Stereotypes and green gilding

The participants of our roundtable discussion:

Kinga Nowakowska
head of asset management sales and marketing of Grupa Capital Park. Since it was set up in 2003, Grupa Capital Park has carried out 99 investment transactions. It currently holds a portfolio of 72 assets (office, retail and residential) located in 40 cities in Poland, with a combined gross area exceeding 308,000 sqm.

Michał Świerczyński
vice-president of Polnord, which was established in 1977 as an office of the general contractor of construction export. It adopted the Polnord name in 1988, by which time it became a contracting company. Now listed on the Warsaw Stock Exchange, it mostly carries out residential projects as a developer. However, in 2010 the company started the construction of an office complex in Warsaw's new district, Miasteczko Wilanów.

Arkadiusz Rudzki
leasing and asset management director of Skanska Property Poland. The company's first office projects were built in Warsaw, but it is now also present in other business locations, including Wrocław, Poznań, Katowice and the TriCity.

Marek Kuryłowicz
president of the management board of the Kuryłowicz & Associates architectural studio. The studio's designs include such office buildings as Focus Filtrowa, Wolf Nullo, Wolf Marszałkowska, Prosta Tower, Wola Center and Quattro Business Park.

Waldemar Lesiak
director of the office and hotel department of Echo Investment. The Kielce-based company was established in 1996 and its first project was a residential building on ul. Manifestu Lipcowego in Kielce. In 1997 Echo Investment entered the commercial market. The Warsaw Stock Exchange-listed developer has completed such office projects as Avatar in Kraków, Centrum Biznesu in Łódź and Warsaw's Park Postępu.

Tomasz Buras
head of the office agency of Savills, which has an international chain of over 200 offices and branches in the UK, the Americas, across Europe, Africa, Asia, the Pacific region and the Middle East.

Zuzanna Wiak, ?Eurobuild CEE': Over 573,000 sqm of office space was leased in Warsaw in 2011. This is the highest level of demand in the history of the office market. Demand was also high in regional cities. Is this a trend that is set to continue?

Tomasz Buras, Savills: Indeed, last year broke the record, and 2010 was also good. We certainly have nothing against beating the records every year. Will this also be the case in 2012? It all depends on what happens in H2. The first few months are instilling the optimistic view that the high demand could continue until the summer holidays. However, we do not know what impact the developments in the global economy will have on the Polish real estate market. Tenants are active in the sectors where there is a lot happening. For example, there might be a few interesting leases in the banking sector this year. An intriguing and quite possibly a new source of demand for offices could come from the shale gas sector.

Zuzanna Wiak: Apart from the banks, who else are office building owners pinning their hopes on?

Tomasz Buras: Pharmaceutical companies are still very active and have been involved in a number of global mergers and acquisitions. This has brought about a consolidation and expansion onto our market. There have been no major changes in the IT or financial services sectors. Offshoring and outsourcing continues to be very active in regional cities, constituting the main source of demand and acting as the driving force of these markets.

Zuzanna Wiak: Is this driving force sufficient for regional cities?
Waldemar Lesiak, Echo Investment: You can be successful in the regions. However, you have to remember that there are considerable differences between individual cities. There is high demand for offices in Wrocław, Poznań and Kraków. We have concluded a few significant contracts in Wrocław. However, the Łódź market is not doing so well. Regional markets are unpredictable - if we shorten the time frame to a month, we would be able to predict what will happen. But it is very difficult to do this for the whole year.

Zuzanna Wiak: If this is the case, how can you make decisions about new projects?

Waldemar Lesiak: We apply a conservative approach. We know what the final product is supposed to be like at the very beginning of the process, when we address such questions as whether to develop the project in stages or not and what each of the floors should look like. Thanks to this we can control and limit the risks. The cost of land also needs to be considered. All these issues must be addressed in a logical manner. We develop projects for leasing, but, importantly, they need to be leased within a scheduled period of time and on pre-determined conditions.

Tomasz Buras: Echo Investment and Skanska operate quite aggressively on the Wrocław market. Echo is building one project there and has now bought another plot. Skanska has three plots in the city. Is this not too much?

Waldemar Lesiak: This is a good question. We bought the land in Wrocław where Aquarius Business Park is being constructed at the moment at quite a good price. This is an area which had been included in the local zoning plan. We are aware, of course, that the interpretation of plans can sometimes be very difficult and requires a lot of effort. However, the plan lays down certain principles which make it easier to operate. Aquarius Business Park is being developed in two stages, but we now have a building permit for the whole project in our hands. Dividing it into stages makes it possible to avoid excessive supply. Our other Wrocław plot is also included in the zoning plan. This means that we do not have to bear the risk of negotiating its usage with the authorities for a few years.

Zuzanna Wiak: Skanska is also active in regional cities. Are your experiences similar?

Arkadiusz Rudzki, Skanska: Very similar. The location, the staging of the project, the good land prices, and the flexibility at the construction stage are also important for us. All the projects we develop in regional cities - apart from Poznań, where a single-staged project is being built - will be in several stages. We see a lot of potential in regional markets and that is why we are active in such locations. It is also worth adding that a friendly approach from the local authorities is crucial for the development of these markets.

Zuzanna Wiak: Is it easier to invest in the capital city or in the regions?

Arkadiusz Rudzki: It depends on the maturity of regional markets. We cooperate with clients who have been developing outside the capital city and feel very comfortable in doing so. Wrocław and Kraków are mature markets that are already entering the second or third cycle of leasing. Some cities could be described as promising. I would include Poznań, Katowice and Łódź in this group, although the situation is a little more difficult in Łódź. The over-optimism of investors in Łódź has led to the market currently struggling with quite a high supply of office space. There are certainly a number of clients interested in this market, and this is confirmed by the successful lease of the first stage of Green Horizon, which is nearly 100 pct leased at quite an early stage of construction. I think that one of the solutions to the current situation on the Łódź office market will be the launch of a high-speed rail connection with Warsaw.

Marek Kuryłowicz, Kuryłowicz & Associates: From our point of view there has been a very significant improvement in awareness of the regional cities. We have had the pleasure of working with large companies that know the market realities perfectly, but we also work with smaller players. Just a few years ago we used to have clients who were planning to build 100,000 sqm of offices in Toruń, for example. Now the approach has changed. Local players know that you cannot build more than 10,000-15,000 sqm at one go and that each floor plan should have an area of 1,000-1,200 sqm. They are also being assisted by funds, who suggest what sort of buildings they are interested in.

Zuzanna Wiak: So can we speak of the greater maturity of the market?

Marek Kuryłowicz: Exactly. Nowadays everyone is trying to satisfy the expectations of potential buyers. All the business parks we have are proof of that. They are very similar products in a lot of cases. And this of course raises the question whether or not this will result in a very ?flat' market, full of facilities built according to identical instructions.

Zuzanna Wiak: Is this also the feeling at Capital Park?

Kinga Nowakowska, Capital Park: We are an untypical player and do not develop traditional business parks. Instead we look for interesting properties which we can add value to. This is why we focus on small office projects in the regions. For example, we have a small building in Łódź (2,000 sqm), and we also have an interesting project in the old town of Gdańsk, where Neptun House with an area of 3,000 sqm is being built at the moment. We only carry out large projects in Warsaw. We will certainly not consider developing 100,000 sqm of offices in any regional city. We also avoid speculative development.

Zuzanna Wiak: Does this also apply to your Warsaw projects?

Kinga Nowakowska: Yes, it does. Both Royal Wilanów and the Eurocentrum Office Complex. The latter is a very large project, one of the biggest in the country. It will be a green-certified building located virtually in the centre of Warsaw. The project in Wilanów, however, is to offer 35,000 sqm in a beautiful location, untypical for an office building. Why Wilanów? I think that most tenants are tired of working in Służewiec, where you need to wait nearly an hour sometimes to enter or exit an office building. This is why we will be looking for locations offering grace and charm. It seems that Wilanów is such a place - close to the city centre and close to nature at the same time.

Zuzanna Wiak: Polnord was one of the first developers to build an office project in Wilanów. Was it worth it?
Michał Świerczyński, Polnord: Eventually we want to develop 140,000 sqm of offices in Wilanów and we are going to focus all our resources on this project. This is our first experience on the office market. The plot in Wilanów is included in the zoning plan, so we expect future stages of Wilanów Office Park to be built according to our plans. We have already finished the first building and the second is to be opened in July. The third building is already under way and we have a building permit for the fourth. At the moment we are holding an architectural competition for the design of the next stage, which will consist of two to three buildings. In order to increase the attractiveness of the project we have developed its surroundings before leasing it. An extension was built for al. Rzeczypospolitej, which leads into the project itself. A shuttle bus has also been provided, conveniently connecting Wilanów with the Wilanowska underground station.

Zuzanna Wiak: More and more people in Warsaw are giving up their cars to use public transport and bicycles instead. Does this have any significance for your project?

Michał Świerczyński: Yes, it does. The access to our project is one of the positive elements influencing its attractiveness, as it turns out that the public transport is not so bad. I also hope that work on the Ursynów-Wilanów section of the city ring road will start shortly, thanks to which the access to our project will be even easier. The second element is a large area of greenery - 50 pct of the biologically active area, as stipulated in the zoning plan.

Zuzanna Wiak: Is it really the case that tenants are fed up with Warsaw's Służewiec district?

Tomasz Buras: Służewiec is a very large business area nowadays. - in fact it is Warsaw's second business centre. And this is not likely to change. Whereas Wilanów... this is a location that needs to be promoted. The popular view is that Miasteczko Wilanów only consists of residential blocks and nothing else. So the perception of this district needs to change. On the other hand it is located close to Konstancin, where a lot of decision-makers live, as is the case in Wilanów. Consequently some people hope it will be easier to attract tenants to this area. I know from my own experience that it is worth checking where the members of the management board live before entering negotiations.

Marek Kuryłowicz: In that case, you might be happy to hear that the Wilanów town hall project, the shell of which is an eyesore at the moment, is back on. Work is just starting on its completion. According to the schedule it is to be opened by 2014, when it should become the pride of Wilanów rather than a blot on the landscape.

Michał Świerczyński: It is worth adding here that Wilanów will soon have a transport link connecting it with Ursynów. There is money in Ursynów's budget for extending ul. Ciszewskiego. I know that the Warsaw authorities want to subsidise the project because the local administration is not able to bear the costs. We are also in negotiations with the mayors of both districts over the construction of ul. Branickiego, which will be connected with ul. Płaskowicka before the A2 motorway is built.

Zuzanna Wiak:The completion of the second underground line will obviously increase the attractiveness of Wola district. This could weaken Wilanów's office position.

Kinga Nowakowska: We are not worried about such a scenario. Wilanów has its own friendly character, and this will have its adherents for sure. In Wola, on the other hand, we have the ArtNorblin mixed-use renovation project, where attractive office space with a unique industrial character is to be developed. Wola is a different district and a different concept, and so will attract a different tenant.

Zuzanna Wiak: What about Praga district? Can it become another attractive place for office projects?

Marek Kuryłowicz: In our experience a lot of office investors are still unwilling to consider Praga. To attract tenants the rents cannot be high, and construction costs are similar in the area. This in theory ends any considerations about investing in the district. Will the underground link itself influence the perception of such districts so that they will be viewed as attractive places for office projects? I don't think so. The underground will be more of a blessing for the people who live there. It could even paradoxically increase the demand for offices in Służewiec because the time needed to get to work will be considerably shorter. As time goes by, Praga will fill up with office buildings in a few places, but the underground is not a factor that can determine that on its own.

Zuzanna Wiak: So stereotypes clearly continue to be of great importance in establishing new areas for projects...

Tomasz Buras: This really is the case. Wilanów itself is still perceived stereotypically. When I was on my way to a presentation of the Polnord project, I was pleasantly surprised by the fact that getting there from the centre only took me just over 20 minutes. So the poor access to this district is a stereotype that needs to be debunked. Another issue is its infrastructure, which is heavily criticised nowadays, but in two or three years will improve considerably.

Arkadiusz Rudzki: In contrast to the business part of Mokotów, Wilanów is better prepared for development. A lot of office buildings were erected in Służewiec in a very short period of time, but this was not accompanied by any improvement in transport infrastructure. In the meantime, Wilanów has been covered by a zoning plan - and thanks to this it will be easier to prepare the area in terms of its infrastructure for the increased activity of commercial developers.

Zuzanna Wiak: You have mentioned promoting new office locations. But what about marketing the office buildings themselves? I am under the impression that the most important thing is emphasising the ecological aspect of the project. Is this green frenzy only a marketing gimmick?

Arkadiusz Rudzki: It is definitely not just marketing. It is actually about environmental protection and building in so-called added value through increasing the awareness of green-building users as regards saving energy and water. This is a very significant factor for many tenants because it translates into measurable financial advantages. Eco-certificates, such as LEED or BREEAM, have been applied for for most of the buildings that are now under construction. However, we want to take this to another level. Our aim is to develop a ?passive' office building in the future.

Zuzanna Wiak: This is quite a bold move. European experience of developing passive office buildings has been rather disappointing. Construction costs considerably exceed profits.

Arkadiusz Rudzki: It's an ambitious goal indeed. However, in the Atrium 1 building, we want to use geothermic springs for heating the office building in winter and for cooling it in summer. We have already prepared the infrastructure needed. We expect that thanks to employing advanced technological solutions we will manage to achieve the top certification levels. Our projects in Wrocław and Poznań are also pre-certified at the top platinum level under the LEED system. However, we always make efforts to adjust projects to the potential and the characteristics of the actual local market. The solutions we use in some of our projects include controlling the light intensity, the use of photovoltaic panels and grey water usage systems. We have carried out our own analyses of pro-ecological offices certified by the LEED Commercial Interior system. The result? Energy consumption dropped by several dozen percent. This has been possible due to the introduction of light system control and educating employees. Positioning the building to take advantage of the movement of the sun is also important in order to utilise all the natural factors that can lower the consumption of electricity. As I mentioned, we would like to construct an office building that would be even more advanced technologically, going beyond the generally accepted standards of building certification. I am convinced that this would the lower maintenance costs of the building.

Tomasz Buras: I think it is not possible to see these maintenance savings yet as these are only in the form of electricity bills.

Arkadiusz Rudzki: They can be seen in the buildings Skanska has developed in the last few years. Maintenance costs are not increasing. It is possible to keep them at a reasonable level. For example, they have stabilised at the level of a dozen or so złoty per sqm in the building which houses the Warsaw office of Skanska Property Poland. This is a large volume office building, and yet advance maintenance payments have not increased for a few years.

Kinga Nowakowska: Our Eurocentrum project is already pre-certified at the gold level under the LEED CS system. All the analyses point to the fact that the savings on potable water will be around the level of 60 pct. Savings in electricity consumption will range from 25 pct for the whole building to 40 pct for tenants' areas. These are real savings, and are carefully analysed by tenants.

Arkadiusz Rudzki: I believe that ecological awareness is growing and growing. I think that we are getting close to the point where a corporate tenant will be prepared to bear the additional costs for having their office in environmentally-friendly surroundings and certifying their office space, provided it brings measurable savings resulting from the solutions applied by the developer.

Kinga Nowakowska: But can we really expect tenants to pay more? Our cost analysis has shown that the increase in construction costs is marginal and almost imperceptible in the overall budget. However, we cannot expect to be able to rent out the building at a higher price because of these solutions. But we could sell it for more.

Marek Kuryłowicz: We should also remember that such certificates, both LEED and BREEAM, have become so popular that nearly every developer wants to be awarded them. Some treat them only as a logo in the commercial of their company. The problem lies in the fact that so far this has been possible because certification systems are designed in such a way that every new building can obtain one without any difficulty. This also applies to finished office buildings. A lot depends on whether investors treat ecological issues seriously or simply intend to follow the trend.

Zuzanna Wiak: So the certificates are somehow fraudulent?

Marek Kuryłowicz: Absolutely not. Admittedly one of the organisations issuing certificates receives thousands of dollars for each certified building to start with, which is added to by a dozen or so cents per each square metre. I think that the companies certifying buildings have pretty good revenues, and there is nothing wrong with this because fortunately the money is then used to increase awareness and encourage eco-friendly attitudes. Such grass-root initiatives often help to convince investors to look for greener solutions. Big players such as Skanska or Echo Investment have already gone down this path and are not merely looking for the solutions that are required for obtaining a certificate; they go beyond these in that they have their own ideas for sustainable development. I think that the biggest companies will end up creating their own environmental departments. And this will impact both the environment and the quality of the buildings.