Looking further afield

Magdalena Rachwald, ‘Eurobuild CEE’: In the first half of 2021, MLP Group saw an increase in revenues and net profits. Your equity also increased, as did the gross value of your investment properties. Is this going to be another record year for you?

Radosław T. Krochta, president of the board and managing director of MLP Group: Looking at what we have achieved in the first half and at the results for Q3, I think we can safely assume that this year is going to be record-breaking in terms of our results, leasing levels and development.

However, you have to remember that we are a developer that does not sell its assets. Our strategy is one of build & hold. We have built up a large-scale business and we are continually developing. New projects are being developed and those we already have are continually showing good results. This is a bit of a snowball effect – under such circumstances, it’s very likely that every successive half-year and quarter is going to break records. If we were a developer that sold our projects, then we would be able to talk about some kind of cycle. But this isn’t the case for us. We have a big portfolio and our results continue to grow every year – our activities are counter-cyclical, which very much improves the comfort of our operations. We are not dependent on investors buying up our shares or on their investment mood.

MLP has now adopted a strategy of investing in Germany – but in comparison to Eastern Europe, you are much less active. Why so?

It is not that we are looking only at Western countries, but if we consider the profitability of our projects, the truth is that our developments in Germany and Austria are much more profitable than in Poland. Our country is a competitive market with low rents. So it’s natural that we try to put our resources, capital and work into those markets that have higher margins, due to such factors as higher rents. Going westward was an obvious move, but we haven’t ruled out other regions.

We are present in, for example, Romania, where our MLP Bucharest West park is developing nicely. We are also looking at other interesting sites around Bucharest. We’re also analysing sites around Budapest and we haven’t ruled out entering Hungary this year. So we’re not just limited to Western countries and one direction doesn’t rule out the other. Of course, we’re looking at the bigger markets. In this regard, the Czech Republic and Slovakia are relatively small and so don’t seem so attractive to us.

We’ve been in Germany since 2015 and have already developed a few projects there, which are soon going to number in the several dozens. We have a strong position there. The market is stable and is developing well. We are also looking at neighbouring countries. Our next target is the Benelux countries and I can tell you that we will already be present there in 2022. We’re also looking at the UK. But we are also keeping a close eye on the economy – inflation, unavoidable interest rate rises and share prices. Low interest rates result in a higher flow of discounted money and higher valuations. Interest rate rises are going to hurt real estate valuations.

MLP has plans to build its Germany portfolio up to the same size as its portfolio in Poland by 2023. How is this going?

Our target is that by 2023 our portfolios in Poland and Germany will be of a similar size and I see no reason why we won’t be able to achieve this. This is one of our a strategic goals, which we are consistently working towards by building up our land bank. Our investment portfolio in Poland is still bigger, but that is going to change over the next few months.

What’s important is that most of our German projects are brownfield. You could say that this is our specialisation since we have already built up such a competency. In fact, all our projects outside Berlin are being built on former industrial sites. We can convert any brownfield site into a modern and attractive business park. We have been buying up old factory buildings from the 60s and 70s, and are currently one of the biggest if not the biggest developer in Germany that specialises in converting brownfield sites into modern and attractive-looking space.

A few of our projects under development in Germany are city/urban logistics projects – or as we call them, business parks. They are a little different from the kind of warehouse parks we’re used to in Poland. The offices are closer in the way they look and their standards to class-A office space. There’s a lot of greenery and we install solar panels on the roofs. We also add cycling facilities and, in one of our parks, we are even setting up a kindergarten. Of course, we are not waiting here in Poland for our German operations to catch up. We are completing our third park in Wrocław – quite a large one. We are buying another plot in Łódź and we’re also finalising another land purchase in Pruszków, where we want to extend our existing development and start work on MLP Pruszków VI. At the start of next year, we are going to buy more land in Poznań and, by the end of the year, we should have completed the purchase of two sites near the border with Germany.

You’ve not moved away from your build & hold strategy. What are the advantages of this?

These days the costs of financing vary at around just over 2 pct. while the returns on this type of development project are around 6–7 pct. We don’t see any point in selling our assets when they generate such a good income. We have good stable tenants with long-term contracts – the average contract length is somewhere from eight to nine years.

It would also be difficult to use the money we could free up to produce similar returns from a well-leased park. That’s why when we look at the costs of financing and compare it to the revenue from this money, there’s absolutely no justification for selling up. We can hang on to our parks forever and they would always continue to generate an income. There’s no point in getting rid of such assets, which I could go so far as to call the family jewels or the family silver and which generate such good cash flows – especially when we have almost limitless access to raising capital. Being a listed company really does help us with financing our investment programme. It makes more sense to sell property if you’re a developer that’s not listed on the stock exchange.

And are you interested in growing your portfolio through acquisitions?

We haven’t ruled this out, but only under the condition that we find a bargain. We are keeping an eye out on the market for them. This would mean quite an opportunistic investment and it would have to have a certain vacancy level for us to be able to create some added value. We are especially looking for such bargains in Germany and the Netherlands and we certainly haven’t ruled out such transactions here. But I don’t think we’ll find any such deals in Poland.

What do you now consider to be your most important flagship projects?

For me, the real pearl is our MLP Business Park Vienna. This will be an urban warehouse centre within the Greater Vienna area and so it will be very well situated. Even though it’s going to be an urban logistics centre, it will be exceptional due to its scale. It will mostly comprise small and mid-sized modules, but eventually it will have an area of 45,000 sqm. It’s a massive investment worth tens of millions of euros. We bought the former refinery site and are remediating the land before starting the construction work. But really, every project is important to us, so I don’t want to put too much store by it.

All new MLP centres are to be BREEAM certified and you have also started modernising your existing properties. Have you set a date for finishing all this modernisation work?

We decided that all our warehouses would be BREEAM certified by the end of 2023 with a minimum rating of ‘Good’, if not ‘Very Good’. We are modernising all our previously constructed buildings and bringing them up to the requirements of BREEAM-In-Use with a rating of ‘Good’. We are approaching this goal step by step. A sustainable development manager has been appointed to be responsible for the programme. In Germany, the British BREEAM system, which is also popular in Central Europe, is not used. There. all our buildings are to be DGNB certified, as this is the common standard in Germany, Austria and Switzerland. Each new warehouse development should achieve a rating of ‘Gold’, but we are also aiming for ‘Platinum’.

The amount of speculative construction projects you carry out without preliminary leasing contracts has been growing. What is the reason for this change?

Some time ago we carried out each new development on the basis of leasing contracts, but the market has been moving towards speculative construction. We are currently aiming for around 20 pct of our portfolio to be built on a speculative basis, but, of course, everything depends on the country and the specific project. This 20 pct doesn’t apply to urban warehouses, which have to be built on a 100 pct speculative basis. You can’t expect a tenant to sign a preliminary lease before construction has begun. It’s similar to leasing out an apartment: potential tenants have to check out the property before they say yes or no.

What do you think are the most important current trends in the warehouse market?

What we are seeing is more interest in urban space. At MLP we call this urban logistics and this is what we have decided to concentrate on. We aim to include more urban warehousing in our portfolio. We are already developing a few projects. For example, we have just completed the first stage of MLP Business Park in Berlin and the next completion, which I was talking about earlier, will be in Vienna. After that, there will be a centre Niederrhein in Germany. When it comes to Poland, we are developing MLP Business Park Poznań, and similar projects are also to appear in Łódź and Wrocław. And that’s what we are looking at today. Our strategy is to pay more attention to urban warehouses and small modules. Such space is, of course, needed for e-commerce, but it’s also very attractive to medium-sized businesses. With urban warehousing, the modules are smaller and of higher quality, while unlike big box warehouse centres the office space takes up 20 pct rather than just 5 pct. In fact, they are really business parks. When we look at the office facilities they are often, and probably always, the same as in a class-A office building in a city. A large proportion of medium-sized companies are moving their central offices to such centres and so they are no longer just offices that directly serve the warehousing space.

The growing importance of environmental issues is also another clear trend. Our parks have a lot of space on the roofs and so we are fitting solar panels on them. In this way we can generate green electricity and try to reduce costs. With photovoltaics, our tenants are both able to use green energy and also to have slightly lower electricity bills.

What do you think is the most important factor behind the success of a project?

I can see a growing number of similarities between Western and Eastern European markets. The most important factor in Germany is finding and preparing the right plot. Firstly, there’s a problem with the availability of sites, because there are not enough of them; and secondly, the right zoning plans aren’t in place. Thirdly, most of these sites are owned by local authorities who don’t want to sell them. The Green Party is becoming a greater presence in Germany’s federal governments and, in simple terms, this translates into a ban on selling any kind of land to businesses. We are seeing the same thing in Poland. Twenty years ago you could buy a large plot almost anywhere, but this has changed. In Poland, securing the right site is slowly becoming the key to success. This is something that is very clear to me because we are making such a big move into urban logistics and there are ever fewer city sites. Our main efforts are now being put into acquiring land and increasing the size of our land bank. The warehouse market is developing, the tenants are there – so the challenge is to find sites that are ready for a reasonable price.

What do you think will happen to the warehouse market over the long term? Are there any storm clouds on the horizon?

In our business, it’s important not only to look at the trends of any given sector, but also to follow the economic cycles. It seems to me that everyone today has forgotten about the basic laws of economics. The economy is as hot as it can be partly because – to put it in metaphorical terms – a relatively healthy patient has been given a huge shot of adrenaline in the form of subsidies to counter the pandemic. Sooner or later the economy is going to slow down and then central banks will have to lower interest rates by around 3–5 pct to bring the growth back. But right now that’s impossible because European interest rates stand at around zero.

The economy follows a cycle. First, a few investors emerge on the scene looking to invest in a certain asset class; then a lot of investors turn up wanting to buy in and the growth accelerates. During the third phase, everyone starts believing that the market can only keep on growing forever. I think right now we are in this third phase, when everyone is talking about breaking more records and that everything will be great and everything will continue to grow. I’ve been reading all these ecstatically optimistic forecasts, these assurances that e-commerce is generating more customers for itself – but when the economy stops growing people will stop buying and e-commerce won’t be able to prevent this. Such commentaries are not based on economic reality.

It’s just like with trees. At some point, they reach their maximum height and stop growing. Trees don’t keep on growing up into the stratosphere. Today we’ve got to be careful with our investments and take the interest rate risk into consideration. It’s easy to slip into a state of euphoria. Trees are never going to touch the sky, no matter how many people believe they can. We had big crises in 1990, 2001 and 2007/8. The last ten or so years have been a period of growing prosperity, but sooner or later it will come to an end. I think you’ve got to take a sensible attitude to economics and not just look at your own narrow market.

This is a big challenge for us, so we always try to be cautious when it comes to growth; we try to keep our development at a sensible level. If the economy slows down, we will continue to develop but just at a slightly slower tempo. We will try to keep our business linear. It’s important to focus on your own niche, but it’s also necessary to remember that it is just one part of a greater whole and not an island governed by its own laws that are somehow detached from the wider economy.