Letting the LEX do the legwork

Tomasz Cudowski, Eurobuild CEE: Let’s start with a hot topic – that Warsaw land transaction at the end of December when a plot next to Imielin metro station was sold at auction for an astronomical sum. Do you regret that it wasn’t Yareal that bought it?

Jacek Zengteler, chairman of the board of Yareal Polska: We attended the auction and, of course, I regret that we were unable to buy the plot, because it is well located and covered by a spatial land plan for the construction of residential buildings. Plots with such zoning and with good addresses are a rare occurrence these days, However, we stopped trying to raise the bid at the right moment, because eventually it reached a level that seriously raises concerns about the future success of the project. A few back of the envelope calculations show that the cost of one sqm of useable space in this project will come to PLN 9,000 for just the purchase of the land – and that’s before the construction, which will include such aspects as the costs of the materials and the general contractor, and that’s before we get to any possible margins. This is just the latest land transaction that shows how limited the supply of plots for residential development is in Warsaw. Meanwhile, the growth in home prices has remained a hot topic, not only for the industry media but for almost everyone who is looking for, owns or leases an apartment. There’s little doubt that without an increase in the supply of land, and with such soaring demand from those looking to buy apartments, it’s hard to expect prices to hold steady, let alone for them to fall. Over the short to the medium term, the solution to this problem is to take advantage of the Specustawa residential law, or what’s known as Lex Developer, which allows homes to be built on land without the proper zoning. It’s a pity that this option is on the way out and will cease to be available by 2025, although the hope is that its role will be replaced by Integrated Investment Plans (ZPIs).

Yareal is one developer that has been able to use the Specustawa – at the end of last year you launched the Mokopolis project in Warsaw’s Mokotów district, which if I’m right is your third such project in Warsaw – so you can still talk about pioneering developments. What was the biggest challenge with this project?

The hardest thing for a pioneer to do is to keep blazing new trails – and in this case it was going through the entire ULIM procedure with all the interested parties and especially with the city. The preparation work took over two years, because for much of this we had to make things up as we went along, such as agreeing on an education levy for the local district and then formalising it and preparing the proper documentation. The agreement includes the building of new schools and kindergartens; but in this location, due to the size of the project, the standard solutions set out in the act – such as handing over a property for educational purposes – simply didn’t make sense. The city itself was also not very interested in a new mini-learning0 facility, which would have limited use educationally and would have been a burden on the city budget. After wide-ranging consultations, it turned out that it was worthwhile rebuilding and modernising an existing school on ul. Gruszczyńskiego. In the end we decided to carry out our own project, financially and physically. It’s worth noting that the project was for the school to be extended in a modular manner to match growing needs and finances. In line with the zoning plan, an underground car park can be built there with a playing court and a new wing to the school building, while the existing building is to undergo a complete refurbishment.

Is what I’ve heard true, that are other investors are looking to invest in this school?

I’ve heard something like this, but nothing official, so I can’t reveal anything specific. But certainly, other investors in the district now have a trail to follow. It’s worth mentioning that Lex Developer under certain conditions (as was the intention of the lawmakers) was a very useful tool, but one that nonetheless became too politicised. That’s why some local authorities made projects based on the Specustawa much harder or simply blocked them. Fortunately, that rarely happens in Warsaw. All interested parties are slowly coming round to the view that Lex Developer is a good way of squaring the interests of the local authorities with investors and residents – and the fact that there are now more of these projects on larger scale that need less time to prepare is proof of this.

When it comes to the residential section of Mokopolis – didn’t you have to reduce its size from how it was in the original plans?

Yes, that’s right. Our residential project was not particularly bold or controversial. However, despite this, when we were agreeing the details with the local architectural department, we had to reduce its size slightly. But the open character of the project and its lack of barriers, which is rather unusual in this part of Mokotów, has been very much appreciated. Our biggest neighbour is an estate built over a decade ago, when fenced estates was the standard – but this makes getting around the area more difficult. You have to walk around the entire block just to get to the bus stop. I hope we are setting a good example to the community, and that local residents will appreciate the benefits of open space and (just like us) will open up their space to their neighbours to make life easier for everyone. We have now started the sales process for Mokopolis and are currently selecting a general contractor. And there’s been a lot of interest from potential buyers.

So, you believe in the investment potential of this sub-district, which in the past earned the nickname Mordor due to the density of its office development?

I’ve only ever been interested in the Mordor in Tolkien’s books (laughs). But as for Służewiec, which some people still call Mordor, we can see the investment potential – especially for housing. Certain service buildings in this part of Mokotów have been going through a difficult period, although good projects are still coping well. Nonetheless, older, less profitable buildings are becoming vacant. In such cases there are opportunities to redefine these existing assets, including by changing their usage. We are currently looking into the possibility of doing this with a few of the office buildings.

Are you talking about knocking them down or converting them into apartment buildings?

I don’t want to get into the details, but turning offices into apartments is a very difficult task due to the different geometry and challenging technical conditions, which results in such problems as insufficient room height and access to light. But, on the other hand, across the world you can find superb examples of this kind of project, and we shall be seeing the first of these in Poland soon. To a certain extent, PRS could be the way to go for converting commercial buildings into apartments – but even this entails a host of conditions, because if you can’t build apartments to own, the question arises of how to overcome the technical issues for apartments for rent. Not every poorly leased commercial building can be repurposed. But still, raising the standard and modernising such buildings has become a growing trend.

On the subject of PRS – are you not tempted to enter this market?

We’ve been looking at this sector very carefully, but we still feel most comfortable selling apartments. PRS is a totally different business. The buildings are constructed to a different standard and their management is different. The current situation on the financial market has provided additional challenges for developers who build apartments for rent but whose strategy does not include creating a large portfolio.

So what is financing the construction of apartments for sale currently like?

For this sector, at Yareal we don’t rely on the support of banks, but on our own equity, and – if possible and justified – we can partially use our clients’ payments through their escrow accounts. I can, however, boast that by the end of last year we were able to refinance the costs of buying a project for our land bank. Such financial products are quite rare on this market, which is why we are all the more pleased to have been able to free up funds for the future development of projects. When it comes to the commercial sector, then the situation is completely different. The financing costs remain high and banks are still being very careful when it comes to financing projects. These high financing costs have been one of the factors behind the yield growth that we saw in the last quarter. So we are now also seeing companies reversing their strategies. Commercial developers with a strong financial position are tending to focus more on asset management than on the cyclical sales of commercialised projects.

Is Yareal following this trend when it comes to the Lixa office complex in Warsaw?

To a certain extent, yes. Firstly, we’ve had no problems obtaining financing and refinancing for the later stages of the complex, which amounts to around EUR 120 mln. This is the best kind of confirmation of the actual value of our office buildings. Lixa C is almost 100 pct commercialised, it operates well and generates healthy revenue. The final D and E stages are to be handed over for use this year and will mark the end of the development of the entire complex. The leasing of both buildings is going very well. We intend to hold all three buildings in our portfolio and to use the leasing revenues to regularly strengthen our balance sheet. Of course, we haven’t ruled any scenarios out, but we are not currently planning to sell the new Lixa office buildings.

Let’s get back to apartments. How has the residential market changed over the last few years when it comes to the relationships between developers?

It’s clearly much better. Just a few years ago there was a fierce war over clients and the competition was harsh, but now we’re seeing more openness to cooperation. The Polish Association of Developers (PFZD) has played a huge role in this through its integration of the sector. Such cooperation has a great deal of value, particularly when it comes to exchanging knowledge or for projects that neighbour each other. One example is in Warsaw’s Bemowo district, where Yareal is helping to develop an infrastructure project together with another developer that is active in its Chrzanów sub-district. We have signed a consortium agreement with the city and as a result we are going to build a substantial part of ul. Nowoczłuchowska together with its technical infrastructure to serve the residential estates that have already been built there or are under construction as well as a new school and commercial buildings.

Home prices are still rising as the demand continues to grow, but new developers are not emerging on this market. Can quick money not be made anymore?

It was never quick money, even though many market commentators are still under the illusion that it was. I will admit that just a few years ago the development business was far less challenging and risky. It used to be the case that every company that had a plot of land and a little money could be a developer and – as long as it didn’t make any serious blunders – it could develop a project and was guaranteed to achieve a margin, which could be small or large. Now I can see a lot of owners of sites who, despite the boom, are not taking any rash decisions to enter the residential development market, since it is much more demanding than it used to be. Such companies, instead of entering the market by themselves, are often considering partnerships with professional players. Joint ventures and partnership projects work well in other countries and are certainly going to be seen more frequently in Poland. New players are still popping up all the time, but it’s definitely not like it was a few years ago.

But if you were to start out again in Warsaw, where would it be exactly?

That depends on the portfolio. In theory, it is wherever we can acquire land with the right conditions and at the right price. The Rondo Daszyńskiego roundabout will, in my opinion, remain the best location for office and apartment projects for many years to come – but there are no free plots left in that neighbourhood. Along with other obvious parts of the city centre, I really do believe in Służewiec, Bemowo and Praga districts.

Hasn’t the general evolution of the office market towards smaller flexible space put investment plans at risk?

Offices are obviously now being used in new ways and this has transformed the market. We are seeing fewer large leases, because even the largest corporations have in part or whole accepted the hybrid work model. Now up to 50 pct of office space is being used differently to traditional workstations. Common space for socialising and resting is more important, which attracts new employees. This in turn makes the interior design more important. Tenants used to be able to negotiate a fitout contribution in the contract worth a few hundred euros and this was their only cost for arranging the office. But now the trend is for an additional payment from the tenant greater than the landlord’s contribution. However, this kind of investment is commonly made to raise the company’s attractiveness to employees as much as possible and thus build up its long-term value. Modern, user-friendly offices allow companies to compete for the best employees. You can also see growing pressure on tenants to go green – any project that does not incorporate sustainable development principles, including energy efficiency, doesn’t stand a chance of securing serious tenants – despite the current supply gap.

Yareal’s office buildings are powered exclusively by green energy. But how do you recharge your personal batteries?

This might sound paradoxical, but I feel better at lower temperatures. In fact, the colder the better. When I have a little free time, I like to go splitboarding. I go jogging every day, but I spend most of my free time with my family and friends – especially when I have the chance to cook for them.

Economics under control

Jacek Zengteler has been working in the development sector since 2002. He spent a great part of his career at Dom Development, where he held the positions of vice-president of development, real estate director and client director. He was also the legal representative of the company. He joined Yareal Polska in 2016 as the general director, and in February 2023 became the chairman of the board. At the same time, he was made a member of the board of Yareal Polska Holding. Jacek graduated in economics and received an MBA from the Warsaw School of Economics and the Carlson School of Management at the University of Minnesota. He has completed several postgraduate courses, including at the Ican Institute as well as the London School of Economics and Political Science. Since 2019, he has been a member of the management board of the Polish Association of Developers in Warsaw, and sat on its national management board from September 2021 to May 2023.