The greater the challenge the more the fun

Anna Pakulniewicz, Eurobuild CEE: You are active in Kraków – one of the busiest markets in Poland. What do you think about the city? Are you planning any further developments?

Marta Wybrańska, leasing director, Avestus Real Estate:Kraków is a vibrant international business destination in its own right. Over the last decade it has established a strong reputation both for its high quality of office space and for its good working environment. Indeed, it now is the second largest office destination in Poland with over 1 mln sqm of modern office space. Avestus Real Estate has been actively developing in the city for the last ten years and has been part of the city’s overall evolution. Our Enterprise Park office complex, which we now co-own with Tristan Capital Partners, has 62,000 sqm and is fully occupied by well-known international tenants. We will continue to invest in Kraków as we still see great potential in this particular office market. It is clear that there is continued interest from both international and local occupiers and we believe that the potential to develop further office space in the city continues to exist. We understand the market well and we and our investors all believe in the city’s future potential. In addition, the city has a number of highly regarded universities that are performing well. This is an important factor in the decision making of both local and international employers and we believe that the high level of skills of these students will continue to attract inward investment and spur on development.

What is the reason for Enterprise Park now being fully leased? Is it so easy to lease space in Kraków?

Mariusz Frąckiewicz, Poland director, Avestus Real Estate:Enterprise Park is a very successful project. As well as its good location next to the city’s main access routes, the project itself addresses the requirements of both international and local tenants, who currently are mainly from the BPO/SSC sector. They provide high quality design with attention to detail, the right size of space with flexible floor plates and also the opportunity for tenants to expand in the future within the same location. These are the qualities that now define successful office projects and also provide the flexibility to meet the challenges of the ever-changing requirements of occupiers both now and in the future. We have also benefited from Kraków’s unprecedented popularity in recent years as an office location. The city has invested in a number of key projects, including the expansion of its tram network. These investments continue to make Kraków a place where growth can be sustained.

Mariusz Frąckiewicz, the Poland, Director of Avestus Real Estate

Are rents high enough?

MW: From a developerʼs perspective, it is clear that rent level rises have been limited over the past few years, but it is also clear that the current levels have been sustainable for development. However, with the recent increase in construction and other associated costs, there is going to be either a slowdown in the rate of delivery of new projects or an increase in rent levels. It is likely that it will be a combination of the two. It is also fair, I believe, to say that this will not just be an issue in Kraków, but also one that is likely to affect all of Poland and possibly the whole region too. As a result rental levels are expected to increase. Certainly occupiers have been trying, with varying degrees of success, to reduce their occupancy costs. This has had an effect more on transaction incentives than on the headline rates. Occupiers are not just looking at rental levels but also at the costs of moving as well as other occupancy costs. Service charge levels are an important factor and I believe that this is something that will yet become even more important. Also, as well as the costs, occupiers are looking at other implications of their occupation. Staff retention is crucial, and HR departments are now getting an ever larger say in the decision making. For example, Enterprise Park is one of the few projects that is fully fenced off and has its own security. The park takes the form of a campus, with a large number of amenities. It has relaxation and sports areas, a variety of canteens and places to eat as well as its own kindergarten. We also have bike rental facilities that are continuing to expand because of the demand. Enterprise Park is a place where people want to be. It is only 10 minutes from the main railway station. But a lot of people come to work by bike – so there are cycle paths in and out of the campus. Zabłocie is now a very popular area in Kraków. At Avestus, we are looking for additional development opportunities yet we remain selective when it comes to new locations. This part of Kraków has great potential and it has a very good catchment area with many residential areas nearby – a lot of people find it easy to commute here from their homes so it is easier to attract employees. Enterprise Park has only three main tenants, all of which are renowned international companies. Two of them have been with us since the very beginning. And they are looking to grow here. It is their decisions that guide us when it comes to looking for locations for our projects.

What about your next project – Imagine?

MF:Imagine is our first project in Łódź. The city has a rapidly expanding office market, which is in large part due to its business-friendly local authorities. The city’s investment in its infrastructure, which includes new rail and road connections, has contributed to what is becoming a vibrant and exciting place, with excellent prospects for growth. Recently Łódź has attracted the attention of both local and international occupiers and the city has all the attributes needed to become an important destination in its own right. Its proximity to Warsaw has in the past possibly been seen as a weakness, but now, with its excellent transport links and the availability of good office space increasing, the city is able to hold its own. We took our time when we were evaluating the city, as we wanted to secure the right opportunity for our first investment. In 2016 we bought a 1.5 ha site at the intersection of two major roads – ul. Piłsudskiego and ul. Śmigłego-Rydza – for a 17,200 sqm office project. We are now at an advanced stage with the construction and the leasing and the delivery of the project has been set for September1st this year. Our intention at Avestus is for our Imagine project to be the first of what will be a number of projects that we are going to take on in the city.

MW:We have signed our first leases and now we’ve just completed a deal with a very well-known international group. We are also in advanced negotiations with our next two leases, which should be signed in a couple of weeks. The project is just over 50 pct pre-leased and we have a clear idea of the amount of space that should be leased prior to its delivery – which will be in September even though the date was originally set for October. The complex is very user-friendly with two office buildings joined by a outdoor patio, and a third building for a car park. An additional attraction of the office buildings is that the 4th and 5th floors have individual terraces. By constructing a separate building for an above-ground car park, we have been able to significantly increase the amount of space available to our occupiers.

So do you want to continue developing in Łódź?

MF:Definitely. We are currently actively considering other development opportunities in Łódź. Both we and our investors think that the city has the potential to become an important hub in its own right. Many of my colleagues and a lot of other companies are watching this market. As always, though, we are concentrating on securing at least one perfect location and this is a process that could take many months to complete.

Do you plan to open co-working centres in your projects?

MW:Just like most of our competitors, we are seeing demand for space from this sector increase. We are currently in negotiations with a potential co-working occupier looking for space in our Imagine project. There is still a lot of debate as to whether this type of tenant is good or bad for a project. We believe that there is probably a threshold above which such a tenant becomes an issue, but the wider market has yet to determine if this is indeed the case. The growth in these kinds of tenants has been substantial in recent years and so there still hasn’t been enough time to see what the long term implications will be. However, we believe that there is space for this type of occupier within our developments and in our mind a threshold of around 20 pct of the total space is all right. I personally believe that co-working space is a good thing for a project. It is like an incubator for tenants, as small companies such as those in co-working centres can grow from three or four people to fifteen and then it becomes a company that can lease a regular 150 sqm office in its own right. A developer can arrange such a floor for smaller tenants. For me, a co-working centre represents potential added value. Our tenants, while negotiating their contracts, often say they want to have the opportunity to expand; they want to be given priority when leasing additional space. Lease contracts are for five to seven years, and that’s when a company wants to grow and there is simply no space to grow later. When we lease 100 pct of our space, there is nothing more. So such a co-working centre gives companies the possibility to expand. I treat coworking as a space that adds value like a fitness or a medical centre. We are also in discussions elsewhere with co-worker occupiers. In Wrocław we are in negotiations for a 3,200 sqm lease for co-working space.

Enterprise Park in Kraków

Where are you looking to expand – in the cities where you already are or are you planning to conquer new markets ?

MF:Poland continues to offer excellent opportunities for developers and investors alike. The size of the country, its economic strength and its ever-improving international and local transport infrastructure means that the number of opportunities we are prepared to consider is also continuing to expand. We are definitely looking at all the cities where we are already established, but we are also thinking about other locations, such as Poznań and the TriCity. In the immediate future we are going to continue looking for new opportunities while also continuing to focus on our current development pipeline in Kraków, Wrocław and Łódź. Additionally, Avestus is one of the leading investor developers in the residential private rental sector in Ireland and we currently have over 1,000 properties in our portfolio. We are looking to expand our work in the sector into the CEE region and, while still continuing with our work in the office sector, we are expecting to start developing this particular type of property in the coming months.

MW:Wrocław is a market with a lot of leasing activity and a lot of tenant interest. It is a very fast moving market. We have just started pre-leasing our Infinity project, and already the entire retail section has been leased. The project is scheduled for delivery in Q4 2020, and we are currently busy with the ground work. We are very much focusing on delivering the perfect project to this market.

The Infinity office building in Wrocław

So you want to expand in Wrocław – how far are you with these plans?

MW:Just to be clear, it is not just Wrocław where we are working on new projects. We are in on-going discussions right now across Poland.

And what about the TriCity?

MF:Our development strategy also includes Gdańsk, where we have selected a couple of sites there to do due diligence. We should be able to say more about this in a few months.

You are working with Tristan Capital Partners on your Kraków and Wrocław projects. How is this partnership going?

MF: Tristan is a well-established and successful global real estate fund and we are delighted to be working with them within the region. We have worked together on a number of projects and have enjoyed doing business together.