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Diversity in adversity

Investment & finance
While some investors have been taking stock during the pandemic and waiting for the market to recover, Savills Investment Management has continued to buy assets in Poland and across Europe. We spoke to Jon Crossfield, the company’s head of strategic partnerships, and Piotr Trzciński, the head of investment in Poland, to find out how it still has such a positive approach

Nathan North, Eurobuild CEE: How has Savills Investment Management’s strategy changed, if at all, in the wake of the pandemic?

Jon Crossfield, head of strategic partnerships, Savills IM: I don’t think our strategy has really changed, as in Poland we were already largely focused on the logistics sector and do not see this changing, given its strong relative performance during Covid. We will still look at Warsaw offices but continue to be very selective. We would have liked to have done more during the pandemic, but have been impacted by travel restrictions and the number of opportunities brought to the market. However, the investment appetite in this sector is still very strong.

Will you be able to achieve last year’s investment volume this time around? Or has the crisis put an end to such hopes?

Piotr Trzciński, head of investment Poland, Savills IM: Last year we invested EUR 3.5 bln globally – and EUR 300 mln of that was in Poland. Despite the pandemic, this year our investment volume in Poland should be broadly comparable. So far this year, all the deals we’ve finalised were being negotiated pre-Covid. We are looking at further deals but are in no rush, and will focus on best in class products for now.

But you had certainly been planning to invest more this year?

PT: If not for Covid the volume would probably be bigger. It’s not the interest isn’t there, it’s just the uncertainty. So Covid-immunity of an asset class became one of the key features behind our focus on sustainable long term income. But still, we’ve been quite positively surprised by the performance of the Warsaw office market in H2. Huge leasing transactions have been done with PZU and Poczta Polska, for instance, confirming that there is still the appetite for large leases. The evolution of formats such as flex office and co-working have been gaining importance, while Polish regional office markets are continuing to grow. On the other hand, there is uncertainty about the labour market, unemployment rate and the salary growth trend impacting the competitiveness of labour costs, both for office and blue collar workers, say, in the logistics sector. And we will have to wait to see if there is a second wave of the pandemic and how this would impact the market.

Is this shift towards Covid-immune assets a significant change of tack?

JC: As a manager, we have always been focused on income. I don’t think that’s changed and, if anything, Covid has only re-emphasised the need for this as well as to be more cautious when it comes to leasing risk and rental growth. The widespread focus on income and core assets has led to yields remaining unchanged, or even falling in most core office and logistics markets across Europe. Warsaw is probably one of the few markets where office yields have moved out, but we remain confident in the long term fundamentals and relative value compared to the 3–4 pct yields in most Western capitals.

So you have shifted more towards investing in logistics and away from other sectors, such as retail?

JC: We have total AUM of app. EUR 20.7 bln globally, EUR 1.5 bln of which is in Poland. Whilst the majority of our Polish AUM is in logistics, we are still active in offices and to a lesser extent retail. As we all know, the wider retail market faces a number of challenges in every country, so we’re not unusual in reducing our focus on it; but we are, for example, exploring segments such as food retailers, which have proved resilient this year. Going forward we see our focus remaining on a mix of logistics, offices and, hopefully, alternatives such as multi-family and student.

But will you continue to be active in the office sector?

PT: If there is a solid, core office opportunity we will still look at it. Warsaw, with an office leasing volume of over 300,000 sqm in H1 2020, was only slightly below last year’s record H1, but many of the deals that were finalised had been under negotiation since 2019. To see the real impact of the pandemic on the market, we have to wait for the H2 figures, which we expect to be a bit different, due to delay over tenants’ decisions. Poland’s trademark advantages, such as educated labour, salary levels competitive to Western Europe – the relatively high quality of build, the new and constantly expanding transport infrastructure, its location as a geographic gateway to Europe and close economic ties to Germany – have not gone away. All of this is appreciated by the office and logistics investors we work with, both from Asia and elsewhere. Despite the temporary dip in the country’s economic metrics, they are relatively still among the strongest – if not the strongest – around, and we are expecting them to rebound in 2021, particularly given the continuing improvements in infrastructure.

In early August it was announced that you had teamed up with Japanese developer Kajima Properties Europe and bought Panattoni’s stake in Łódź City VI. Could you tell us something about how this JV came about and what each party brings to the table?

JC: We manage assets on behalf of a number of Asian investors across Europe, and the partnership with Kajima Properties Europe builds on this success. It is a complementary relationship, bringing together their development and construction experience and our own experience in managing assets across Europe. The partnership with Kajima has started in Poland, with the recent acquisition Panattoni’s Łódź City VI, but our intention is that it will become diversified across Europe.

And this is your preferred model with the other partners you have?

JC: We are flexible in our approach and are constantly looking at ways of working with quality partners. If we are to access best in class opportunities in very competitive markets such as logistics, we need to be able to adapt to situations and, where necessary or appropriate, work with partners if that optimises results for our clients. We see this flexibility and bringing together of complementary skill sets as being increasingly common, particularly in specialist sectors.

PT: We started out a few years ago in Poland by investing in standing assets, then we took on more complex transactions like forward-funding. And now we are entering partnerships, such as with Kajima. This flexibility not only benefits our investors with early access to product but helps to secure it long term.

So there’s a greater need to diversify your operations – and with partners you can do this?

JC: Yes. We have strong ambitions to grow our total AUM, and Poland and the CEE region is an important part of this. To achieve this, we want to diversify further into new sectors and in some cases, this could lead to us aligning ourselves with sector specialists. The wider residential and student sectors are a key target for us across Europe, and we are beginning to look at this in Poland too. The demographics in the country, with its young, increasingly affluent population, are very suitable for the growth of this market.

Do you feel that Poland is in a better position than maybe some Western European markets to recover from the impact of the pandemic?

JC: Certainly, our expectation is that Poland is well placed to recover more strongly than many other countries. Whilst GDP is expected to shrink by around 3–4 pct this year, that’s still half the average for Western Europe and Poland is expected to bounce back to good growth in 2021–22. We have great belief in the country and are very confident about its prospects. It is the 7th biggest economy in Europe and is now a significant part of our business. It is now a truly international investment market, with capital flowing in from not only Germany but from a much wider range, such as from South Korea, the US, South Africa, SE Asia, China, France and the CEE itself. In almost every case, our experience is that when investors visit Warsaw and Poland for the first time, they leave with a very different and much more positive view than they had before.

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