Black swans and cycles

Small talk
Piotr Trzciński, the Poland, head of Savills Investment Management, gives us the investors' view of how we have coped with a year of unpleasant surprises and how things look like settling down again this year

What kind of animal do you think would symbolise the previous year for the investment market?

Piotr Trzciński, head of Poland, Savills Investment Management: It would definitely be a black swan and not just one. The outbreak of the war in Ukraine and the uncertainty this generated, of course, had the biggest impact on the market – due to the influx of refugees and the dynamics of the conflict over the border, investor scepticism towards the CEE region and Poland began to grow. Many transactions were halted in our region, previously considered to be relatively safe and predictable, in order to wait and see what would happen. On top of that, there were the huge interest rates hikes due to the soaring inflation, along with the prospect of falling valuations and signs of an approaching economic slowdown. Eventually, it turned out that the war, for the time being, was not having a direct impact on asset security, once the risks of the Ukrainian conflict were evaluated. However, the cost of financing and the inflationary rises in rental costs posed a bigger challenge – and this was one of the reasons for the price corrections. Investors are still asking themselves the question: “Why should I buy right now?” But nonetheless, confidence is slowly returning to the market. I expect liquidity to make a comeback in the second half of the year, together with an improvement in the economic, consumer sentiment and industrial indicators.

But we still have to deal with the interest rate hikes. How long are they going to last? Are you tempted to make predictions about specific sectors?

I’m cautiously estimating that this correction is only going to last at least until the middle of the year. In comparison to 2021, average yields for warehouses have already risen by 50–70 bps and by 30 bps for PRS. The recent rebound of publicly-traded REITs might suggest that the low related to the valuation of bonds on the private market is now behind us. When it comes to the costs of financing, we can expect things to stabilise in the latter part of the year, but only on condition that interest rates remain stable and there is a permanent turnaround in inflation. The market has to believe that the worst is behind us. The current situation could be favourable to investors who want to take opportunistic advantage of forced real estate sales at real prices, or it could favour equity investors over those using what is now expensive financing. Under such circumstances, it’s worth noting that between 2023 and 2027 around EUR 90 bln of debt secured by real estate reaches maturity, of which 20 pct (EUR 18 bln) is going to be hard to refinance. This is a potential gap that may be used by those offering alternative financing.

Could such a situation influence rents? And in which sectors?

That depends on the sector, the trend is not uniform. I see no reason for retail rents to rise, since this sector is particularly sensitive to rising cost pressures and the effect of online sales. According to PMA, online sales are predicted to rise by almost 15 pct in Poland over the next four years. Rents for offices could still rise in locations with low supply, but the high cost of fit-outs will result in a lengthening of the average rental period. Further rises in warehouse rents depends on continued demand and the access to supply. Only the rents in PRS assets, which have been rising since 2022, could fall, which would be due to a fall in the purchasing power of tenants and a rise in running costs. Regardless of the sector, effective management of operational costs will be at the centre of attention, and the more solutions there are that are modern, energy saving and environmentally friendly, the greater the chance of maintaining profitability.

Which market sectors are particularly attractive to your firm? And which ones are you predicting a brilliant future for this year?

In general terms, I see those sectors that meet everyday consumer needs as the most resilient to the current turbulence. In other words, those that are related to shopping and having a roof over your head. We have all got to eat and live somewhere. That’s why I’m betting on last-mile logistics, retail parks based on groceries and the apartment sector (particularly the popular and student segments) As an optimist, I’m nevertheless convinced that the whole market will return to health and the turbulence of the last few months will just be seen as part of its cycle.

When we spoke this year about your passions, you spoke enthusiastically about mountain biking. Have you been anywhere interesting on your bike, or maybe you’re planning an exciting trip?

Yes, last year I made my long-term cycling dream come true. On a trip to the Italian Alps, I cycled across the Stelvio Pass, more than 2,750m above sea level. It is the second-highest mountain pass in Europe, so it is quite exhausting. It’s hard for me to imagine how professional cyclists are able to overtake other people on that road. This year I’ve got a few ideas for my holidays and each of them include me taking my bike.

Interviewer: Tomasz Cudowski