A degree of stabilityFeature
As the economic outlook remains uncertain and with war still raging across our border, this year the Polish real estate investment market, which has yet to fully recover from the pandemic and adjust to the new realities it brought with it, is still very much trying to find its feet. Inflation and interest rates are still high, making financing more expensive and less available – and this has naturally been having a knock-on effect on transaction volumes. Other factors are also having an influence, such as the disparity in pricing expectations.
In the opinion of Tomasz Tondera, a partner at EY for real estate and mergers and acquisitions, “I believe the current situation on the Polish and CEE investment markets can be best described as a wait-and-see approach. What we observed in H1 2023 was a slowing down in investors’ activity and decreasing volumes. We can make a clear link between the market slowdown and the increased interest rates and uncertainty. The higher costs of borrowing have had a huge impact on valuations and led to discrepancies in price expectations between sellers and buyers. As the drop in investment volumes has taken its toll across all sectors in all CEE countries, it is difficult to pick out any winners. In my opinion, the situation is not likely to improve unless this pricing gap narrows down.”
According to Michał Ćwikliński, the principal and managing director for Poland at Avison Young, these pricing discrepancies are mainly due to purchasers looking for discounts on properties. “They are not ready to accept the prices they used to pay in 2021 or 2022. Also, the institutions are significantly less active and it is only private capital that is gaining momentum. We can also see smaller lot sizes being traded as well as more Polish capital in the market looking for good opportunities,” he says.
Weronika Guerquin-Koryzma, a partner of Baker McKenzie in Warsaw, notes that the restricted access to financing has led to a further decrease in the number of transactions this year, “including in the logistics real estate market, which in recent years has seemed to be immune to any turmoil. Many transactions that started many months ago have not been completed. Transactions that seemed certain have been suspended due to a lack of financing.”
Pump up the volume (please!)
So, given the current wariness of institutions and the approach of investors, what kind of volumes are we heading for in 2023? According to Avison Young’s figures, the real estate investment volumes in Poland in 2021 and 2022 were very similar, each ending the year at EUR 6 bln. But it is likely to be a very different story this year, as the H1 2023 volumes have been around 72 pct lower than the same period last year. This has also brought down Poland’s share of the CEE volumes, in which it usually accounts for 50 pct of the total. “We estimate that the whole of 2023 will be significantly quieter than the previous two years and the year-end volume will come to app. EUR 2–2.5 bln. This is mainly due to the lack of large portfolio transactions in all sectors,” explains Michał Ćwikliński. However, the consultancy has also seen evidence that the activity in the market has picked up after the summer and forecasts that the property investment volume in 2024 will significantly increase.
And when there is uncertainty over the economy and pricing, yields tend to go up. While not all the data is yet in, EY estimates that the prime yield for office projects is in the range of 5.25–5.75 pct in Warsaw and 6.5–7.5 pct in Polish regional cities, while for shopping centres the prime yield could vary between 5.25 and 5.75 pct in Warsaw and 6 to 7 pct in regional cities. Prime yields for industrial projects in Warsaw are estimated by EY at 5 to 6 pct and 6 to 7.5 pct in regional markets, depending on the WAULT and tenant mix. “I would expect that the yields for offices may still increase next year as the market sentiment to this asset class is still rather sceptical. Yields for other asset classes should stabilise as the monetary policy easement is expected to materialise,” comments Tomasz Tondera. Michał Ćwikliński of Avison Young, agrees: “Yields have gone up and it looks like they are now stabilising. The sellers need to get used to the new pricing and the buyers need to sharpen their pencils a bit to get the deals done and convince the sellers to accept their offers. It is the pricing mismatch that has actually caused less activity in the market and a lower investment volume than in previous years.”
Who’s buying and selling?
The profile of real estate investors has also been shaken up somewhat by the current situation. Rather than the US, German and other Western funds that have previously dominated, there has been a noticeable shift to domestic investors from around the CEE region. According to Mateusz Cieślak, a counsel at Baker McKenzie, traditional investors who have so far been present on the Polish market have either significantly reduced their activity in Poland or even stopped it completely. “This highlights the general trend on the investment property market, not only in Poland but throughout Europe, which has been experiencing a slowdown for months. Some investors, especially those from outside Europe, have also identified additional risks related to the war in Ukraine. Those from the CEE region and the Baltic countries, being right next door, have a different assessment of this risk. Among other things, that is why Czech, Slovak and Hungarian capital has been the most active over recent months. We can also see increased activity from Lithuanian and Latvian funds,” he says. Michał Ćwikliński of Avison Young paints much the same picture: “The most active investors these days would be those from the CEE region, with Czech and Hungarian investors being most active; but we are also seeing capital from the Baltic states as well as from Poland, and there are some Ukrainian investors on the market, too. The main reason is that these investors are looking for diversification and the markets in their own countries are relatively shallow, hence they are turning their faces to Poland – a relatively large, fairly mature market with reasonable pricing in comparison to Western Europe.”
The largest transaction for Polish real estate registered in H1 2023 was the acquisition of the 185,000 sqm Campus 39 warehousing project in Wrocław by Czech industrial landlord P3 from Panattoni for app. EUR 139 mln. And while in general logistics and industrial has continued to do relatively well compared to other market segments, it is not as hot as it used to be. And relatively well means a 40 pct drop in volume y-o-y compared to the 72 pct decrease in the total market volume. Michał Ćwikliński reveals that: “Whilst this is nothing official, there are one or two portfolios that are being strongly considered by investors or they have actually entered due diligence. It is, however more likely those deals will close in 2024 than by the end of this year.” The biggest office deal so far this year in Poland was the sale of Wola Retro in Warsaw, which houses the offices of ‘Eurobuild CEE’, by Develia (represented by Avison Young) to Budapest-based Adventum Group for EUR 70 mln. Develia was also the purchaser in another transaction worth mentioning, but this time it was not an asset acquisition, but a deal for an entire platform. The company bought out the Polish subsidiary of French residential developer Nexity for EUR 100 mln. Tomasz Tondera of EY believes that this points to a wider trend: “Whereas the foreign exchange risk and high financing costs have caused a severe decrease in the number of asset transactions in the residential or wider living sector, we have observed a continuously growing interest in M&A or JVs concerning residential developers or PRS platforms. The market experience is that alignment with residential developers is the best solution for PRS platform expansion in the current macroeconomic environment.” He also mentions R4R and Echo, Life Spot and Murapol, TAG Immobilien and Robyg as well as Resi Capital and Cavatina as companies that have been involved in similar mergers and takeovers of residential and PRS platforms in recent years.
Yes to PRS
Weronika Guerquin-Koryzma of Baker McKenzie feels that the situation on the Polish PRS market should be quite interesting to investors, due to the supply gap, demographic changes and, surprisingly, the introduction of the government’s 2 pct mortgage loan programme. “At this point, it is difficult to predict what the final effects on the market of the programme will be,” she says. “It has certainly influenced the increase in apartment prices and increased demand. This is unlikely to translate into a weakening of the still growing apartments for rent market. The supply gap is too high; besides, the approach of the younger people – those that the 2 pct loan scheme is addressed to – to owning their own home has been changing. The uncertainty of the situation, the need and desire for mobility, the reluctance to incur long-term financial commitments, and for many not meeting the conditions of the programme, will be the factors accelerating the development of the PRS market sector.” As she points out, the PRS market in a broader sense, which includes not only apartments for rent but also dormitories and senior homes, will enjoy the greatest interest of residential investors.
Another sector whose performance this year should be of interest to investors is that of hotels. “There is also more and more talk about the improving condition of the hotel sector, which has been dynamically making up for its post-Covid losses and this may result in a return of hotel transactions in the near future, but it should be noted that institutional investors in this segment will only be interested in hotels that they can become the sole owners of, rather than those financed under the condo system,” argues Mateusz Cieślak of Baker McKenzie. He has also recently observed a growing interest in the Polish construction market by entities from outside Europe: “By entering Poland or increasing their share in our market they are preparing the foundations for entering the Ukrainian market and participating in the reconstruction of Ukraine as soon as this becomes possible. Such entities are looking for opportunities to purchase or establish cooperation with construction companies and manufacturers of building materials present on the Polish market,” he explains.
Reasons to be cheerful
What are the prospects for the Polish real estate investment market next year? Will it still be in the same doldrums as in H1 2023, or has it turned the corner? While nothing can be certain in the present environment, the tone of those interviewed for this article, including Tomasz Tondera of EY, seemed slightly more cheerful. “There is a lot happening politically and geopolitically around Poland. The upcoming elections have triggered a politicians’ commitments festival, which will make combating inflation even harder. Nevertheless, we can expect interest rates to be lowered. On the other hand, Poland could benefit from its geopolitical position as it is considered as Europe’s number one nearshoring destination. We have been observing increasing interest in advisory on production relocation or supply chain remodelling. This should trigger higher demand in the industrial sector with other asset classes set to follow,” predicts Tomasz Tondera. Avison Young’s Michał Ćwikliński appears to have been feeling the same positive vibes: “We are now seeing the activity picking up after the summer. Hence the prospects for 2024 are cautiously optimistic. There is more happening, interest rates are set to stabilise and so will the entire market. And stability is the key driver for investment.”