A whole site better

Land prices have slumped by as much as 50 pct in just 1.5 years. However, according to one market analyst the sums people were prepared to pay back then were crazy. Now, having been brought back to reality with a bump, prices per sqm bear some correlation to the future revenue from leasing out potential projects

Emil Górecki

The land market, more than any other, came to a complete standstill as a result of the credit crunch. The reason for this was simple: no banks have been willing to finance land purchase for the development of any kind of project – until now. And only a few companies have had the necessary cash in their pockets. On the other hand, this raised hopes for some interesting acquisitions at prices lower than the exorbitant sums at the beginning of 2008. Analysts from Colliers International remark in their Real Estate Review Poland 2010 report that in H2 last year better data for the market started coming in, which resulted in the growing optimism of developers. However, they still wanted to build on the sites they had bought earlier. This is why the first big transactions for plots should only start to take place at the end of H1 this year. “We have closed two transactions at this point and we are now finalizing a third. We should be able to conclude another three in the next quarter and are negotiating seven others, each of which has a chance of being finalized or for a preliminary contract to be signed before the end of the year,” explains Daniel Puchalski, associate director of the land department at Colliers International.

These transactions involved 6-ha for the development of logistic projects in Łódź and a plot in Warsaw’s Mokotów district for the construction of 35,000-40,000 sqm of leasable office space. The other deal is for the purchase of a site with an area of nearly 35,000 sqm on which as much as 55,000-60,000 sqm of office space could be built. The price is likely to be in the region of PLN 70 mln net.

How much cheaper is land today?

According to Daniel Puchalski, investors are looking to buy plots for office development not just in Warsaw, but also in Kraków and Wrocław, as well as land for residential development in every city and land for retail parks. Logistics is the worst in this ranking. He reveals that a number of plot owners who wanted to sell have started negotiations with developers since the beginning of the year with regard to establishing SPV companies together. “The prices of real estate for office development in Warsaw are 30-45 pct cheaper than the highest prices offered before the crisis,” estimates Daniel Puchalski.

The difference in the prices of sites for office development between the end of 2008 and the end of 2009 constitutes a fall ranging from 7 to 20 pct, depending on the city. The only exception is the 12 pct growth registered in the centre of Warsaw. Prices have also fallen in the retail sector. “According to our observations, there has been a visible revival on the land and development project market since the beginning of this year. However, it is the sustainability of this trend that is important, and it seems not to be at a very high level, but it is at least stable. We are all waiting for the symptoms of a clear recovery,” asserts Monika Przybyłowska, development director of Silesian company Opal Real Estate, which deals with real estate purchase consulting, among other activities. According to her, the most popular sites at the moment are for the development of hotels, office buildings and companies’ own facilities.

  Who is selling? Not surprisingly, these are most often companies which made exaggerated purchases during the boom and as a result are now having difficulty maintaining cash flows. According to analysts from Colliers International, the prices of land for warehouse and factory development started at EUR 17 per sqm in the area of Piotrków Trybunalski or the third zone of Warsaw, going up to as much as EUR 150 per sqm in Warsaw city centre at the end of 2009. It is worth noting that the average price per sqm of such land has fallen by just over 20 pct. “The supply of land is relatively high. Some companies are looking to withdraw some of their capital that is locked up in the land and are willing to sell plots for prices even lower than the book value. Finding a tenant for a new project is bordering on the miraculous because there is a lot of supply of finished space, the vacancy rate in warehouses is currently as high as 20 pct,” claims Renata Osiecka, the managing partner of Axis Real Estate. On the other hand, even though a recovery is certainly taking place, it is still very weak.

End of the oligopoly?

According to Renata Osiecka, it is the old and well-known players that are buying today. However, the leaders in the sector, such as ProLogis, Panattoni and Segro, have already finished buying up large enough land banks. This provides companies with a smaller share in the market with the chance to make up for earlier losses. “I expect the current structure of the market to change. It should become more diversified soon and consequently healthier,” she predicts.

Can smaller players buying land really change the structure of the market? To some extent. Companies such as Panattoni and ProLogis have no need to invest in plots or project preparation. Their plots are often already fully-supplied with water and electrical infrastructure, and so are ready for projects to be launched. As a result they are able to complete projects much faster than companies that are only just completing their land banks now.

Business plans not trusted by banks

In the hottest period for the market, the prices of plots reached such high levels that this called into question the profitability of any projects that could be developed on them. The most extravagant examples of this included the purchases of the areas of the former bus terminals on ul. Chełmska and ul. Inflancka in Warsaw. According to the experts, in the former case it is still feasible for Sando Inmobiliaria to develop a project on the ul. Chełmska site, as the Spanish company could demand PLN 2,200 per sqm for the land as part of the price for the possible residential space that can be built there. However, on the other plot, fellow-Spanish company Lubasa has a much harder task ahead of it. The area of the former bus terminal on ul. Inflancka cost so much to buy that the developer would need pass on as much as PLN 3,900 per sqm to the buyer for the land. “There are a lot of projects on the market whose profitability is questionable due to the land having been bought at exorbitant rates. The chances of selling them are still very low at this point. On the other hand, banks have a lot of reservations when it comes to trusting the business plans for projects whose profitability is lower than 20 pct. The only chance for developers to get out of this situation is to go ahead with these projects using any other available sources of funding. However, this pushes up the financial costs. On the other hand, it seems to be the only way of getting back the money invested in the land,” explains Przemysław Pączek of real estate advisory ProDevelopment.

Change of plans

Last February Pirelli Pekao Real Estate sold an attractive 6,000 sqm site with a building permit on ul. Grzybowska in Warsaw. An apartment complex including an office and a retail section with a total usable area of 26,000 sqm could be built on the land. The buyer was Mor-Eden Tower, which paid more than EUR 8 mln for the site. “Plots of land with building permits are just one of the products we can offer to the market, like our finished apartments. We recognize that the higher class apartment sector is not our core business for now, and so we agreed this transaction. Now we have to focus on projects we have in the pipeline for standard apartments. The sale of the Grzybowska plot will help us to do that. Could we have obtained a better price earlier? I do not believe so. The plot did not have a building permit then,” claims Małgorzata Kosińska, board member of Pirelli Pekao Real Estate.

Only two or three years ago the company declared a willingness to develop in big Polish cities such as Wrocław, Kraków and Łódź. Up to now, outside Warsaw it only has projects in Gdańsk and Lublin. The earlier plans had to be abandoned due to the crisis and because of the high prices of plots. “We have indeed made an analysis of the other big cities, but we decided not to go through with any projects, with the exception of Lublin and Gdańsk. Now we are focusing on projects we can start on the plots we already have. However, I can see that the market is reviving and there are a number of land property offers available. Plots with building permits are a unique product in my opinion. We are still monitoring what is going on in the bigger cities. We are focused on our current projects and will consider expansion in the future. However, at the moment this is not our priority when it comes to our quite large land bank,” asserts Małgorzata Kosińska.

The analyst has observed a slight decline in the price of land in the last six months. This mainly applies to the highest asking prices, whereas minimum prices have only changed slightly. The average price of land for development projects has fallen by 2.4-6.6 pct, depending on the city. In the residential segment the decline in prices is relatively slow. However, in the retail segment prices have slipped to a greater extent. According to 
a study by ProDevelpment, the average price of land has not decreased significantly since November 2009. The biggest price depreciation with regard to retail projects is to be found in locations outside city centres (5 pct on average in Warsaw, 4.5 pct in Kraków and 6.6 pct in Wrocław). The decline in the price of land for residential projects ranged from 2.4 pct in the districts outside central Warsaw to as much as 5.6 pct in Wrocław, also outside the city centre. The average share of land in the total cost of retail projects ranges from nearly 15 pct in Warsaw to 9.7 pct in Kraków and 8.9 pct in Łódź or in Silesia.

According to Małgorzata Kosińska, the valuation of land has gone back to basics as a result of the crisis. Now it is not any supposed continuous growth trend that is the main consideration, as it was in 2006-2007, but instead it is the location, the progress of the building permit process and the quality of the project that are the main factors. “We observed the land purchase transactions concluded by a number of developers when the market was at its peak. Our analysis of the potential of those plots confirmed that they were overpriced and did not provide security for the projects that could be developed on them. This is why after the due diligence process we decided not to finalize a number of potential deals for land purchases. But I do not expect any further decline in land prices to take place,” she predicts. ν