Caged tiger

The main Market players are managing to keep up their spirits. The hopes of the residential market lie with the  shortage of housing. there is also a lack of warehouses, and other factors in Poland’s favour, such as its location and the development of infrastructure. High demand will guarantee success for offices and robust consumption will do the same for shopping centres

Emil Górecki

The ex-president of the Polish National Bank and former Minister of Finance Leszek Balcerowicz sees a chance for Poland to become the “tiger of Europe”. The Poles and the Czechs are expected to suffer the least during the crisis, which is why real estate investors still have a lot of trust in these markets. Poland is now considered to be a mature market, comparable to those in the West. And this not only applies to investment standards, market transparency, product quality and the quality of specialists. Nonetheless, these markets are not immune to experiencing similar problems as France, Russia and Italy: a shortage of liquidity in the financial sector, the absence of new loans, the lack of transactions, and the inability to even forecast the levels of yields.

In the capital or outside of it?

According to the Colliers agency, last year was characterized by strong activity on the office market. In Warsaw, which is unbeatable in this respect, leasing contracts for a total area of 500,000 sqm were signed, including the spectacular lease of the Lipowy Office Park to Bank Pekao. The leaseholder will occupy an area of 39,000 sqm.

Lessees were generally interested in locations outside of the city centre, which accounted for 85 pct of their activities. It comes as no surprise that the rents were even a dozen or so euro lower there, where the vacancy rate currently stands at 2.87 pct after falling by 0.2 pct year-on-year. According to Mirosław Januszko, AIB PPM Polonia Property Fund’s investment vice-president: “Regional office markets in Poland constitute a back-up for Warsaw. However, the development of a good office building in one of the regional cities tends to be rather satisfying work, because cooperation with the municipality is easier and the design can complement the town in an interesting way. Whereas in Warsaw what you generally get is just another office building. However, the regional markets are more susceptible to market changes. We are planning to acquire one or two office buildings in Warsaw this year, although we are also going to keep an eye on the regional cities.”

Because many developers had high hopes for the office market, there have been cases when residential projects have been adapted into office buildings. According to Colliers International, an area of 250,000 sqm was built in Warsaw last year and this year another 315,000 sqm is to be completed. One third of this has already been leased. However, this number is not fully reliable, since developers are revising their plans every day. The biggest projects finished last year include: Marynarska Business Park (43,000 sqm), two stages of Marynarska Point (23,400 sqm), Tulipan House (17,000 sqm) and North Gate (29,900 sqm). “Last year we withdrew from significant purchases because of high overpricing. Now we are expecting a lot of interesting products to come onto the market,” remarks Mirosław Januszko.

Warsaw makes up 72 pct of the total office market in Poland. However, regional cities are becoming more and more important. Colliers International has calculated that a total area of 296,000 sqm was completed in secondary cities, most of it in Wrocław (114,000 sqm), second only to Warsaw interms of total office space. Wrocław and Kraków account for app. 6 pct of the market. These are followed by Gdańsk, Sopot and Gdynia (4 pct in total), and then Poznań and Katowice (3 pct each). The biggest leasing contracts in the regional markets were concluded in H1 last year. This includes the 6,700 sqm signed up for by Hewlett Packard in Wroclaw’s Globis building and 11,600 sqm leased by State Street Corporation in Kazimierz Office Center in Kraków.

The future in store

According to Colliers International, there is just over 3 mln sqm of warehousing space in the whole of the country, out of which 1 mln sqm are in new – not more than 1 year-old – buildings. The biggest proportion of this space is to be found in Warsaw and its surrounding area – 1.9 mln sqm – and another 290,000 sqm is under construction. However, the regions are gaining more and more in importance. Their potential grew by 60 pct last year. The leaders are: Upper Silesia (867,000 sqm), Lower Silesia (542,000 sqm) and the Wielkopolska region (730,000 sqm). Most of the warehouse area under construction is located in Upper Silesia, more than twice as much as in the Warsaw area. Last year, 900,000 sqm was leased outside the capital. Ben Bannatyne, ProLogis’ managing director for the CEE region (the second largest player on the Polish warehouse leasing market in 2008) lists many reasons for considering the Polish market as a good prospect. The geographical location of Poland, which is an important transportation and a distribution hub serving neighbouring countries, is one big advantage. The logistics trade and good outsourcing prospects attract clients interested in warehousing areas. Taking into consideration the location of the country and its relatively low operational costs, many international corporations are planning to lease warehouses in central Poland, with a view to carrying out distribution to Central Europe and even Western Europe from this location. In addition, the prices of plots of land and construction work are currently on the slide. Furthermore, there is also the improving condition of the road infrastructure.

“Although we are still witnessing reasonable levels of demand for warehouse space in Poland, the lack of available finance has meant that many developers have had to halt their development programmes in order to preserve capital and slowdown or stop their land acquisition schemes. 
In addition, there are very few investors in a position to acquire income producing assets in the warehouse sector or indeed any sector, which means the exit for the developer is very uncertain for the time being,” adds Ben Bannatyne.

The number of leasing contracts finalized in 2008 was similar to the previous year’s figure. The total demand amounted to just over 1.4 mln sqm. This was much lower than the level expected by analysts and developers based on the results recorded in H1 2008. “Projects of a speculative character will simply not be built this year. Developers are finishing the projects that are currently in progress, and only developing new ones provided they have pre-leased at least 60 pct of the area, or they are in the build-to-suit format. Construction costs have decreased by app. 20 pct though,” remarks Maciej Chmielewski, a partner in the warehouse department of Colliers International. The two biggest warehouse leasing contracts last year were achieved by Panattoni and ProLogis. The former company leased 56,000 sqm to Leroy Merlin at Panattoni Park Stryków, while the latter leased 51,000 sqm to Antalis at ProLogis Park Błonie.

Thriving on trade

There was 8.4 mln sqm of modern retail space in Poland at the end of last year. According to research carried out by DTZ, 840,000 sqm of the total was completed in 2008, out of which 15 pct constituted extended developments. The increase in the supply of retail space only amounted to 1.6 pct last year in comparison with 2007. DTZ, despite their earlier predictions of an annual increase in supply of over 1 mln sqm in both 2009 and 2010, are now estimating that there will only be an increase of 800,000-900,000 sqm annually. After this period the sector should return to rapid growth.

The biggest shopping centres that opened last year were Forum Koszalin (54,000 sqm leasable area), Pestka in Poznań (42,000 sqm) and Focus Mall in Bydgoszcz (39,000 sqm). None of the developments stood out significantly in terms of size. However, Bonarka shopping centre, with an area of 101,000 sqm, is to be completed this year. This will be followed by Maximus II in Warsaw (60,000 sqm) and Galeria Malta (55,000 sqm).

Vacancy rates in shopping centres of 0 to 3 pct at the end of last year is evidence of the relatively good condition of the retail sector. New brands are appearing on the market, including those for the wealthiest clients as Valentino announced their debuts on the Polish market in 2009. However, DKNY has scrapped such plans. The dynamic development of shopping centres targeted at less wealthy customers can be expected in the next few years. Primark and TK Maxx have announced their entry to the Polish market in 2009; and Halfords, which has been present in Wrocław for a year, has revealed substantial development plans. Supermarket chains have been showing interest in the development of smaller formats and in smaller urban areas in the last few months. “A tendency to return to town centres is also notable in this sector,” declares Tomasz P. Chenczke, chairman of the board of Centrum Development & Investments. He goes on to add that: “The positive aspects of this new approach are appreciated not only by customers but also by urban planners, who have mostly come to the view that shops generate movement in town centres and encourage the establishment of restaurants, pubs and places where people come to spend time and money,” says Mr Chenczke.

The level of rents in shopping centres last year was steady. However, an increase was recorded in a majority of Polish high streets. Now, however, DTZ’s experts are predicting a stable level of rents both in shopping centres and on high streets in 2009.

According to Padraic Coll, chairman of the board of the Irish Development Group, each retail operator thinking about expanding its chain, must consider Poland to be one of the most important points on the map. According to research by Jones Lang LaSalle, in terms of attracting international retail chains, Poland with 8.9 pct share of all the investment in 2007-2008 had the third highest level among European countries. “I am convinced that Poland is currently one of the best places to invest. All the reports and experts indicate that this country will be considerably less affected by the crisis than the rest of the Europe,” asserts Padraic Coll.

Empty apartments

According to the GUS, 166,000 homes were completed in the whole of 2008, which constitutes a 24 pct growth on the figure for 2007. This increase is a result of the momentum that had earlier been generated in the market, and which finally petered out last summer. The number of apartments coming into use in January 2009 amounted to 19,000 i.e. a 37 pct decrease on the previous month, but still a year-on-year increase. At the moment, both prices and the number of clients interested in buying are falling away. This situation is supposed to exclude from the market “one-time” developers, which had become over-popular. However, a stop on new bank loans has also limited the number of customers for the big residential developers, which has forced them to fight over home-buyers, reduce prices or include bonuses, cooperate more closely with banks, and even to lend customers part of the cost of their homes (!). According to REAS (Real Estate Advisory Services), 3,100 unsold apartments are waiting for buyers in the 5 biggest conurbations. “Unfortunately, the worst of the economic crisis is still ahead of us,” remarks Maciej Gnoiński, management board advisor at J.W. Construction Holding, one of the biggest residential developers in Poland. In his opinion: “Hopes that the situation will be short-lived are likely to be dashed. Residential developers are waiting for the support of the state with regard to new bank loans to revive the market. However, we may be waiting in vain.”

The aversion to lending to both developers and customers has brought about the postponement by at least a year of a large number of residential projects. As a consequence, the number of building permits issued last year shrank by over 7 pct. Moreover, investors started the construction phases of almost 175,000 apartments and houses – 5.6 pct less than a year ago. In the case of individual projects, which still makes up over half of the Polish market, the number of construction starts remained higher than a year ago (by 5.1 pct). Developers, however, launched 15 pct fewer projects.

So, which types of apartments are going to win out during the crisis? Experts (maybe wise after the event) have been highly critical of developers for building residential towers, which are generally built only due to high land prices. Since price is still the most important criterion for Polish homebuyers, the ‘economy’ segment of the market in good locations should do fine. Developers also have a lot of faith in unique top shelf developments. One of the most prestigious Warsaw projects is the revitalization of the more than 300-year-old Młodziejowskiego Palace, located in the heart of the capital. “We want the building not to lose the atmosphere of a palace, which is why we are planning to have a ballroom on the first floor,” claims Radosław Sieroń, chairman of the board of Mermaid Properties.

Roads and bridges instead of homes 
and offices

State infrastructure contracts are currently the big white hope of the construction sector. Poland is now the biggest beneficiary of EU funds and has substantial investment plans. Moreover, investors have the fixed deadline – at least for some of these projects – of the European football championships in 2012. This is why engineering and construction companies have got a lot of work on their hands. Residential construction companies, however, are quite a different story, and there are considerably fewer public orders for facilities such as hospitals and schools. “Cooperation with construction companies is certainly easier these days than in more prosperous times. Their services are getting cheaper: I am expecting a 25 pct drop of prices in the period from July 2008 to December 2009. At the moment, these companies are looking for work, although only half a year ago it was hard to organize any tenders due to a lack of participants,” comments Padraic Coll.

Investment question mark

What is the state of the investment market at the turn of 2008 and 2009? Looking for an answer is a waste of time at this point. No transactions are being closed, so it is impossible to establish the level of yields today. We need to wait for the first sales of projects, which will establish the rate. However, these are not taking place at the moment because of the highly divergent expectations of sellers and the buyers. As a result, negotiations are being drawn out as long as possible and none of the investors wants to make the first move.

In 2008, despite a fair start to the year, investment activity fell away. According to the CB Richard Ellis agency, 51 transactions were completed with a total value of app. EUR 1.9 bln – as opposed to EUR 3 bln in 2007. Most of the transactions concerned office buildings (EUR 1.16 bln) and retail developments (EUR 461 mln). Seven transactions for warehouse developments were closed with a total value of EUR 144 mln; and 3 were finalized for hotels with a combined value of EUR 100 mln. CB Richard Ellis has observed that 2008 yields for the best developments rose, reaching the level of 6.25 pct in the office sector, 6.75 pct for retail and 7.75 pct in the warehousing sector.

When a transaction does takes place or a property is put up for sale, these decisions have not so far been forced by the developer’s or investor’s difficult financial situation, but are rather the outcome of parent companies’ policies: the decision came from the top rather than due to any obvious need. With the exception of investment in land for residential developments, all other forms of real estate are generating satisfactory incomes, which allows the servicing of current liabilities. Analysts expect that in the future such products will only be sold in exceptional cases, and will not become a market trend, despite the fact that many players, such as funds, are very interested in such products.

We are experiencing a situation where the old financial system has collapsed and the new one will be completely different, although we do not yet know the form it will take. But the one thing that is certain, is that it will be – at least at the beginning – more restrictive or even oversensitive. “In a way, 2009 is likely to be lost year for the real estate industry. So far the sales market is frozen, and it is impossible to make any calculations due to the lack of transactions for reference. Only a few, very strong projects are going to be developed. The possibility of funding by bank loans will slowly return by the end of the year, but it will be on a different scale and with much tighter regulations,” remarks Tomasz P. Chenczke. ν