Poland Hoping for smooth waters

Following the outbreak of the Covid-19 pandemic in early 2020, the Polish investment market has consistently navigated its repercussions, only to face additional challenges from the economic turbulence resulting from the war in Ukraine, rising interest rates or inflation. Despite maintaining stable investment volumes for three tough years, 2023 witnessed an inevitable slowdown, as anticipated. In Poland, only 3 out of 85 transactions surpassed the EUR 100 mln mark, with the largest being the M&A of 7R shares by NREP. Additionally, only 6 portfolios were acquired, 4 of which pertained to small retail schemes.

INDUSTRIAL MARKET

In 2023, the warehouse sector emerged as the dominant force in Poland’s investment market. Despite a noticeable overall market downturn, industrial transactions constituted nearly half of the total investment volume. This performance highlighted the resilience and dominant position of the Polish warehouse market, even in the face of challenging economic conditions.

In 2023, the industrial sector recorded an investment volume of EUR 966 mln, primarily driven by smaller-scale projects. This resulted in a 25 pct decrease in the average transaction volume compared to 2022 and 2021. Notably, only two transactions surpassed the EUR 100 mln threshold: NREP’s acquisition of an 80 pct stake in 7R and the Campus 39 deal in Wrocław. The market witnessed only 2 portfolio deals acquired by EQT Exeter and P3.

In 2023, excluding the 7R M&A transaction, over 80 pct of warehouse properties were sold in the primary market. Panattoni divested 12 assets, totalling over EUR 520 mln, representing more than half of the total investment volume in the warehouse sector. We anticipate sustained interest in the sector in 2024, particularly in sale and leaseback deals and the acquisition of existing facilities that remained unsold in 2023.

RETAIL MARKET

The retail investment market in Poland is drawing interest from investors across various formats and asset types, spanning major agglomerations to small cities and towns. The diverse range of available products caters to opportunistic and redevelopment acquisitions. However, transactions involving prime shopping centres are not anticipated in the near term due to the persistent discrepancy between sellers’ and buyers’ pricing expectations.

The retail sector concluded 2023 with a total volume of EUR 430 mln. The most significant transaction marked the debut of FREY. The French newcomer successfully completed the acquisition of Matarnia Retail Park in Gdańsk for over EUR 100 mln in Q3.

Unwaveringly, retail parks continue to represent a reliable and secure investment option, consistently garnering the trust of investors. In 2023, retail parks and convenience schemes accounted for 56 pct of the sector’s total volume and were involved in 13 out of 27 transactions. The segment experienced sustained demand for regional shopping galleries and schemes for redevelopment.

In upcoming quarters, the retail sector will invariably attract investors with retail parks and convenience assets, which remain a safe type of investment. Investors seeking higher returns, on the other hand, will continue to look for attractively priced malls in secondary cities, as well as opportunistic assets with redevelopment plans. The competitive prices and attractive locations of older malls make them a higher-return alternative.

OFFICE MARKET

In 2023, there was a noticeable surge in investor interest in older value-add and opportunistic office buildings. Over 60 pct of the transaction volume in the Polish office investment market was associated with these types of properties, many of which were designated for redevelopment. This trend is driven, in part, by the scarcity of land for development. Consequently, such buildings are being considered for demolition or a change in function into PRS, student housing or other alternative use.

In the past year, these asset classes represented two-thirds of completed deals, marking a substantial increase from 2022, which witnessed a predominance of core and core+ transactions.

Warsaw was the epicentre of office investments in 2023, capturing 97 pct of the total volume, with a notable 76 pct of transactions occurring in noncentral office areas. This trend aligns closely with the nature of the properties being acquired. This pattern is unlikely to shift in the near future.

PRS

Despite the slowdown in purchasing activity within the PRS sector, investors are actively monitoring the market. However, the product’s availability is limited due to current residential market conditions. Developers prefer to sell apartments directly to individual clients rather than selling entire properties to investment funds.

In 2023, the closed residential deals amounted to app. EUR 150 mln. The sector’s momentum is constrained by the limited availability of land for new projects and the high construction costs. While land acquisitions resemble “beauty contests”, investors are increasingly open to considering purchase of older office buildings, with the possibility of converting them for PRS purposes.

We expect that the Polish market will attract both local and foreign investors, who can obtain higher investment returns in this sector than in Western European markets. 2024 may bring the creation of more platforms, created by the developer-investor arrangement, which will ultimately increase the product base for purchase by current and incoming investment funds in Poland.

READY FOR 2024?

Currently, the market is explored mainly by investors hunting for opportunities. The situation is unlikely to change in the short term. The geopolitical uncertainty and bargains at local markets are restraining Western European institutional funds from investing in Poland at larger scale. New foreign players are also waiting. Albeit, may consider certain asset classes when it comes to larger platforms or more complicated structures.

Prime yields are showing the trend to stabilize across all market sectors. Although banks are still looking carefully at the projects they are to finance, interest rates are expected to decrease at some point this year. Therefore, this situation might accelerate investment activities, at the beginning mostly among opportunistic buyers. Furthermore, we expect to see a surge in refinancing activity and renegotiations of existing financing terms, coinciding with the five-year mark since the high volume of loans issued in the record year of 2019. Thus, this may force some owners to divest their assets or to look at alternative ways of exit. Due to this fact some large transactions, which were not seen in 2023, may finally occur.

ESG will also continue to be an important factor influencing real estate purchases, which is increasingly being incorporated into the investment strategies of funds in particular institutional ones.

It seems that 2024 will be an interesting one, with the gap in pricing expectations between sellers and buyers narrowing, which in turn will translate into increased investor activity in all market sectors and hopefully higher investment volume.