Industrial powerhouse

Adam Zdrodowski, ‘Eurobuild Central & Eastern Europe’: More than 1.3 mln sqm of warehouse space was leased in Poland in H1 2016, which was one of the best figures in the history of the Polish market. Is this strong leasing activity set to continue in the second half of the year?

Martin Polak, the regional head for the Central and Eastern Europe region at Prologis: Overall, our Central and Eastern European portfolio has been performing very well, with Poland being the largest market continuing to lead the way. We continue to see strong and growing demand for warehouse space across the region – and in the core markets in Poland, such as Warsaw, Central Poland and Silesia, in particular, which is due to factors such the lack of new stock, new businesses entering the market and the expansion of existing businesses. We remain optimistic about the second half of the year – considering the continued demand, the steady pipeline of both build-to-suit and speculative projects, and strong interest from investors who view logistics real estate as a reliable asset class with long-term benefits.

After the outbreak of the ongoing conflict in Ukraine, some fears arose that geopolitics could negatively impact the perception of Poland in the eyes of international real estate investors. Have the fears proved to be justified?

No, at the moment we are not aware of any global macroeconomic or geopolitical factors that could have a negative influence on the performance of the warehouse property market in the CEE region.

How does the tenant activity in the Czech Republic, Slovakia and Hungary compare with that seen in Poland at the moment?

In H1 we leased more than 870,000 sqm of logistics space in Central and Eastern Europe – Poland accounted for more than 50 pct of the figure, whereas the Czech Republic and Slovakia accounted for app. 32 pct of the volume and Hungary for the remaining space. These are the typical market shares by country in the region and they should remain more or less the same in the near future. The availability of logistics assets varies from country to country, but the demand remains at a high level in the core markets in the region. Across the entire CEE region, Prologis concluded the second quarter with occupancy of 94.8 pct.

Which sectors have been generating the most demand for warehouse space in the CEE region?

This depends on the market. In Poland we have been receiving the most requests from the logistics, retail and e-commerce sectors. The latter sector is now also growing in the Czech Republic, whereas in Slovakia the market has been mostly driven by the automotive industry.

Will the significance of the e-commerce sector and its impact on the warehouse market in the region grow significantly in the near future?

E-commerce is one of the fastest growing sectors and is widely regarded as a new structural driver of demand for logistics real estate across the globe. E-commerce companies operate fulfilment centres that require the transformation of distribution, with features such as mezzanine space, although the impact on the building itself is relatively minor. Time-to-market can provide a competitive advantage for such companies, and so logistics facilities are becoming increasingly important in terms of revenues and profitability. We are very keen to meet this need and are adapting our facilities to do so. Importantly, demand from traditional retailers remains unaffected by e-commerce.

In Poland, speculatively developed space already accounts for around 50 pct of the total new stock under construction. Do you think this trend will strengthen even further in the coming months?

Speculative developments are usually launched in a situation when strong demand for state-of-the-art warehouse space is combined with low supply levels in a given location. It is not enough to be optimistic about the prospects for the market as such – there needs to be a good business case for a developer to decide to build speculatively. You need to be careful and review the statistics for the particular location in order to make sure that the planned speculative project will be successful. When it comes to our CEE portfolio, speculative space now accounts for much less than 50 pct of the total space under construction, but this is also the result of our ability to secure BTS project opportunities. Since the beginning of the year, Prologis has started the development of 13 buildings in Poland, the Czech Republic, Slovakia and Hungary, totalling 201,000 sqm of space. BTS space accounts for 68 pct of this volume.

Rents have remained at a very low level compared with the levels seen in Western Europe – do you expect any upward pressure on rents in the near future?

Market rents in Prague and Bratislava are expected to rise in the near future, whereas in Poland the situation looks a bit different. Poland has quickly become one of Europe’s logistics development hotspots, both in terms of build-to-suit and speculative projects. And yet it may come as a surprise to learn that Poland’s market rents are among the most challenging in Europe. The recovery has been delayed by new development that, in some instances, seems uneconomic. There are instances where developers have started new projects despite depressed rents, and have still been able to crystallise profits on their outlay due to inflated values. There are two factors driving these starts: Poland remains an opaque market and one with considerable concessions. Together these factors have led to some of the widest gaps between headline and net effective rental rates globally, resulting in excessive property transaction values that do not accurately represent the actual economic prospects. Those not familiar with these factors face missed expectations and – depending on their initial underwriting – value write-downs. Looking ahead, increased transparency and reviewing rental rates on a net effective basis will be critical. New entrants who understand the true economic terms can minimise these risks and, perhaps, capitalise on the market as it normalises through the adoption of best practices from elsewhere in Europe and beyond.

Which new locations in the CEE region could Prologis enter in the next few years?

Our strategy is to be in the well-established core markets that never disappoint us – locations that have performed well even during the difficult years of the most recent global economic downturn. We are focused on master planned, multi-tenant logistics parks in locations with developed infrastructure. In the emerging locations with limited demand and limited infrastructure, there is often only room for one or two developments – and this is not the scale we are interested in. When you look at our logistics parks in the Czech Republic, Slovakia and Hungary, many of them comprise more than 250,000 sqm. I do not want to say “yes” or “no” to emerging locations as we are always ready to pursue logical business opportunities, but our preference is definitely the core markets.

What does your CEE business strategy look like at the moment – are you focused on development, or rather on the ownership and management of logistics property in the region?

Many people think we mostly manage our existing assets, but this is not entirely true – we are actually very active on the development side, too. This is the fourth year in a row when we have a strong development pipeline. We are focusing on the existing, well-performing parks under our ownership that can be further developed, and are selectively looking for opportunities to buy land and establish new locations. At the same time, we have the responsibility of managing our existing portfolio, which is by far the largest in our part of Europe.

Will you launch construction on any new buildings or parks in the CEE region before the end of the year?

We currently have nine warehouse facilities under construction in Central and Eastern Europe – and if the demand continues we won’t stop. We will continue to be active in Poland in H2. We also plan further development activity in Prague and Bratislava.

Are you planning any new acquisitions of existing logistics parks in the region in the next few months?

As a long-term owner we are always ready to look at good real estate assets that fit in well with our port-folio in terms of quality and location. We do not acquire facilities just to grow, we acquire to strengthen our position and increase the offer to our customers.

How much land for future projects in the CEE region do you have at the moment?

Currently we have more than 200 ha of land for future developments in the core markets across Central and Eastern Europe.

Are you planning to buy more plots any time soon?

We are very selective with new land acquisition. We are always ready to look at new plots in the core locations across the region, but our priority is the development of our existing land bank. When it comes to the acquisition of new sites we are going to be mostly active in the Czech Republic and Slovakia where our land bank is shrinking; but as I have said, we are always ready to consider attractive investment opportunities wherever they emerge.