A slow first quarter – but better times ahead?

There are obviously several factors - generally economic and financial – behind this, but is it a cause for concern for the rest of the year, or is it rather that investors are just keeping their powder dry for more activity in the months ahead? And if so, are we already seeing signs of this?

In the opinion of Marta Gorońska-Wiercioch, a director in the capital markets department of BNP Paribas Real Estate Poland: “There was not much excitement in terms of volume of transactions in Q1 – around EUR 360 mln was transacted in Poland in an echo of the 2023 slowdown. Processes are taking a little longer, about 7 to 9 months on average, so the deals that did take place clearly started in 2023. We are aware that there are several portfolio deals in the pipeline, which if accomplished will boost this year’s volumes, but we don’t expect the overall volume for 2024 to be anything spectacular.” According to her, the main reason for this is that the cost of capital is still very high, which means that pricing hasn’t been very aggressive and the market has slowed. But she has nonetheless recently detected a few optimistic signals: “We are hearing from our colleagues in the UK, the Netherlands and France that there are the first signs of an improvement in the markets over there and of yield compression – and Poland usually plays catch-up with these markets. Interest rates are the real game changer. The markets are expecting the first decreases in June, by about 25 bp., and that should translate into more commercial real estate transactions.” Another possible factor that might be dampening investors’ appetite for the Polish real estate market is the geopolitical uncertainty, in particular the conflict in Ukraine, which is showing no signs of coming to an end. But Marta Gorońska-Wiercioch does not believe that this is a significant factor affecting investors’ decisions: “It’s more about the pricing and rates of return. In Poland investors still expect a premium compared to Western markets of about 150 bp in terms of yields,” she points out.

Adding value

Marcin Purgal, a senior director for investment at Avison Young, very much echoes her view of the situation: “The total investment volume in Q1 of EUR 364 mln was not much. But we have to wait for the year-end results. I strongly believe that the investment activity and volumes will be at a different point by the end of 2024.” But he is also aware of transactions that are in the pipeline: “We are now observing an increase in the interest from investors, more talks and underwritings taking place – and even deals that are about to finalise. Still, there is no core capital on the market, but those investors who represent the value-add or opportunistic approach and obviously developers could steer the investment volumes to new maximums,” he suggests.

One such investor is logistics specialist EQT Exeter, which is listed on the Stockholm stock exchange and is backed by American equity. It has been active in Poland for nine years, where it currently manages 1.8 mln sqm of warehousing. According to Waldemar Grabka, the senior director for investment and leasing in Poland at EQT Exeter: “The company has been a selective buyer in Poland over the last 12 months. There is very little transactional activity in the market right now. We are selectively active and a few others are, but the active investors tend to be strategic, patient, long-term capital market participants. If someone’s strategy is a quick flip, the exit risks are too high given the unpredictable interest rate market.”

Sheds still the best

When it comes to how the Q1 investment was divided up by sector, it should come as little surprise that industrial and logistics took the biggest share – EUR 138 mln and 38 pct of the total, thus reflecting its strong fundamentals and healthy take-up rate. This result was largely due to one transaction – the EUR 55 mln portfolio acquisition of two Warsaw West Parks by Hillwood from DWS, which accounted for 40 pct of the sector’s volume, but this was still much smaller than the biggest transactions in 2021 and 2022. Other notable deals in Q1 included the sale of Panattoni Wrocław West Gate and of MDC2 Kraków South. “In the warehouse sector, the disparity between the price expectations of sellers and buyers is particularly visible,” stresses Marcin Purgal. “While transactions are occurring, their scale is somewhat limited due to this misalignment. Investors seem to be taking longer to reconcile their price expectations, and there is a notable absence of major core players capable of executing large-scale deals exceeding EUR 100 mln,” he explains, but also expects more deals to take place in the following months. “I’d say that logistics remains an attractive sector for a value-add strategy,” believes Waldemar Grabka of EQT Exeter. “Those who invest in logistics must either have a long investment horizon or buy under-rented assets. Low rent means low capital value, and buying below replacement cost is considered a safe strategy. At EQT Exeter, we see attractive opportunities in the current market to buy well-designed and located buildings but it’s important to be selective and be aware that this window will not be open forever,” he adds.

Office deals made up 29 pct of the volume (EUR 108 mln), as this particular market continues to find its feet after the pandemic. “Most were opportunistic or value-add with requirements for improvements. But we know of several office deals in progress in Warsaw that we could call core or core-plus,” reveals Marta Gorońska-Wiercioch. Seven out of the eight concluded deals took place in Warsaw and most of these were outside the city centre, in Służewiec, the Żwirki and Wigury corridor and the West office zone. According to her, the appetite for regional office product remains very limited at the moment. But Lithuanian investor Capitalica Asset Management, which entered Poland last year following the launch of its Capitalica European Office Fund, is planning to invest in not just Warsaw but in the Wrocław, Poznań and Katowice office markets. “We maintain a strong belief in the resilience of the office asset class,” insists Gabrielė Gegevičiūtė, an investment project manager at Capitalica. “Despite the historic transformations being driven by various socio-economic factors, the enduring necessity of office space remains tangible. We have recognised the evolving situation post-pandemic, characterised by a renewed emphasis on employee-centric workplaces and flexible arrangements. While short-term adjustments may ensue, we are expecting a recalibration leading to a new equilibrium in due course. It’s worth noting the nuanced nature of the office segment, where location plays a pivotal role in determining demand dynamics. Our strategy prioritises acquisitions in the central business districts of major cities, capitalising on sustained demand trends. While Warsaw remains a focal point, we are open to exploring opportunities in key regional cities, given their demographic significance,” she adds. Marcin Purgal of Avison Young confirms that office investors are not just looking at Warsaw. “In ongoing discussions between sellers and buyers, we have been observing growing investor interest in regional cities. Will this be reflected in concluded transactions? We shall see. Regional offices are still facing high levels of vacancy and issues with remote-style working, but at the same time there are great buildings with superb locations where the prices could be more easily negotiated, so potential purchasers could secure some good deals.”

A niche in need of growth

Of the other sectors, retail and hotels/residential each took a 16–17 pct share (EUR 60 mln) “There has been an outflow of capital from the office market into retail and also into hotels, residential and PRS – but these are regarded as specialist product, so not every investor is willing to step into them,” admits Mateusz Skubiszewski, the senior director and head of capital markets at BNP Paribas Real Estate Poland. While there has been some excitement in recent years about the prospects of PRS as a growing niche market, it is still far from being a stable product in Poland. “The investment into this sector is in foreign currency but the rentals are in domestic currency. There have been some attempts to denominate rents in euros, but it’s unclear how far this can be taken. It’s far from being an institutional product, so there is still scope for developing this market,” adds Mateusz Skubiszewski. However, as Marcin Purgal of Avison Young points out: “Although the PRS market in Poland is still in an emerging stage compared to its counterparts in Western Europe, we are witnessing tremendous dynamics. Assuming that all projects due for completion in 2024 are finalised as planned, the market will experience a fivefold increase within five years. It’s worth noting that regional markets are currently responsible for over half of the existing stock, as well as developments under construction.” The deals that did take place in Q1 include NREP’s acquisition of the Noli Mokotów co-living project in Służewiec from YIT Development and Van Der Vorm’s purchase of an entire residential building in another Warsaw district – Praga. “Looking ahead to Q2 2024, we are expecting the closure of another two transactions, both to be acquired by Heimstaden Bostad,” reveals Marcin Purgal.

Biggest European deal of the year?

Mateusz Skubiszewski is rather more bullish when it comes to retail. Last year, the investment deals in this sector were dominated by retail parks and convenience centres (56 pct of the total, according to Avison Young) and this trend continued into Q1 2024, when four of the six closed deals were for retail parks. All the transactions were in the range of EUR 5–15 mln and the most active buyer in Q1 was Polish group TERG, which is expanding its Aura Park retail park chain. But despite the weak Q1 retail investment figures, a major deal has since taken place – and this time it wasn’t retail parks that were changing hands. In Q2, Cromwell Property Group sold a portfolio of six Polish shopping centres to Czech-based investment fund Star Capital Finance for EUR 285 mln in its first Polish transaction. The centres, which have a combined area of more than 220,000 sqm, include CH Janki near Warsaw, CH Korona in Wrocław, CH Kometa in Toruń, CH Tulipan in Łódź, CH Ster in Szczecin and CH Rondo in Bydgoszcz. “According to the current European pipeline, this could be one of the biggest retail deals in Europe this year,” reveals Mateusz Skubiszewski. “It confirms that investors are not just interested in retail parks but also in other retail formats. And it is a sign that things are changing – because the deal was leveraged by bank financing, showing that banks are now willing to provide such large amounts of finance for Polish real estate acquisitions,” he adds.

Poles, Czechs and Baltics take the lion’s share

One of the most interesting trends in Q1 2024 was that in terms of invested capital Polish players made the biggest splash (25 pct, according to Avison Young), thus bucking the longstanding trend for investors from outside the region to dominate. Poland was followed by investors from the US (23 pct) and Western Europe (18 pct). “It’s definitely safe to assume that around 50 pct of the Polish real estate investment volume is coming from CEE investors – and most of the rest is accounted for by neighbouring countries, such as Germany and Scandinavia, along with the US. There is visibly much less capital coming from Western Europe, the UK and Asia at the moment,” emphasises Mateusz Skubiszewski. Naturally, in times when capital is expensive, investors will stick to their own markets. But as we have already seen in the deals outlined above, Czech and Baltic investors are also increasingly active in Poland. “These markets have the liquidity and the investment funds, but they also have a scarcity of product and a lack of assets in their home countries with the required returns, which is why they are now looking for opportunities in Poland,” explains Marta Gorońska-Wiercioch of BNP Paribas RE. This is confirmed by Gabrielė Gegevičiūtė of Capitalica: “Due to the disruptive impact of the pandemic to subsequent challenges such as soaring construction costs and geopolitical tensions, the Baltic market has experienced a dearth in developmental activity, resulting in a noticeable gap in the availability of prime real estate opportunities. Compounded by the limited acquisition windows of our closed-end funds, this landscape required a proactive pursuit of alternatives. Hence, Poland emerged as a compelling prospect. Furthermore, the conflict in Ukraine prompted a temporary pause on the investment activities in Poland of institutional investors from Western countries, reducing the competition for assets and facilitating our entry into the Polish market.”

So, what are the investment prospects for the rest of 2024 based on the activity in the early part of the year? “To make the capital market work and significantly increase transaction volumes, we need either a lower cost of money or steady, predictable rental growth on top of strong tenant demand,” believes Waldemar Grabka of EQT Exeter. But Marcin Purgal of Avison Young feels that this might be achievable: “We hope that the investment volume in 2024 will surpass that of 2023, signalling growth in subsequent years. Nevertheless, returning to the full liquidity seen in previous years will take some time. The biggest challenge the market experienced over the past two years has been the disparity in price expectations between sellers and buyers, which delayed the finalisation of many transactions. But in Q1 we finally observed more compromises on pricing from both sides. Which also adds to our optimism about this year’s market dynamics,” he concludes.