Into the crystal ball

Eurobuild Awards
Last year was considered to be worthy of – at the very least – a good grade by the commercial real estate sector. The expectations for the next twelve months are also quite high and the market data is promising

The experts are looking to the future with some optimism. They can identify significant development possibilities across each of the real estate markets in Central and Eastern Europe, although these are not expected to emerge quickly as they did in 2015 in Poland. “2016 will probably be quieter than 2015. Vigorous development activity will continue, particularly in the office sector, while investment activity should also continue, but in my opinion it will be difficult to break any records in this area. We are also expecting there to be active involvement from the banks when it comes to providing financing, even though in Poland the planned introduction of the bank tax and its final shape will certainly result in an increase in the banks’ margins and, as a consequence, an increase in the cost of credit for developers and investors,” predicts Tomasz Trzósło, the managing director of JLL Poland.

Warehouses still riding the crest ofawave

Logistics facilities still seem to be attractive products. Particularly on the Czech market, where international players are looking to locate businesses. “The demand for logistics warehouses in the Czech Republic has remained strong, driving vacancy levels down to a five-year low. With the positive economic news across Europe, we expect this demand to continue in 2016. The low vacancy levels have sparked new speculative construction, but only approximately one third of the space under construction is still available. Therefore, we expect more speculative projects to begin and to be completed in 2016” says Ondřej Vlk, a senior associate and head of research at Colliers International in the Czech Republic. The situation is also expected to improve in terms of investment. After a weak 2015 in comparison to 2014, investment volumes are expected to go up. “We expect that 2016 will see this trend reversed with major portfolio/platform deals likely to happen as major global investment groups look at ways to enter the market,” claims Chris Sheils, a director in the CEE investment team at Colliers International in the Czech Republic. The situation is similar in Romania. “Romania is an attractive market for the production sector, due to the competitive labour costs and its strategic location in the region. The logistics market in Romania has recently reappeared on the investors’ radar, as private consumption has been growing by more than 3 pct, generating momentum for logistics operators to start looking for premises. So after four years without any new development and gradually decreasing vacancy rates, a number of developers have started looking at speculative logistics projects in the country. Bucharest’s warehouse supply is set to increase significantly by the end of 2016, considering that more than 100,000 sqm of new projects currently now under construction will be added to the current stock,” says Daniela Popescu, the head of research at Colliers International in Romania.

A few trends that will be significant in 2016 can already be observed in Poland. One relates to the growing significance of special economic zones and the increasing role of small and medium-sized e-commerce companies, which are looking for increasingly smaller premises of 500 sqm to 1,000 sqm. “The dynamic growth of the e-commerce sector over the next few years will make this year a very demanding one for courier firms. Companies are in a fierce competition with each other to offer their clients a better service. Thus the shortening of the parcel delivery time, i.e. same-day delivery, is of key importance. This will result in the optimisation of internal supply chains,” emphasises Patrick Kurowski, the head of the industrial and logistics department at CBRE in the country. Developers will also be exploring new markets. “Bydgoszcz has been gaining popularity because of the lack of warehouse and production space in and around the city and due to the development of the road network. So investors are very interested in this location. With its good road infrastructure and close proximity of the German border, Szczecin is also being targeted by many Scandinavian companies and clients from across the north-western border. Apart from Bydgoszcz and Szczecin, Lublin and Rzeszów constitute another potential warehouse and industrial region,” claims Patrick Kurowski. And what problems are investors expected to face? “A revolution in the turnover of land is set to have an impact on the development of new projects across Poland. The act on the shaping of the agricultural system contains provisions that could make it virtually impossible to buy plots designated for warehouse and industrial projects. Only on those construction plots included in zoning plans will be possible to buy or sell on the current basis. Unfortunately, there are only a few of these in Poland. The new act will apply to all the remaining plots, so investors are focusing on those already covered by zoning plans,” admits Patrick Kurowski.

Varied office market

In contrast to Poland, vacancy on the office market in Hungary has been declining. The trend started and picked up steam in 2015, leading to the highest net absorption in history. The vacancy rate as a result has fallen to record lows not seen since before the credit crunch. In the light of this, experts are expecting a slight increase in office rents. “The main drivers of the office market remain the SSC/BPO and IT sectors, which are continuing to grow in terms of workplaces. Several other industries are faced with challenges when it comes to securing the right quality of workforce, therefore the standard of office space available that is able to provide a quality working environment, while enhancing the engagement of employees and their productivity, is now a key driver for the office market. The vacancy rate is expected to continue to decrease and landlords to continue to provide reduced incentives and to slightly increase the headline rent,” predicts Kata Mazsaroff, a director and head of the tenant agency at Colliers International in Hungary. In Romania the outsourcing services sector has been playing a leading role in the office market. Employment in this sector is set to increase to 150,000 people (from the current 60,000) over the next five years. “In line with the completions over the last four years, the Bucharest office market will grow by 100,000 sqm in 2015. As a result, the modern office stock will reach 1.87 mln sqm by the end of the year. 2016 is expected to be a record year in terms of deliveries, with more than 280,000 sqm scheduled to be added to the stock and 500,000 sqm more by 2020,” says Daniela Popescu. The growing interest from investors combined with the low supply of new office space could increase developer activity, according to specialists’ forecasts for the entire Czech office market. “The improving office market dynamics, together with the highly restricted supply in 2016, will continue to encourage investment in this sector. However, with the limited number of new projects being delivered to the market in 2016, this could constrain transaction volumes. But we do expect there to be increased demand from investors for more asset management intensive propositions in light of the improving leasing market and falling vacancy rates,” explains Chris Sheils. Meanwhile, the future of the office market in Poland looks promising. An increase in vacancy should follow the current increase in supply. All this is connected to the continuing demand for modern office space. The BPO sector has been strengthening its position as a strategic tenant, particularly with regard to office buildings in regional towns. In terms of expansion and searching for new locations, this activity will probably be followed by the financial and IT sectors. “In the office sector we can expect extensive new supply, which will mainly enlarge the market in Warsaw, but also Kraków, Wrocław and the TriCity. The demand will continue to be strong, but after the historic high year of 2015 in terms of tenant activity, it will be difficult to break the record yet again. Upward pressure can be expected when it comes to vacancy, as a result of the high supply,” emphasises Tomasz Trzósło. Regional cities have been a talking point among experts for some time now. Which of these could play a starring role this year? “I’m expecting an increase in tenant activity in the TriCity area, which is now becoming an alternative to the south of Poland. Poznań also deserves a mention. Added to that, Rzeszów, Lublin, Opole and Bydgoszcz are focusing on building up their brands and city promotion for their target group – business,” claims Łukasz Kałędkiewicz, the director of office department at CBRE in Poland. Warsaw, being the leader of the Polish market, is still a subject of great interest. “This year will bring 430,000 sqm of new office space to Warsaw. It will be a record year in this respect and an increase of 100,000 sqm compared to 2015. The strong development activity and the emergence of new players, such as Penta Investments, gives us concrete ground for optimism, since they confirm the continuing interest in investment in Warsaw and that there is still room for high quality office projects. However, we expect that much of this new supply will have an impact on the vacancy rate, which will particularly increase in some parts of the city. Much of the new supply and the greater choice for tenants will result in a reduction in nominal rents. We have been seeing a significant disproportion between base rates and effective rates for some time now, but this should decrease in 2016,” remarks Dorota Ejsmont, the head of landlord representation at Savills. The growth in the development of office locations such as Wilanów and along Al. Jerozolimskie and ul. Łopuszańska has also been evident for some time now. “The projects being developed there represent an alternative to Mokotów, part of which has become associated in tenants’ minds as Warsaw’s office ‘Mordor’. It is also worth taking a look at Warsaw’s Praga district – a district with significant potential that has already been noted by developers and global brands. Over the next few years Praga will have become a location for the creative sector and hi-tech companies,” adds Łukasz Kałędkiewicz.

Retail ups and downs

The retail sector in Central and Eastern Europe became a strong investment product in 2015 and this is expected to continue. However, this market varies a great deal depending on the individual country. In Romania, analysts have identified an opportunity for development thanks to the growing purchasing power of the country, which translates into tenants’ turnover. “The Romanian retail market has seen a boost in activity over the last two years encouraged by the country’s economic performance and the significant increase in monthly salaries of 4 pct, and this has translated into a greater appetite for consumption. As a result, we could see an improvement in the performance of retailers, since many large fashion concepts registering 10–15 pct higher turnovers in 2015 compared to 2014. By the end of 2015, the total stock of traditional shopping centres in Romania is expected to reach 3.26 mln sqm gla (Bucharest accounting for 30 pct of this) and this is expected to increase by 500,000 sqm by 2020. Out of this stock, 130,000 sqm gla is due to be delivered in Bucharest in the next 24 months, with the 72,000 sqm gla Parklake Plaza being the largest pipeline project to be announced,” reveals Daniela Popescu. Meanwhile, in the Czech Republic there are still a few blank spots in need of development. “The number of new projects for 2016 is thus very limited. Over the next few years, the trend will rather be one of the improvement of existing retail projects, either via extensions or thorough refurbishments, due to their age and becoming outdated and unattractive,” Ondřej Vlk.

In Poland the market has been gradually becoming saturated. Warsaw, where a few large projects such as Galeria Północna and Galeria Młociny are planned, has been experiencing something of a renaissance. Mixed-use projects such as Koneser or ArtN are among the successes that have recently been chalked up. Development and management firms have been closely monitoring the changes in consumer behaviour as they impact the shape of Polish retail. “Changing consumer behaviour has resulted in the growth of restaurant provision in shopping centres and on the main streets. So food courts have been undergoing renovation, as shopping centre owners focus on restoring their malls to their former glory,” says Magdalena Frątczak, the director of the retail department at CBRE. However, the government’s plans to introduce the so-called ‘hypermarket tax’ could be a source of concern. “We need to closely follow the moves of the current governing party, which is planning to put restrictions on Sunday trading and introduce a tax on large-format retail space. The introduction of such plans could result in changing prices and maintenance costs for retailers. However, we have European examples such as Germany, which is a proof that shopping behaviour is a matter of habit, which, as everyone knows, can itself be transformed,” adds Magdalena Frątczak.

Buying and selling

In 2015 investors in Central and Eastern Europe were most interested in the retail and office market. This is also expected to be the case in 2016. “Investors should remain positive towards the commercial real estate in Central and Eastern Europe. From what we have seen, the Polish retail market will continue to be the most in-demand sector,” says James Chapman, a partner and head of CEE capital markets at Cushman & Wakefield.

“Retail – in terms of dominant regional projects – and high streets are at the top of the list,” reveals Alexander Rafajlovic, an associate in the capital markets group of Cushman & Wakefield in the Czech Republic.

“2015 has seen a high proportion of retail transactions close – 64 pct of all deals at the end of Q3, and this level is likely to be similar at the year-end. We think that this trend will continue during 2016, with there being several large pipeline shopping centres across the country underway and set to open in the next twelve months,” argues Chris Sheils.

“The Romanian investment market has been attracting new investors who by the end of the year will have closed transactions worth app. EUR 800 mln, close to the level of EUR 950 mln registered in 2014, all supported by the positive economic context and development of real estate fundamentals, as well as the yield crunch in rival markets. With a GDP growth of more than 3 pct expected for 2015, Romania is outpacing other European countries and has the smallest public debt to GDP in EU: 38 pct compared with EU’s 90 pct average,” says Daniela Popescu.

Meanwhile, in Poland offices are set to be popular with investors (including those on regional markets), as well as certain retail and warehouse projects. “Warsaw offices are coming back into focus for 2016 and we expect to see over EUR 1.2 bln of such properties trade in the capital over the next twelve months, while key regional cities will also continue to grow. We expect the industrial market to enjoy a strong H2 2016 as new product comes online. One new trend that has emerged over the last couple of months and is expected to continue into 2016 is the demand for secondary and tertiary retail properties. So we might start seeing some older properties being the beneficiaries of capital injections, as investors see opportunities in repositioning these assets,” remarks James Chapman, the director of CEE capital markets at Cushman & Wakefield. But where is all this money coming from? “When it comes to sources of capital, investors based in Germany, the Netherlands, France and the United Kingdom will be the key players on the Polish retail market for most of next year. The market will likely see more money coming in from Canada and North America. However, there will be a shift in terms of the type of capital, meaning less opportunistic investors and much more long-term buyers aiming to purchase assets that would play a more strategic role in their portfolios. Additionally, there should be new entrants from around the world, for instance from such destinations as South Africa and Korea,” says James Chapman. ν

Adrian Karczewicz,

transaction director, Skanska Commercial Development Europe

No slowdown in sight

The increasingly stronger position of regional cities is an interesting trend on the investment map of this part of Europe. Yields range from 6.25 pct in Wrocław and Kraków to 7.5 pct in Łódź and Katowice in terms of the best office facilities. We have also been seeing greater interest in Budapest and Bucharest – a true raising star of the office market in Central and Eastern Europe with yields of around 7.5 pct. Prague and Warsaw continue to be first choice locations for investors looking for safe and profitable assets, even though the yields are slightly lower – around 5.5 pct in the capital of Poland. This strong investment activity has been having an impact on the growing market maturity and as a result has led to a reduction in yields. However, the office product in Central and Eastern Europe guarantees higher returns than similar asset classes in Western Europe. The trends we are seeing should continue into 2016. We are not slowing down our pace and this year’s batch of properties due to be sold will be similar to 2015’s.

Dorota Wysokińska-Kuzdra

senior partner, Griffin Real Estate

Opportunities craved

2016 is likely to be a year of dynamism. Investors will want to take advantage of the market’s winning streak. At a time of low interest rates, real estate seems to be the only reasonable alternative in terms of investing money. The question is whether there will be enough transactions for everyone. The regions are continuing to develop well, not just traditional regional cities such as Kraków, Wrocław and Katowice, but there is also a strong demand for modern office space in Gdańsk and Łódź. This year Griffin is planning to close a number of transactions we are currently working on. We are continue to look for individual transactions, but will be focusing on investing in and developing various platforms as well as investment in areas that are still underestimated or have been unnoticed on a greater scale by the market.

Jeroen van der Toolen

CEE managing director, Ghelamco

Starting a milestone year

The next twelve months will be a milestone for our company. We will celebrate our 25th anniversary on the Polish market. It will also be when we deliver our flagship project – Warsaw Spire, along with Plac Europejski. We will close an important chapter in our history and open a new one with our energy even redoubled, launching much-awaited large-scale development projects in Warsaw and expanding our activity onto regional markets. For many years Poland has maintained a leading position in the CEE real estate market. The dynamic situation in this sector is reflected by the demand for office space across the whole country. 2015 was a record year in terms of the volume of leasing transactions and net absorption – the volumes for the first three quarters of 2015 exceeded that for the whole of 2014. Last year was also outstanding for Polish real estate in respect of the inflow of capital and new investors, as well as the increased activity of investment funds, which provides proof that Poland’s property is highly valued by the capital market and gives us a promising outlook for the future.

Jan Mroczka

president of the board, Rank Progress

Customers and their needs come first

2016 is likely to be an intensive period for the largest cities in Poland. It will be marked by changes to some of the largest shopping centres, but will also see new projects being carried out. We currently have a large amount of modern retail space on the market, which is why new centres will be quite a challenge in terms of meeting consumers’ expectations and competing against established malls that are already popular. Things will be similar in the case of regional markets. The last few years have been a period of the intensive development of shopping centres in towns with up to 100,000 inhabitants and the market is quite saturated now. The number of new projects will be subject to project quality and how well designed they are for consumers’ needs. Developers will also aim to add to the potential of existing facilities through changes to their tenant portfolios, but also through extensions and modernisations. The increasingly demanding requirements of small town shoppers, who want to have a complete retail offer locally, as well as the growing role of e-commerce, are creating favourable conditions for this. Customers can now do their shopping at the touch of a button without leaving their homes. As a shopping centre manager, we have to address these needs and deliver not only the right mix of retail, entertainment and catering to consumers, but also guarantee that they will be able to make their purchases efficiently and in a pleasant atmosphere.

Stanislav Frnka,

president, HB Reavis Poland

Tailor-made product is what counts now

In my opinion, 2016 will be a good year for the office sector in Central and Eastern Europe. Over the last few years many global companies have turned their attention to our region and have become increasingly willing to open branches here or even to re-locate their head offices in other parts of the continent here. What has primarily been drawing them in are not only the relatively low operating costs but the well educated staff who can easily compete with specialists from around the world in terms of knowledge and experience. According to Colliers International, Central and Eastern Europe is already generating 20 pct of the European GDP and is where 35 pct of its office space is located. And these numbers are expected to grow. The future of the Polish market also looks optimistic. The country’s healthy economic status and the related strong activity of companies, both local and foreign, meant that last year the conditions for office property developers were ideal. The rude health of the sector should continue, at least in part, into 2016. Of course, this is subject to future political developments and how many of the changes planned see the light of day. Still, there are some areas of activity that we can be sure of. One is the BPO/SSC sector, which seems very promising. In its recent report on the modern business services sector, ABSL states that as many as 250,000 people could be employed in service centres financed by foreign capital in Poland. All the employees of this sector will need modern space to work in. However, many new facilities are being built and the amount of vacant space will increase at some point – but the main problems will mostly apply to ‘B’ and ‘C’ class facilities. We will still have the occupiers’ market. Those developers who identify and adjust to their needs best will stand a better chance in the battle over tenants. What counts first of all is the right design of the building, in terms of the specificity of its tenants, as well as the flexibility of the space available and the innovativeness of the services offered. Over the next nine months we are planning to complete the first of two buildings of the West Station complex, which neighbours that railway station in Warsaw, as well as the second stage of the Gdański Business Center project, which will add a total of 83,000 sqm of ‘A’ class office space to the Warsaw market.

Jacek Wesołowski

Poland country manager for development, Immofinanz

Demand meets supply

From the point of view of the retail sector, 2016 will be, in our opinion, dominated by the further development of the retail segment in small towns with around 25,000 inhabitants and catchment areas of around 60,000. The development of projects in such towns is a natural step and has been progressing geographically – only a few years ago facilities designed for towns of this size were being developed in western countries. Our company’s strategy confirms the importance and correctness of this direction as in 2015 it involved the launch of the construction of another two Stop.Shop retail parks. Furthermore, Immofinanz is to announce two more such projects early this year. In our opinion, medium-sized towns in Poland will also continue to need a professional retail offer. However, the precise adjustment of a given centre, not only in terms of size but also function, will be a decisive success factor, as everybody knows that retail facilities are not just about shopping nowadays. The Vivo! brand is our response to such requirements.

Magdalena Kowalewska

Poland country manager for office and logistics asset management, Immofinanz

A breakthrough year

From the point of view of our company 2015 was certainly a breakthrough year, because Immofinanz almost doubled its available leasable area in Warsaw and considerably strengthened its leading position in this respect on the capital’s market thanks to the closure of one deal – the purchase of Empark Mokotów Business Park. We expect the strong demand in the office sector to continue in 2016. Furthermore, large corporations will, in our opinion, aim to extend their cooperation with international partners from the real estate sector while looking for economies of scale in the region. This trend will be more pronounced over the next few years. 2016 will also be another year in which developers who hold office property portfolios look to add amenities, additional services and other additions that will make it possible for their products to stand out and attract potential tenants.

Fabrice Bansay

CEO, Apsys Polska

Meeting expectations

Increased consumer expectations and the fierce competition between malls and other retail formats are the key challenges that the shopping centre market in Poland has had to face in 2015 and will continue to contend with over the next months. Today consumers are visiting malls for an experience that goes well beyond traditional shopping and have greater expectations, particularly regarding online and offline channels. To stay competitive, malls need to stay abreast with the latest trends for interior design, new technology and customer service, but also need to provide an experience that consumers may not have online: restaurants, leisure and culture. We are seeing a growing trend, particularly when it comes to older malls, for comprehensive redevelopment and extension work – and I think this tendency will continue into 2016. This year Apsys Group will mark its 20th anniversary, which is the perfect occasion to celebrate our accomplishments thus far and carry out new projects in Poland. This year, we will begin the construction work on the extension of our Janki centre in Warsaw, which will be enlarged by an additional 24,000 sqm gla. In the autumn in Poznań we will open Posnania, which will have 100,000 sqm gla.

Scott Dwyer

CEO, Atrium Poland

Larger Promenada

The last few months have seen significant progress in the realisation of our key redevelopment project: Atrium Promenada in Warsaw. The construction is progressing and clearly visible now from ul. Ostrobramska. The first phase is scheduled to open in the first quarter of the year. The redevelopment of Atrium Promenada is a long-term project that will be carried out in phases. In the first two phases of the redevelopment, a total of 7,800 sqm gla will be delivered this year, enhancing the whole centre. During 2015 we will also be focused on deepening our relationships with tenants. In all Atrium shopping centres, we have designed a retail offer ensuring differentiation to others. Last year we signed more than 300 lease contracts, totalling close to 70,000 sqm gla, with both new brands and with our long-term tenants.

Leszek Sikora

managing director, ECE Projektmanagement Polska

Small things matter

In 2016 we will mostly be focusing on our everyday work in terms of increasing the attractiveness of our centres, either by improving their range of goods and services, such as we are doing with Poznań City Center, or preparing the designs of their extensions, which we are planning to do with Galeria Bałtycka. We will continue to be interested in the acquisition of existing shopping centres with the appropriate parameters. In 2016 there will be a further verification of the strength and quality of the centres in operation, as well as projects that are under construction. On a saturated market it is the tenants, and ultimately the customers, who determine the success of a project. The age of cheap money does not look like coming to an end any time soon, so the high values of successful centres are likely to be maintained even though their supply has been and will be limited. With nothing concrete on the table so far, it is difficult to comment on the planned taxation changes for large-format stores or the possible restrictions on Sunday trading, however, I am convinced that our sector will devote a great deal of attention and energy to these proposals. But I wish everyone a rewarding 2016!