared and leased out unit the return rates amount to 7 to 10 pct a year. Prices depend on the size of the property. For instance, a small 40 sqm unit located on ul. Marszałkowska in Warsaw could cost PLN 20,000 per sqm. Meanwhile, larger units in such locations as ul. Świętokrzyska in Warsaw cost PLN 15,000 to PLN 20,000 per sqm. On Warsaw’s ul. Mokotowska, monthly rentals vary between around EUR 70 and EUR 120 per sqm. The rates for ul. Świętokrzyska reach EUR 70 to EUR 80 per sqm. However, the tenants who lease 300 sqm units there face rentals of no more than EUR 50 per sqm. The latest transactions we participated in that I am allowed to mention include the purchase of nine units with a combined area of 950 sqm on ul. Jana Kazimierza, and four units with 800 sqm of space in total on ul. Piękna in Warsaw. ”