Tenants, not investment products!

‘Eurobuild CEE’: Which aspects of your strategy have given MLP Group the greatest competitive advantage?

Radosław T. Krochta, president and CEO of MLP Group: First of all, there’s the fact that we are a long-term investor – and this is what our tenants appreciate the most. If someone signs a long-term contract for five or ten years, they want to be sure that the same team will be working with them for the duration of the contract. If problems arise or some changes are needed, we will be able to resolve them together with the same team. Clients don’t like being treated as an investment product, but this is what happens when today fund X is the owner of the park, tomorrow it’s fund Y, and a bit later it’s fund Z, while the property services are provided by yet another company. Such long-term predictability and stability is undoubtedly one of MLP Group’s huge advantages.

And what else is?

The fact that we have large parks located in key regions of Poland. We try to buy as well as make reservations for investment sites in order to be able to provide our current and potential clients with excellent locations, good infrastructure and the possibility of expanding the park. This gives us quite a significant competitive advantage. It also gives the company greater flexibility in its dealings with the tenants. If the client has been with us for a long time and wants to continue cooperation and now needs more space, for example, another 5,000–10,000 sqm, we are able to provide that, and the tenant can stay in the same park. Such an option encourages tenants to decide to stay, because if a small park is fully leased out, the only alternative is to move out and look for another place. That, of course, brings with it additional costs, including the removal costs. When the park has a large area, we can always offer the client a transfer to a new, larger facility within the park or to provide additional space as needed. This flexibility and the size of our projects are the added value that can we offer.

MLP Group generated a profit of PLN 121 mln in the first half of the year. The pandemic doesn’t seem to have done you any harm…

Everything has been going smoothly so far. We haven’t had any problems with tenants and their payments. All our projects have been carried out on schedule. There have only been minor delays resulting from administrative issues, such as obtaining building or occupancy permits. From the business side things look good, and I can even say that we are in a really healthy situation.

This increase was largely due to an increase in the value of your assets. How do you explain this?

It was mainly due to increases in asset values in Germany. We currently have six projects in Germany and Austria. These are in Niederrhein, Dortmund, Unna, Berlin, Gelsenkirchen, Cologne and Vienna. We expect that the German assets will continue to have an even greater influence on the group’s results, as the German economy is now moving forward much faster than Poland’s. A lot of help was given to the private sector there and we can also see quite a lot of optimism on that market. It should also be noted that the Chinese economy has recovered quickly, and Germany is a very significant exporter to China. Talking to many of our tenants, I get the impression that most people are no longer so concerned about the pandemic and its impact on their financial results. Investors have started to invest again and without much trepidation, which is undoubtedly an important factor. The German economy, therefore, has restarted on very strong foundations, rather than just being subsidy-driven. I’m convinced that the warehouse sector in Germany will accelerate significantly and expand even faster than in Poland. Especially when it comes to new investments, new plants and new projects.

What are MLP Group’s current goals?

Our main goal is to attain a value for our assets outside Poland at a similar level to those in our home market by around 2022/2023. We see our expansion in Germany as being of great importance. The capital we have invested there gives us much higher rates of return than in our own country. Therefore, more and more of our attention is being focused on increasing our investment in the German and Austrian markets. They are our priority right now and we have high hopes for them.

Will MLP be entering any other new markets?

We are also analysing other countries. After Germany, the Benelux countries are particularly interesting for us and we will probably sooner or later expand our portfolio to include, for example, assets in the Netherlands or Belgium. These are the markets we certainly want to be present in and we eventually will be. I expect that this will happen in 2021. But we are also constantly strengthening our position in Poland and still looking to have prime projects in the most attractive locations.

MLP Group has built around 1 mln sqm of warehouse space in Poland since 1998, when your first park was completed. How can you hope to obtain a similar value of assets abroad in just two or three years, when you’ve been building your Polish portfolio for two decades?

You have to take into account that the value of a square metre in Germany is more or less that of two metres in Poland. Because effective rents in Germany are at the level of EUR 4.4–5 per sqm, whereas in Poland the rate is EUR 2.5. In fact, we have already started projects in Germany and Austria that should add about 250,000 sqm to our portfolio. I expect that in 2022 we should get close to somewhere between 500,000 sqm and 700,000 sqm. Our goal is to have developed and leased 1 mln sqm outside Poland by 2023.

And do you have any specific annual targets when it comes to MLP Group’s development volume, as well as the leasing of the new space?

Each year we try to build and lease around 300,000 sqm of new space. Already half of this takes place outside Poland. This should shift by a few percent each year in Western Europe’s favour. In fact, I expect that by 2021 the proportion will be 60:40 in favour of Western Europe. In Germany, as in Poland, we only invest in the main locations. And just like in Poland, there are five basic markets in Germany, but only one in Austria. And these are primarily the areas that interest us most – Cologne, the Ruhr, Berlin, Munich, Stuttgart and Hamburg. In Austria it is Vienna. We have no intention of investing in other locations, because we are an investor that holds assets for a long time, so we always focus on the core markets. And it’s the same in Poland – we are not planning to launch any projects in Rzeszów, Białystok or Zielona Góra.

Where are you building now? Which new projects are just starting?

We have just purchased more land for MLP Pruszków II, the largest park in the Warsaw area, and soon we will have accumulated almost 100 ha there. The area of the park will be huge, making it one of the largest in Europe – around 500,000 sqm of warehouse space. In addition, we also have MLP Pruszków I, which is in Pruszków town centre and covers 35 ha.

New projects are also being launched in Łódź and Poznań. What exactly is happening at these locations?

Soon we will start the construction of a park in Łódź, which will be built on an area of ​​app. 10 ha in a typical urban location. We acquired this plot in March and plan to build the complex in two or three stages. Talks with several potential tenants are already underway, and the general contractor should enter the construction site soon. In Łódź, meanwhile, we are planning to purchase another site. Central Poland is a very attractive region with excellent transport infrastructure, including Łódź airport and the junction of the A1 and A2 trans-European motorways. In Poznań we have added an old park from the 1950s to our real estate portfolio. It is located in the city centre and as such is obviously a brownfield project, which we are currently rebuilding. We intend to open a modern SBU centre there. We are also buying more land in Dąbrówka, on the S11 route close to Poznań airport. As a result, we will increase the area of ​​MLP Poznań West to almost 30 ha.

And there’s another new investment in Wrocław?

Yes. MLP Wrocław West Park is currently under construction on an area of ​​app. 10 ha. The first tenant is Inpost, which is to have its main warehouse there for the entire Lower Silesia region. We are also talking with other tenants.

And is there anything else in Silesia?

At the moment we are constantly surveying a number of sites in Silesia, because we have just finished work on MLP Gliwice. This has already been fully leased and we are now considering what to do next. This includes buying land in the western part of Silesia by the end of this year. We would actually like to buy maybe one or two plots in this area, but we haven’t settled on any final locations yet. In Silesia there are often issues related of the condition of the soil, mining damage and other similar problems.

Are you planning to invest in Stryków?

Yes, this is one of the core markets we’ve been interested in for some time. MLP Group has already put up a huge billboard at the entrance to the motorway in the direction of Warsaw. This transaction should hopefully be finalised by the end of this year. It will be a very large park – app. 50 ha or, if you like, 200,000 sqm of warehouse space. I’m convinced that such an attractive location in the very centre of Poland, just off the A2 motorway, will provide our future tenants with excellent access to all regions of the country.

MLP Group seems to buy a lot of land and yet still has a large reserve of it, on which as much as 1 mln sqm could be built. Aren’t you overdoing this?

Our land bank is of a very reasonable and sufficient size. But when we look at specific locations, it turns out that we still need new sites – for example, we currently don’t have anything in the western part of Silesia, but would like to. The situation is similar abroad. Things are fine in the Ruhr, but in Dusseldorf we have zero land, so there are places where we need sites and we still don’t have them. In addition, that 1 mln sqm land bank includes 500,000 sqm just in Stryków itself and in Silesia, so the lion’s share of this potential development is concentrated in only two locations.

On the other hand, the expectation is that the increased uncertainty due to the pandemic will discourage investors from investments that do not immediately generate returns. And that includes investing in land…

That’s all true, but you are now talking about those investors that give money to developers who don’t have their own finances. Our situation is different. We are not dependent on any external funds. Thus we usually buy land on a speculative basis. Nothing holds us back from buying sites, as long as we are convinced that they are good plots in good locations. Then we simply buy them.

Has your resolve not been shaken by all the uncertainty in the wake of the pandemic?

We take a 3–4 year perspective. Today we have a pandemic, in six months we won’t. I don’t know if there will be another, if any, in the next three years or so. Therefore, despite the present situation with Covid-19, we are still able to take decisions. We bought land in Łódź in the midst of a pandemic, even without securing a tenant. We are buying land in Vienna, where there is also still no tenant. When purchasing land, it is not a significant factor for us whether there is a tenant at the moment or whether there will be a return on the capital outlay. We can afford to freeze the money if we believe that the location is strategic and that it’s a good project on a good site.

Just a few years ago, there were literally almost no solar panels on warehouses in Poland. Back then the attitude was that photovoltaics was a purely environmental commitment, rather than a business-related undertaking. What changed?

I must say the change has been huge. Today, we now prepare the buildings in all our new projects for the installation of photovoltaic panels. Such panels have become highly efficient. Their price regularly drops and their efficiency increases by several dozen percent each year. This will greatly accelerate the investment in such systems. Even though we don’t live in the Middle East, where the sunlight levels are very different, with the technology we have it’s now possible to earn money from these installations. In this case, taking care of the environment also makes economic sense. Installing solar panels on warehouse roofs has become a profitable business. An additional factor is that our clients are increasingly demanding that a greater percentage of the energy they are supplied with is green. At the moment this amounts to around 17 pct of their supply, but with solar panels we can increase it to even as much as 30 pct.

How good is this business?

It has healthy foundations. A percentage of MLP Group’s profits come from MLP Energy – the company responsible for our tenants’ electricity and gas management. This includes not only the supply of green energy from solar panels on the warehouse roofs, but also, for example, wholesale energy purchases. Our company can take advantage of our economies of scale. We can buy energy directly and sell it to our tenants. It is obvious that a tenant that only occupies 5,000–25,000 sqm will not be able to obtain the same energy prices as we – who have 1 mln sqm – can from suppliers. We are able to buy at exchange prices unavailable to small and medium-sized companies. The same goes for the panels – we can also use our economy of scale because we are the owner of a very large number of logistics parks. And so the banks are willing to finance their installation. This is a normal business that is built on healthy foundations.

But not all your activities generate money for you. Which of them would you be unwilling to characterise as a business at the moment?

Well, for example, electric vehicle charging stations still can’t be regarded as a business on their own terms. We have installed one such station in our MLP Pruszków I centre. Around 3,500 people work there and only four have electric cars. And how many top-ups take place there? Maybe one a day. That’s not a business. We have also invested in smart metering, which allows our clients to optimise and control their electricity consumption. We are not able to make a business plan for this, but we do acknowledge that it makes economic as well as environmental sense for our tenants. The same is true of planting organicgrass that doesn’t need to be watered, rainwater recovery and certifying buildings. We try to do all of this, it’s true, but it doesn’t make economic sense for ourselves. This is where business ends and is simply where we start caring for the environment.