Rent rises take to the driving seat

Small talk
Karol Skiba, the investment director of stock brokerage CVI, gives us his perspective on the health of the investment market for logistics assets post-pandemic – and how the war in Ukraine might have both negative and positive consequences for it.

Logistics assets as an investment product actually grew in value during the pandemic. According to JLL, the investment volume for the warehouse market came to EUR 2.8 bln. Are we going to be seeing more records being broken in the years ahead? Is there still a chance of this happening despite Russia’s invasion of Ukraine?

Karol Skiba, the investment director of stock brokerage CVI: Logistics purchases accounted for around 10–12 pct of the total volume between the financial crisis in 2008 and 2016. In 2020 and 2021, they accounted for over 20 pct in Poland and over the last two years around 50 pct of the volume has been in the logistics sector. This just goes to show how big the appetite is from foreign investors. Before the 2008 crisis, warehouses were seen mainly as assets that supported the main investment products of offices and retail centres, but now they have become part of the mainstream. One of the factors that has contributed to the additional demand for real estate, such as warehouse space, has been the low interest rates. Up until now, the main factor driving the rise in the value of warehouses in Poland has been the yield compression. In the future, rental rates are expected to take on the role of the generator of further growth, and all the more so when in Poland they are comparatively lower than across the CEE region. It’s worth pointing out that there’s a lot of capital on the market held by real estate funds for investment. And it’s growing. More and more capital is looking for its place on the real estate market. Other asset classes, such as large format retail centres, were hurt by the pandemic and as a result lost the interest of investors. Rental revenue security is an important part of a real estate purchasing strategy. The demand for warehouse space is growing and last year gross demand came in at around 30 pct of the total warehouse stock. At a time of inflation, regardless of whether rents are indexed to the rising price of goods and services, increasing demand leads investors to expect not only leasing levels to go up but also rents to rise rapidly, which also applies to lease renewals. As for the consequences of the invasion of Ukraine, it has generated a real fear that transactions will be suspended or cancelled. Capital can find safer markets than those right next to a war zone (but this only concerns the financing of projects). On the other hand, we can hope that when the situation calms down, current trends, such as nearshoring, will become even more important.

What is going to be the most profitable side of the logistics sector and how is the situation changing for developers and investors?

Above all, developers make money from the difference between the capitalisation levels for sales and those for construction, or in other words, the difference between the investment and the development yield when rents have relatively little meaning if the sale takes place soon after construction. Over the last few years, construction costs have been under a lot of pressure and that has reduced the profits from project development, while the neutralising buffer was the fall in capitalisation from sales – and now it’s difficult to expect any further reductions in this. The biggest determining factor for returns from the point of view of anyone investing their capital in a completed building, is more likely going to be the rise in rents from the moment of the purchase to the time of the sale. Tenants are expected to accept this increase in rents, even though they are not going to be evenly spread. They will depend on the region, the exact location, and the class and age of the centre. We are possibly going to see a slight rise in the rates demanded, as these are subject to yields and valuations, but a much higher rise in the effective rates.

Is the demand in Poland keeping up with the supply?

These days there are limits to the demand. These include the limited access to suitable construction land and lengthening administrative procedures. We have a lot of developers in Poland and new companies are emerging, all of whom are looking to secure attractive plots. In cities, meanwhile, SBU warehouses and last-mile logistics are competing with residential developers, who can pay much more than warehouse operators. Additionally, building in new locations frequently means that facilities have to be built and roads have to be invested in. This all raises the investment costs and means you have to wait longer for the development. It is possible that the current situation to the east is going to cause problems on construction sites, since some Ukrainian citizens employed in Poland are returning to defend their country.

Can such conflicts be factored into an investment strategy?

It is actually unexpected external factors that are the biggest uncertainty in the logistics sector. Everything the market can rationally expect has already been factored into current investment decisions. Although armed conflict has been a risk for a long time, it was never considered as a base scenario. Before February 24th, geopolitics still meant that the east of Poland was perceived as less attractive as a new location for developing warehousing space.

A demanding job requires a lot of energy. Where do you get this from on an everyday basis?

If my employer gets to read this interview, the answer has to be the passion for my work. But in fact, I find relief from stress in sport. I play tennis and I do aerobics. I think this is the healthiest way to deal with a lot of everyday burdens and stress.

Interview: Magda Rachwald