The power of concentration

There are currently 640 residential developers active in Poland’s six largest cities. But a wave of consolidation now seems inevitable as the market matures

The last few months have already borne witness to a number of significant acquisitions of developers. In April, Echo Investment bought Archicom, a company based in Wrocław; while just in the last few weeks, CP Developer has bought Budimex Nieruchomości. Meanwhile, we are awaiting the takeover of Kraków-based Sento by Dom Development, a transaction that was announced in the first half of the year. A list of earlier acquisitions, however, would go on and on, because this is a trend that has already been evident for a few years.

The strength of a local brand

Echo Investment’s acquisition of Archicom is one example of expansion through taking over a local company. And this one has turned out to be rather a tasty morsel, mainly because of the strength of Archicom’s position in Wrocław. “The company has very strong local competencies and a good land bank. Plus Wrocław is a city where Echo has not had a large presence, so there wasn’t so much of an overlap between what we already had in our land bank and what they had,” explains Nicklas Lindberg, the CEO of Echo Investment. It’s worth adding that Echo had been trying for some time to establish itself in Wrocław, but was never able to build up the scale it had hoped for. “Echo Investment has a strong management team that can handle expansion into most of the cities across the country, but we were lacking a way into the Wrocław market,” he adds.

The purchase has significantly strengthened Echo and now the company is planning further activities with a certain gusto. “Echo Investment, which now includes Archicom and Resi4Rent, will start building as many as 7,000 apartments this year. This is quite a lot considering that our strongest competitor is, I think, going to start around 4,000 apartments this year. So we are by far the leader in this respect, and we are going to continue growing,” declares Nicklas Lindberg. Of these 7,000 apartments, around 4,000 are to be for sale and 3,000 for rent. Echo Investment intends to build around 3,000 apartments a year, while at the same time steadily increasing the number of apartments it puts up for sale. “We are aiming to grow organically and are constantly looking at buy-opportunities as well. But we are still only at the beginning of our journey,” says Nicklas Lindberg.

Another leading apartment developer has also gone down the road of taking over local companies. As early as 2017, Dom Development bought TriCity firm Euro Styl and, according to a stock market report in March this year, is also preparing to take a controlling stake in Kraków-based Sento, a local developer in that city that specialises in building higher standard apartments. According to the report, Dom Development expects the share purchase contract to be signed in the first half of this year, providing UOKiK, Poland’s competition authority, gives its approval. For now Dom Development is releasing no further information on the upcoming takeover.

Foreign Investment

It’s not only Poland’s largest developers that are looking to take over local developers. Foreign investors are getting in on the act as well. “The growth prospects of the Polish apartment market are considered to be some of the most promising in all of Europe, so unsurprisingly foreign companies are keeping a close eye on us. For them, this is a fantastic chance to enter into a new attractive market and taking over a local company is the simplest and most profitable way to do this,” claims Marcin Jański, the head of residential and alternative investments at CBRE.

Budimex Nieruchomości is currently being taken over by CP Developer, a company owned by large Czech investor Crestyl Real Estate and Polish investment management company Cornerstone Partners. According to Cornerstone Partners, this takeover is just the first step in the creation of a major new market player, which is to operate both in the sales and rental markets for residential properties. “Taking over a developer is not that much different from taking over a company from any other branch. If a buyer finds out that such a company is for sale – which for example was the case when Budimex made a public declaration about Budimex Nieruchomości – then it’s easy. To put this very simply, it’s just a question of making a valuation and putting in an offer. A less common way and requiring more finesse would be to seek out a company and put in a takeover bid. Such a takeover can also be done through the capital markets. So far this hasn’t happened in Poland, but you can’t rule out that soon we’re going to see the first takeover like this,” suggests Marcin Jański.

And indeed, it is the growth of the Polish rental sector that has proven to be the catalyst for a fair number of takeovers. International investment companies and funds are looking these days for portfolios of apartments to rent out. There is little available product on the market, so one way to build up your own portfolio is to take over a development firm. There are many examples of this in Poland, one being the takeover of Vantage Development by TAG Immobilien at the beginning of 2020. For Vantage, the entrance of a powerful investor (in Germany, TAG Immobilien has a portfolio of 84,000 rental apartments) naturally entailed huge changes. “During the pandemic, when most companies have had to cope with a reduction in staff numbers, we actually recruited another 50 people for our team. We established a new department to serve tenants and manage rental properties. In the end, we decided to expand beyond Wrocław. We secured and purchased properties in Poznań and Łódź, while at the same time building up our local teams in those cities to oversee the development of the projects,” explains Dariusz Pawlukowicz, a member of the management board of Vantage Development.

As a result, the company has to a large extent changed its business line. “Since the end of April, in Wrocław we have been offering our clients rental apartments under the Vantage Rent brand. We haven’t stopped selling apartments, but we have significantly reduced the new supply of these in order to build up our rental portfolio,” reveals Dariusz Pawlukowicz. And that’s just the beginning of the company’s changes, since its new owner has set it even more ambitious targets. By 2025, Vantage intends to build 11,000 rental apartments in several different cities across Poland. “In this year alone, we are planning to start construction work on projects with 1,800 rental apartments for Vantage Rent. We are continuously looking for new plots – and not only in Wrocław, Poznań and Łódź,” Dariusz Pawlukowicz informs us.

With the support of foreign investment, Vantage has managed to acquire land for around 7,000 apartments. “In just over a year, we have managed to create a new product from scratch, we’ve built up our team and started our expansion into other local markets. We certainly wouldn’t have been able to do this without the financial support and trust of TAG Immobilien,” points out Dariusz Pawlukowicz.

For Polnord too, an injection of foreign funds has proven to be very important. In 2021, Hungarian developer Cordia bought all the company’s shares. “Above all this has allowed Polnord to pay off its debts, which wouldn’t have been possible without the fresh capital from Cordia. Altogether, the cost of buying all the shares and paying off the debt in 2020 came to almost PLN 120 mln,” says Michał Melaniuk, the managing director for residential investment at Cordia Polska and the chairman of the board of Polnord. When Cordia became the majority shareholder, Polnord received occupancy permits for a number of its projects and began apartment sales for the fifth stage of its Stacja Kazimierz estate in Warsaw’s Wola district. The company has also been disposing of the land it will not be using while preparing the sites that it needs. “In the near future, the main goal we have set for ourselves at Cordia and Polnord is to further restructure the business and to integrate the operations of the group. The result of this should be rapid expansion. I can already say that at Polnord we are working on projects for our key sites. Among others we are planning the development of Miasteczko Wilanów 2,” reveals Michał Melaniuk.

“A key advantage of a takeover is that you can acquire a land bank, which if you were to grow organically could take years,” points out Marcin Jański of CBRE, who goes on to elaborate: “These days there are no attractive sites in Poland. Most of those that are available are in bad locations not covered by a spatial plan with all the legal complications that this entails. Purchasing land is also complicated by administrative procedures, which sometimes cannot be navigated by foreign investors.” In that case, what kind of company is in demand? “Definitely, those that have suitable land banks, but they also need to have the organisational structures that will allow them to acquire more sites and develop them. It’s important that such companies have strong local connections, so that not only are they familiar with local procedures but also with their potential customers, including their habits, preferences and ways of thinking. The residential market, unlike other commercial real estate sectors, is locally-based and this feature is very important for companies that want to increase their geographical range – and acquisitions are therefore the easiest way to expand. A few developers that have wanted to expand beyond their home town ran into problems with organic development, so the next time they entered a new city they chose instead to do it through acquisitions,” explains Marcin Jański.

The market matures

Most experts are in little doubt that the market will continue to consolidate over the next few years. “We are going see many more exits from the business and more consolidations, which is healthy for the market – because that’s generally what has happened in other sectors and segments of the commercial real estate business. The market is maturing. It was very fragmented, but now it will become much more consolidated with fewer but bigger players, as this is a natural step in the development of any market,” insists Nicklas Lindberg.

But is the wave of consolidation set to continue in Poland, and what impact would this have on the structure of the residential market, in both larger and smaller cities? “We are certain to see further consolidation on the residential market – and this is a trend that will continue, because the land assets that could be acquired quickly are going to disappear. The sites available are so big that they require large financial resources to purchase. We can also expect smaller companies to join together to become bigger, which will also allow large land banks to be created. Is there a chance that this trend will spread to smaller markets? It’s hard to say, but I don’t think it will become common practice soon. Everything depends on how developed a specific city is, what its prospects are and, as a result, how attractive a place it is for big capital to invest in. The biggest players manage large portfolios of apartments for rent, for which there has to be the right level of demand. And such demand is difficult to generate in a city with a population of 100,000,” concludes Marcin Jański of CBRE.