How the land lies

Over the past year, a number of quite significant changes on the land investment market have taken place. According to Daniel Puchalski, the managing partner and co-founder of real estate investment advisory Immo Lab, last year began with a wave of optimism and enthusiasm. However: “The outbreak of the war in Ukraine cooled the investment frenzy and investors returned to the plans they had before it started. Most of these plans have been changed and a large number of businesses have held back from further investment or limited their activities when it came to new purchases or launching construction projects,” he points out.

These sentiments are echoed by Damian Woźniak, the land development director at Ghelamco Poland: “The war in Ukraine introduced an element of uncertainty to the market, but this in itself didn’t have a direct impact on the price of land. However, the current economic situation is definitely having an effect, through the slowdown in Poland’s economic growth, high inflation and the rising cost of financing debt. Land still remains the safest asset for investing capital in. Sites in top locations have not lost their value. Meanwhile, the price of debt is rising and the reduction of investor activity has resulted in a drop in demand for land, the maintenance of which has become a heavy burden on investors’ portfolios. This has resulted in opportunities for bargain purchases and owners are more ready to negotiate. Locations that are not so good and are not prepared for immediate investment are going to see prices flatten out or even a small correction. What is going to have a large effect on land prices is the readiness of banks to finance new projects,” he explains.

Has the demand for land slackened due to the faltering economy? Konrad Płochocki, the vice-president of the Polish Association of Developers (PZFD), believes that it has. “According to a survey conducted by the PZFD in December 2022, 100 pct of the developers that responded plan to limit their developments in 2023. Under such conditions, the demand for land should fall within the next year,” he predicts.

But despite the turbulence caused by the war in Ukraine and the state of the global economy, according to Daniel Puchalski of Immo Lab land transactions still appear to be reasonably healthy. “We’ve seen more investment land purchases for all purposes as well as purchases of completed and leased office, warehouse and retail developments. However, this latter category has been targeted by investors interested in repurposing, often through new investment on a larger scale for another purpose, such as mixed-use development,” explains.

Panattoni is also feeling fairly calm about the changes that have taken place on the land market. “The largest price rises are definitely behind us,” declares Michał Samborski, the head of development at Panattoni, who goes on to add that: “Top quality land ready for investment and appropriately prepared is holding its value at a similar level; so in context of double-digit inflation, we can even say that it is falling in value. We are still seeing price rises for private land, which is basically cheaper due to the necessity to prepare it for industrial usage. Owners often treat it as a safeguard against inflation, which is why prices are rising together with the current inflation rate, but normally by not as much, so in effect land is also becoming cheaper.”

A time of change

At the beginning of last year, issues such as inflation and bank financing were a major headache for many developers, according to Daniel Puchalski of Immo Lab. “There were mass changes in strategy; sometimes these were forced and sometimes they were preventative. The shareholders of many companies put their shares up for sale or part of their land banks, but in many cases the prices were too high and did not suit the current situation. As is widely known, the spring is often a time when stocks mature – and so the large majority of these companies tried to save themselves by selling their land, which often came with building permits, but this would in turn often require a new project and a new building permit. With the closure of building sites and apartments being withdrawn from sale, investment companies in both the office and apartment markets turned to PRS in an attempt to save jobs, and this resulted in an avalanche of offers directed at funds from this sector. Most of the plots and developments were unattractive due to the unsuitable apartment sizes, large car parking areas, poor ESG standards and inadequate communal service areas,” admits Daniel Puchalski. However, he then goes on to point out that these were not the only opportunities available to such funds: “Funds don’t have to only buy apartments. They can also offer rental services as hotels and student lodgings in the service buildings they own. Many of these companies have plots in good locations in large cities. This means that some can sell land that is intended for offices to companies that are building for funds or to the funds themselves, and in some cases the developers themselves decide to build rental apartments together with the funds or by themselves so that they can sell them later in a future package deal.”

No blood spilled yet

Immo Lab has witnessed some significant changes in strategies over the past few months. “Over a period of a few weeks, we surveyed 60–80 developers about their investment plans, the markets they operate in, their budgets and their strategies for 2022 and 2023. Over the last few months, the trends have changed greatly. The transaction market went from a standstill to a purchasing euphoria and then to carefully considered statements and differing market opinions in November and December. From this one group of companies what stands out is that they foresee a lot of problems and a looming market crisis, but this group mostly comprises firms that are already in a difficult position or will start to be in one from the middle of 2023 as a result of borrowed money or maturing stocks as sales come to a standstill. Meanwhile, operating expenses are not falling but are rather on the way up. Both investors and foreign investment funds are also among this group and they feel that there will be a crisis on the real estate market, while at the same time they are saying that they are ‘waiting for blood to be spilled’ before buying up land at discounted prices. At the same time, a large number of buyers for cash has been active and remain so, constituting around 30 pct of the market – and these are actively making purchases, often in central locations or those that suit the PRS sector and partly in other city areas for a small discount. There is also another group of investors, around 40 pct of the total, who are in a good financial condition and are holding back on selling in the belief that they should be able to return to this in April or May. They feel that prices will fall for land intended as investment, logistics or office products, but they are not predicting a market crisis,” reveals Daniel Puchalski.

Overall, Immo Lab regards 2022 as having been a very good year for the land market. “We have seen over PLN 2 bln in land transactions, excluding land sold together with investment products in transfer sales. Our estimate for this is that a figure of over PLN 1 bln will be paid upon the completion of the construction work. This is definitely an underestimate, because we don’t know about all the transactions on the market, since such information is often incomplete. We have also not taken into account package portfolio sales and shareholding deals by developers, including the share purchases in warehouse and residential developers that took place, nor the land sales worth a few hundred million złoty in Warsaw scheduled for January 2023, since there’s no guarantee that this will be signed off on. Looking only at Immo Lab’s transaction portfolio worth a few hundred million złoty, in which we advised on the sale of land for warehouses, PRS, apartments and mixed-use projects, it’s clear that the market has been active in all sectors, including the commercial ones. November and December was also a busy period for us, when we closed a number of deals with a combined value of around PLN 150 mln. Importantly, none of these transactions was discounted due to inflation or the war,” recounts Daniel Puchalski.

Legal changes

He also points out that the Polish government’s new Lex Deweloper act is now providing some support for the market. “Initially, this tool was seen only as a political move and so it was met with some scepticism by local authorities. However, with the first approvals for new projects, an extensive educational campaign and the exchange of information between businesses and local authorities, it is now bearing fruit. The amendment should allow new apartments to be built in old office buildings and malls. Of course, just like any other bill, it entails a number of controversies and risks. But it’s better that there is such an act than if it didn’t exist at all – contrary to the opinions of some market players.”

Overall, Daniel Puchalski remains rather confident. “To summarise the situation, the transactional land market in Poland actually fared very well in 2022. We saw new capital, while the old capital continued with its purchasing plans, The fall in transactions after the outbreak of the war was eased by the PRS and warehousing sectors, while the high number of purchases was due to e-commerce and the SBU format, which represented a natural continuation of the trends of 2021,” he says.

Damian Woźniak of Ghelamco, however, is a little more circumspect in his assessment of the year. “Over the past year, the land market has changed significantly. Many development projects have been cancelled or delayed. Many sales offers have been reviewed and some plots have even been overpriced. Due to the lack of access to finance, we are seeing a tendency for investors to limit their risk, which is also going to have an impact on the land market,” he admits.

Michał Samborski of Panattoni also sounds a cautious note as he reflects on the passing year: “The number of new transactions and developments has been significantly smaller, which obviously results in limiting the demand for land. This all stems from the uncertain situation and the disruption to investment. Investor appetite has been reduced by the recent pricing and access to financing as well as by Poland’s geopolitical situation, given that it borders onto the ongoing conflict to the east. At Panattoni, we have had a very active year. In the first three quarters we bought over 500 ha of land, which is more than in the whole of 2020. The demand for industrial land is being largely driven by the logistics sector, which continues to look to the future with optimism. In Panattoni and CBRE’s latest ‘Confidence Index’ report, 84 pct of logistics companies expect either growth or stability next year while 68 pct want to hire new staff,” he explains.

Not so bad after all

Nevertheless, the land market clearly seems to have entered a period of greater stability. “Residential land prices are holding firm and will probably remain at the current level except for construction land for credit clients. We have seen a price fall of 20–40 pct compared to the prices asked for and offered at the beginning of last year or even since the summer of 2022. Land prices for rental apartments are not falling, but they are also not rising due to how sensitive the financing model is for such investments. Additional figures for PRS are in line with the same figures for the office market, so land that serves both sectors behaves in a similar manner. In addition to this, all the locations that are of interest to PRS and office developers will have a chance to transact at the current prices, while the rest will have to wait for better times or to be sold at a high discount – of even up to 40–50 pct. The warehouse sector is showing many similarities to the services sector and the best locations are maintaining their pricing. However, there is no chance of prices rising while all remaining locations are seeing major price reductions,” explains Daniel Puchalski of Immo Lab.

Konrad Płochocki of the Polish Association of Developers was probably the gloomiest of those interviewed for this article. In his opinion: “The cost of capital and alternative investments such as bonds has diminished the attractiveness of real estate markets. The money is still there, but at a very high cost. This means that we should expect a reduced number of transactions and developments to be launched in 2023 in every segment. Therefore, land prices should fall in 2023, despite the high inflation. Sellers are ready to negotiate on prices and 2023 may be a very good year for those who want to buy land.”

Indeed, Michał Samborski of Panattoni, as a buyer, sees no major problems: “The market has undoubtedly changed a great deal. Rising interest rates, inflation, the economic slowdown and the rapid rise in energy prices have meant that the market has had to become accustomed to continual change. You could say that in the light of all of these changes the industrial real estate market has found itself in a privileged position. The continued high demand for new buildings allows developers to pass on these costs to the tenant,” he claims.

When it comes to the office market, Damian Woźniak of Ghelamco remains unperturbed. “The need for high-quality product will always continue. The supply of land in attractive locations is stable and under no risk; however, the speculative element has gone. Land that has been well prepared for investment will now take a greater share of all transactions,” he concludes.