When the magic fades

A green island in a sea of recession - this how the Polish economy was perceived until recently. But now the excitement has died down somewhat. Is there anything to be worried about?

Radek Górecki

The investment market is finally shaking off its lethargy. According to Jones Lang LaSalle, the volume of investment transactions in Poland in 2010 reached nearly EUR 2 bln. Eighteen of these transactions were for properties on the retail market, fifteen were on the office market and a few significant transactions were registered on the warehouse market. Cushman & Wakefield provides similar data: the office market, which registered a 75 pct growth in transactions compared to 2009 - a total of EUR 617 mln - is in a healthy condition. Excellent results were also registered on the retail market, where the transaction volume reached EUR 1 bln. The biggest deal in the sector in 2010 was the purchase of the European portfolio of Simon Ivanhoe by Unibail-Rodamco. Meanwhile, according to Cushman & Wakefield a total of EUR 215 mln was invested on the warehouse market. Compared to the data from 2009, a clear revival is evident. Furthermore, analysts from CB Richard Ellis expect that the biggest investment funds will focus on Poland again this year. So there are solid grounds for optimism. Or are there?
One bad apple
There is no denying that the Polish economy has some difficult reforms ahead of it. Public debt has already reached PLN 773 bln and is still growing, while more and more economists are demanding radical reforms. Analysts of the big investment banks have also been monitoring Poland - recently the Polish economy was given a severe dressing down from Barclays Capital. According to one of its analysts, the problem consists in the fact that the government has still not come up with a realistic plan for reducing the public debt. So the bank has recommended buying up so-called CDSs (credit default swaps) for the Polish debt. The Polish press has interpreted this recommendation as a warning that the country is threatened with bankruptcy. Even though this is certainly an exaggeration, there is no denying that the picture of Poland as a green island in a sea of economic woe is now a thing of the past.
Can such opinions cause turbulence on the investment property market? The specialists are cautious. "Opinions and recommendations of all sorts are always speculation. We have already had examples in the past where the institutions publishing them were not always acting diligently," notes Wojciech Pisz, the director of the capital market group at Cushman & Wakefield. "There is no denying that publications in the press have an influence on investors' perceptions of Poland. News about the successes of the Polish economy considerably contributed to the increased activity of investors interested in our country's real estate at the end of 2009 and early 2010," remarks Michał Ćwikliński, the head of the investment department at Savills. But in his opinion, publications portraying our economy in an unfavourable light can also influence investors' decisions. It is worse, though, if sporadic negative press turns into more widespread rumours.

The excitement may have gone, but...
"Despite the continuing significant interest in Poland, investor excitement about our country has slowly been subsiding. During the preparation of our 'Emerging Trends in Real Estate Europe 2011' survey, the opinion was expressed that we  had been a star for one season only," - is how Kinga Barchoń, the director of the property team at PwC Polska, bluntly puts it. In her view our economic growth last year, unique at the time compared to the rest of Europe, gave us some bonus points, but now when more and more countries are recovering, our results are nothing special.
Interestingly, when listening to the differing opinions of analysts and investors, one could get the impression that they are describing two completely different worlds. On the one hand, some cautiousness and anticipation can be sensed. On the other hand, there is a good measure of optimism. "It is worth emphasising that Poland has stopped being perceived as part of the Central and Eastern Europe region. Now it is an independent market. When it comes to investment funds we are at the top of the list of countries worth investing in. Warsaw has started to be compared to London, Frankfurt or Paris. This is a fact that is worth taking note of," claims Wojciech Pisz. And he goes on to list a couple of the most positive aspects: the government is soon to put forward its debt reduction plan and the discussion on pension reform has finally started.
Positive sounds are also coming from investors themselves. "We are analysing every statement. Our perception of Poland is currently very good. This is reflected in the fact that despite being a fund which operates in the Central and Eastern Europe region we are mostly focusing on Poland at the moment. We invest nearly 90 pct of our capital here. Outside of Warsaw we are currently only considering investment in Prague," declares Ewa Szafrańska-Mądry, the managing director of Azora International, one of a few funds that were buying properties in the difficult years of 2009 and 2010.
All the opinions translate into the current perception of the property market. However, specialists are emphasising that in the case of the property market it is not only macroeconomic indicators that are being taken into account. "They generate the climate around a given country, but we have to remember that analysts working for funds do not just take into consideration the macroeconomic environment. This is important, but an analysis of the leasing market, the competition and finally an assessment of the property itself will be of equal or even more importance for an investor interested in the purchase of an office building in Warsaw," claims Wojciech Pisz.

...it is the facts that are important
According to Michał Ćwikliński, investors look first of all at the facts. If Poland started to have problems servicing its debt and financial institutions operating on the Polish market began to experience problems regarding cash flows or had to be nationalised in order to avoid bankruptcy, then such a situation would certainly alarm investors. However, the expert from the Savills agency believes that we are currently some way from this happening. Financial institutions in Poland can still boast about their high cash flow levels, leaving many international banks envious of their situation. And there really is some truth in this, as we can see from the latest 'Emerging Trends in Real Estate Europe 2011' report by PwC and the Urban Land Institute. In the investment prospects ranking, Warsaw was in tenth place after moving up three positions since 2010. According to analysts, investors are increasingly perceiving Poland as a mature market. "It seems that we could have become victims of our own success. The great interest in our country has had an influence on the growth in prices of the best commercial properties - for some funds these prices are no longer so attractive compared to those in Western Europe. Besides, funds precisely specify in their strategies the percentage of their capital that can be invested in a given market. Some have already used up their limits for Poland and will have to look for other markets. Among the other problems that investors might face in 2011, both in Poland and in other European countries, is the still limited access to financing and the need to refinance loans at higher margins," comments Kinga Barchoń.
What then is the future of the investment market? According to specialists, 2011 will be marked by stabilisation. Analysts from Jones Lang LaSalle expect that the value of the capital invested in property in Poland will reach the same, or even perhaps a higher level than in 2010.
So what about the concerns over the possible bankruptcy of Poland? "This is just rubbish! Analysts who publish such opinions are not being serious. Poland is not in any danger of bankruptcy," asserts Prof. Witold Orłowski, chief economic advisor at PwC, with a clear sense of outrage. Nevertheless, he goes on to add that: "So far we have seen growth in Poland, Germany and the US. But nobody should think that this is the end of the problems," he warns.
"It is particularly worth remembering that investors are keeping their finger on the pulse," adds Ewa Szafrańska-Mądry. "Our shareholders have a long-term outlook regarding Poland. And so far, the assessment is very positive. This is why we are one of a few funds investing in development projects. But we are still being vigilant. If there are negative signals, we will react immediately. In 2008 we refrained from investing in properties due to the emerging situation. This was at a time when others were still buying. Subsequent events have demostrated that this was absolutely the right decision."

Anna Zielińska-Głębocka member of the Polish Monetary Policy Council
Development in the right direction of
Ibelieve that Poland has been developing in the right direction. Nothing is pointing to possible bankruptcy - I simply do not believe in such a nightmare scenario. On the basis of the available forecasts and analyses, I predict that economic growth will stay at around 4 pct over the next few years, and it might even reach 4.5 pct in 2012. It should be emphasised that this is a high level compared to the prevailing conditions around the world. The important factors stimulating economic growth will be domestic demand and investment - both public and private. Our foreign trade has also been developing very dynamically.
When it comes to the public finances, the compulsion to carry out reforms will be so strong that reforms will have to be introduced. They will also be somewhat forced by the preparation for entering the euro zone. This is why I believe that there is nothing terrible or exceptional happening to the Polish economy. Other countries have similar problems with growing debt and will also be forced to introduce cost reduction programmes. There are also no reasons to lower Poland's ratings due to - for example - the proposed changes in the operations of open pension funds. And this can already be seen: the discussion which has now started over open pension funds has not influenced the perception of our economy outside of the country in any way. I believe it has even been interpreted as an attempt to reform finances positively.
I also have a positive assessment of the response of economists. This public pressure, from such eminent economists as Leszek Balcerowicz, has highlighted the fact that a debate on the really important issues is now underway. We are finally starting to discuss the really important issues: the economy, the demographic situation and pension system reform.