Positive Thinking

Rafał Ostrowski, ‘Eurobuild CEE’: What is the current sentiment on the office development market in Poland?

Jeroen Van der Toolen, Ghelamco’s managing director in the CEE region: I think the office market is very healthy. Last year we witnessed record breaking leasing activity. According to the main real estate agencies, over 1.38 mln sqm of space was leased in Poland, including over 830,000 sqm of the total net take-up in Warsaw. According to the data, this was the third largest take-up in Europe after London and Paris. Before 2015 everybody was forecasting that the vacancy rate in Warsaw would increase, but it actually went down. And our company itself signed 80,000 sqm of lease agreements, which made it a record breaking year for us. So considering the forecasts for 2016, we are again very positive regarding the number of lease agreements that can be signed. We can also see the regional markets getting stronger.

Just before we talk about the Polish regions, let me ask a question about the investor sentiment. How do they feel about Poland today, especially in terms of the political issues we have recently heard so much about?

When I talk to the investment agents, they say that all the deals that have been ongoing are still ongoing. They went to London, to Frankfurt, to Hamburg with the intention to explain the situation in Poland at the moment. Because, based on various reports in the foreign press, some investors are also wondering about what’s really happening. These questions arise because what’s in the newspapers is not always exactly the truth. So after their explanations the agents insisted that none of the investment funds had changed their opinion about investment in Poland.

So you don’t think that the political situation will impact the market strongly. Would you go as far as to say that it won’t impact the market at all?

Even if it does, that would only be for a very short time. Because this would be a short-lived reaction to the media coverage. But looking at Poland, at the market, at the GDP forecasts, at all the jobs that are being created, the companies entering the market or continuing their expansion here, there is no reason not to invest in Poland. It is one of the strongest economies and also has the best forecasts in the European Union. I agree that Standard and Poor’s downgrading of Poland is a purely political measure. It is not based on the economic parameters of the country. Also bear in mind that the other agencies have not downgraded Poland’s ratings. I don’t think the measures taken by the new government have had an impact on the economic situation of the country.

Aren’t you afraid that the new tax that has been imposed on the banks will limit the availability of credit?

No, I am not. A few years ago we had the economic crisis. Lehman Brothers went down and this was followed by the new Basel banking accords and credit was much less available across the entire world. What then happened was that the banks only granted loans to the healthiest and most professional players. I am not saying that such a situation is good for the biggest players, but even in the worst case scenario it would be the smaller and less experienced players that get hurt, not companies like ours. And besides that, interest rates today are very low. From this 0.44 pct tax that has been imposed on the banks, they will transfer some of that percentage onto their clients. This means that the cost of financing will be a bit higher, but this is still a small proportion of the entire cost of the development of real estate. It’s not like in the case of the cost of raw materials – when they go up worldwide then the costs of construction are genuinely higher. So, coming back to your question, I don’t think that this additional tax will impact real estate much.

You said that Polish regions will grow stronger. Which regional cities do you see as the most attractive?

The most attractive for BPOs are, of course, Kraków and Wrocław, but I also think Łódź will start growing faster because of the new motorway and the new train connection to Warsaw. In Łódź we started a BTS project for MBank last year and we are now seeing that some other companies are seeking for space there. These are not just international BPOs, but also the back offices of some Polish branches. If you look at MBank, for example, which is headquartered in Warsaw, it can use the convenient train connection for commuting to its back office in Łódź. There are also a number of other Polish organisations that are starting to look at such locations. And it is not only the five biggest cities in Poland, but also the smaller cities that are attracting new companies. The drawback, however, is that in these smaller cities it is more difficult to sell real estate.

Why is that?

Because German and American funds are interested in the more liquid markets. If you ask them if they would like to invest in a 10,000 sqm or 15,000 sqm project in a small city, they say it could be difficult to re-sell or re-lease when the tenant moves out. So today the interest is mainly in cities like Warsaw, Kraków, Gdańsk, Wrocław, Katowice and now also Łódź.

So what will be the balance between Warsaw and the regions in future?

I think the balance between the regions and Warsaw will not change too much. The Warsaw market may even become slightly stronger than it is because more and more BPOs are starting to consider establishing offices here. Warsaw has been able to attract more BPOs than ever before, because salaries are getting closer to each other, plus the availability of people in Warsaw is larger. When you analyse this 830,000 sqm, there are many purely new organisations who are coming to Warsaw, or were active in Poland previously but have now brought completely new divisions to Warsaw – and many are BPO companies.

So I understand that in line with this trend you will be focusing on Warsaw rather than increasing your presence in the regions. Am I right?

As the matter of fact, we were among the first to enter Wrocław and Katowice. Later we started focusing on Warsaw, because there were great opportunities here. In the meantime we have acquired good plots in some other cities. We have recently started a development project in Łódź, for example, and we should be starting projects in two other cities this year. So we are going back to the larger regional cities. The regions are not an alternative to Warsaw for us, but rather an extension of our activities.

If you had the power to change something on the development market, what would that be?

Looking at Warsaw and some of the other cities, I think it would be a good idea to invest in high quality master planning. At the moment too many things are happening on an individual basis, but by commissioning some highly professional master planning companies you could easily increase the quality of life for the inhabitants. And I think this is not a barrier for development but simply something that the cities need to really focus on. Because at the beginning, when we were starting out in Poland, everybody wanted to have a small apartment, a TV set, a car and so on; but now what people are seeking is a better quality of life, which also means spending quality time in the city.

So what can we do to increase the quality of life in the cities?

I think that developers should be able to sit down together with the city authorities and think about how to create good areas for development – so that the roads, accessibility by public transport, bike paths, greenery and sculptures are all in place at the right time. Sometimes developers have small plots that are simply the shape of the eventual building, like Rondo 1, for example. So when you step out of such a building, you are directly onto the street. All the surrounding area is owned by the city and there is nothing interesting there. Thus it is important to have a discussion with the city on how to increase the value of this area for the people working in these buildings, as well as for those living in the neighbourhood.

Do you get the chance to talk with the city about these issues?

Yes. We were in talks about the entire Towarowa area, where Ghelamco has built the Warsaw Spire and the Plac Europejski public square. After us Golub, Skanska, Griffin, Karimpol and many others bought plots in this area. It would now be good for the entire neighbourhood to have something like a single concept for the public space. I think it would be beneficial for everyone if there was a kind of organisation that would work together with the developers and oversee this.

Ghelamco has been active on the Polish market for about 25 years now. How would you sum up this time?

It has been a very good time for us. We are a private company and we have built ourselves up with our own funds. At some point we had to decide whether to develop larger projects in Poland or to expand into Romania, Hungary or the Czech Republic. There were so many opportunities in Poland and the market was so positive, we said: “Ok, let’s focus on the Polish market.” And when you look at the number of square meters we have done so far and the trends that we have introduced to the market, you could say that for many years we have been leading the office market in Poland. In 2003 we were the first developer to introduce BREEAM sustainability certificates. We have developed nice green public areas with fountains – and other developers have followed our lead.

Do you want such nice public areas to become a kind of signature for your future projects?

Yes, we do. We are now building Gdański Station, which will also have beautiful public spaces around it with lots of greenery. So it will not be a typical train station development, but will all be set in a green environment. We want to create space that people will want to come to, which was precisely the concept for Plac Europejski.

Are you sure that investing in public areas will pay off?

Yes. Well, you could say of course that all the money that has been invested in Plac Europejski is just pure cost for us. Of course, we could have created a public car park instead and made money out of that. But with 100 cars parked outside the entire project would look totally different. If you have 160 trees and 14,000 plants instead, with fountains and five restaurants, it becomes a destination. It’s a win-win situation, it brings value to the project and it brings value to the people using it. They appreciate this. When you feel good in the building where you work, you want to stay in such a location.

So to what extent could this affect tenants’ decisions?

Companies say that for their employees it doesn’t really matter if they work for this or for that bank or FMCG company. The salaries are approximately the same for most of them. So how do these companies compete to get the best talent? A way to do this is to provide the younger generation with additional amenities and a superb working environment. And having a nice location is an essential part of this.

Your flagship Warsaw Spire is to be opened in May. What are the next projects in your pipeline?

We have started the construction of Sienna Towers and we are starting Dworzec Gdański this year. These are currently our two largest developments. Of course, we are also going to do other things, for example two smaller retail projects in Łomianki and in Piaseczno. We have already started the construction of Wronia 31, which is to be finished at the beginning of Q2 2017. MBank is under construction in Łódź. So we currently have a number of projects underway.

What are the schedules for the Sienna Tower and Dworzec Gdański projects?

Sienna Tower is scheduled for completion by the end of 2018. Dworzec Gdański, which is 165,000 sqm in total, will be built in phases. We want to start the first phase this summer. It will include the train station and one office building. And the subsequent phases will follow based on the commercialisation of the first phase. Realistically speaking it is possible that every year we will be able to deliver one building to the market.

What about your other projects, like Spinnaker, Plac Grzybowski, Sobieski Tower and Chopin Tower?

According to our current programme, the next project would be Spinnaker, but this depends on the market. I can’t say when Plac Grzybowski or Sobieski Tower will start, as we are still working on the administrative procedures. The Chopin project has been put on the back-burner for now. Maybe in the long term we will do something, but we are not presently working on it. We have, of course, Bellona, which we have invested a lot of money in refurbishing, but we could also build a high-rise building attached to it. This could have a very interesting modern design, something like the famous Hearst Tower designed by Foster in New York.

How important is the role of technology in your projects?

It is very important for us. We analyse all our projects to see how we can improve them compared to our most recent ones. When you look at the difference between the buildings that are being constructed now and those built ten years ago, there is a very big difference in their performances. We are investing a great deal in the insulation of the façades and have signed an agreement with Samsung to introduce smart technology to our projects. There is a lot of new innovation coming onto the market, which we should be implementing in our new buildings.

Do you see any game changer coming from the technology sector, something that could revolutionise the office market in the next decade?

There is a lot of interest in energy-generating façades. So far photovoltaic panels have had a very small impact on energy saving systems. But when it becomes possible to put a kind of film on the façade that generates energy, so that the buildings become fully energy independent, this will obviously have a huge influence on the market, because energy costs currently account for a third of the service charges. Therefore this technology will provide a very big competitive advantage. So we are closely monitoring the market, to make sure that whenever a game changing innovation comes along, we will have it.

Why did you opt to apply for green certificates back when nobody in Poland was even asking for them?

We have two groups of clients – not only our tenants, but also the investors who buy our buildings in the end. So we want to develop buildings in line with all the international standards, because our end-clients are the investment funds. When they, for example, have the requirement that they can only buy BREEAM or LEED certified buildings, we want to make sure that our buildings have those. And the second reason is that we want to be the leader of the market. So maybe our first two or three buildings could have been sold without them, but we also wanted to set a trend – and today this is the market standard. When it comes to sustainability and creating public areas, many people are talking about these things now. It is good that people are following our lead, because this only creates a better market in the end.

Are you currently in the process of selling any of your projects?

We are not in the process of selling anything. The Warsaw Spire is currently 80 pct leased; we have had some enquiries and at MIPIM we will start initial discussions with funds, but it will only be then that we will start this process.

What should I wish you for the future?

Another very successful 25 years of the development in Poland, with many great projects that are fully leased and highly appreciated by the inhabitants of the cities.