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edition 10 (224)
October 2017

Last-minute record?

Despite a slow start, many believe that the Polish investment market will break the all-time record this year

Tomasz Szpyt-Grzegórski

Last-minute record?
Agata Sekuła, the CEE director of the retail property capital markets department at JLL

Investors in Polish real estate seemed to get cold feet during H1. The turnover, EUR 1.5 bln, was 25 pct down on a year ago and has meant Poland has slipped down the region’s rankings. However, market analysts believe that that this is just a blip and a bounce is expected before the end of the year... a big one

The signs of a slowdown in investment volumes were already evident in Q1, when the Polish market was easily overtaken by the Czech Republic. One quarter is a blink of an eye on the market, so perhaps we should not be so worried. According to Colliers International, EUR 2.2 bln was transacted on the Czech investment market in H1. Poland had the next highest figure, EUR 1.5 bln, while Hungary came in third with EUR 824 mln. It is worth bearing in mind that the year has so far been a very successful one for the entire Central and Eastern Europe region, with H1 volumes increasing by 17 pct (compared to H1 2016) – hitting a level of EUR 5.4 bln. The driving forces behind the growth in the region were: the Czech Republic (investment up by 114 pct), Romania (155 pct) and Bulgaria (213 pct). “After the end of Q1, we were confident that the record level of investment on the CEE real estate markets last year would be broken in 2017. The full H1 data still indicates that this prediction was accurate,” claims Mark Robinson, a CEE market research specialist at Colliers.

Why the Polish slowdown?

The weaker results in Poland in a boom time for the entire region could, however, be a cause for concern. Analysts point to one of the possible reasons: “The lower number of finalised transactions is a result of longer and increasingly complicated processes due to changes in the tax environment – and these do not result in efficient transactions,” explains Przemysław Felicki, the director of the capital markets department at CBRE. “Investors now have to devote more time to analysing the tax structures and tax implications for transactions and this is clearly extending the entire process. The turbulence surrounding the VAT changes has led to funds pulling out of transactions subject to the tax – and although the market has reacted flexibly, shifting towards the sales of shares in companies or the sale of structured parts of enterprises, it still resulted in a slowdown of processes compared to last year,” adds the CBRE director.

Stanislav Frnka, the CEO of HB Reavis Poland, is of a similar opinion. “The weaker turnover dynamics on the investment market are not the result of any lack of properties of a suitable quality being available to potential buyers – there are quite a few of these in Poland. It is the lack of clarity over the legal and tax changes that has been the main factor behind investors’ caution,” he believes.

However, the market abhors a vacuum and the experts expect that H2 will see a significant shift. Investors are slowly getting used to the about-turns in the transaction settlement method on the real estate market and prefer those forms of transaction that are more secure for them. “Poland’s loss of the lead on the investment market in Central and Eastern Europe is certainly a temporary phenomenon and the trend will have been reversed by the end of the year,” argues Agata Sekuła, the CEE director of retail property capital markets department at JLL. “By the first week of September the value of investment in commercial property in Poland had increased to EUR 1.925 bln – EUR 1.01 bln in retail, EUR 463 mln in offices, EUR 335 mln in hotels and EUR 64 mln in warehouses,” she reveals.

Records set to be broken in Poland

The experts also claim that in fact a lot is actually happening in the sector, but this has so far not been reflected in the statistics. “It needs to be emphasised that some large transactions are in progress, in the office, retail as well as the logistic sectors, which is why the level of transactions expected at the end of the year should be much higher than expected and Poland will return to the top position in our region of Europe, which it has lost to the Czech Republic. Two or three large transactions can often determine a radical change in the investment value, which is why it is still possible that the levels from previous years will be reached,” argues Przemysław Felicki.

Furthermore, there are those who expect that the Polish investment market might reach a level not even seen in the record year of 2006. “According to our forecasts, the value of deals on the Polish investment market in 2017 will reach EUR 5.5 bln and this would mean that we would break the record of 2006. Of course, there is the possibility that the finalisation of some deals might take longer, but they will then be recorded at the beginning of the next year,” says Agata Sekuła.

The economic situation and positive investor sentiment towards a country are vitally important when making purchase decisions. For Poland, hings are now slightly better in this respect.

“New investment funds keep emerging in Poland, which is very promising for the volumes on the entire market. The investment market is also being supported by good ratings – including Fitch and Moody’s – as well as the excellent results in the office sector,” believes Jeroen van der Toolen, the CEE managing director of Ghelamco. “I think that in this situation some of the funds should take another look at the Polish market and increase their activity,” he adds.

Retail attracts retail

If the situation on the investment market resolves itself, the question still arises: which real estate segment is set to gain the most from this? Agata Sekuła has no doubt about which one. “In retail we can expect turnover of around EUR 2.4–2.5 bln. Large transactions are also being negotiated in the warehouse and office sectors. Each of the investor groups thinks along different lines, but everyone has been encouraged by the very positive macroeconomic indexes: the economic growth, the low unemployment rate, the substantial increase in retail sales and the promising economic forecasts. All of this has gives added impetus to consumers’ spending power – a basic parameter that is of huge significance from the point of view of shopping centres,” she adds.

In her opinion modern shopping centres are no longer buildings with a similar range of brands that only differ in terms of location. Creating a modern shopping centre is an entire philosophy that first of all involves designing the project for customers’ needs; however, these days the consumer often has wider knowledge about products greater than that of the retailers and they are actually aware of their needs and therefore aim to use their time in the best possible way to achieve this. “I am convinced that good shopping centres that follow the zeitgeist and react decisively to the changing needs of customers will remain an excellent investment product. In a slightly different segment, there will still be the potential for adding value by purchasing centres that are still undergoing extensive improvements,” believes the director of JLL, who goes on to add: “Yields for the best properties are estimated at 5 pct. However, there has not been any large retail transaction in Warsaw for a few years, so we should expect that if it came to the sale of any of the best malls, it would be realistic to expect them to go below 5 pct,” he forecasts.

This positivity seems to be confirmed by the transactions taking place on the retail property market. Information about some of the larger deals currently in progress became public knowledge in the late summer: Blackstone is selling the Magnolia Park shopping centre in Wrocław to Union Investment Real Estate; while Kwasa Europe, which is owned by pension fund Employees Provident Fund of Malaysia (EPF), is trying to acquire Galeria Katowicka from Meyer Bergman. In spite of the fact that the parties do not want to go into any of details for these transactions, it is estimated that they will eventually add at least EUR 0.5 bln to the figures for the investment market.

Offices head towards 5 pct

The office market cannot be that far away from the 5 pct yields expected for retail, either. Colliers has recently registered a transaction on Warsaw office market that closed at 5.15 pct. The parties to the agreement and the analysts themselves are keeping tight-lipped about the details, but according to information unearthed by our editorial team this is likely to be one of the office buildings on ul. Królewska in Warsaw city centre. The situation on the country’s regional markets is interesting, too. Wrocław stands out in this respect, as German real estate fund manager Warburg-HIH Invest Real Estate has signed a contract to buy Sagittarius Business House, which Echo Investment is developing in the city. The total estimated transaction price is EUR 73 mln with a 6.16 pct yield, which is also noteworthy. “EPP was not willing to go below 6.25 pct, so we put the building on the market,” revealed Nicklas Lindberg, the CEO of Echo I nvestment, at a conference on Echo Investment’s H1 operations. The buyer also seems to be satisfied with the outcome. “Another purchase in Wrocław means taking advantage of an excellent opportunity, because the Polish real estate market offers more attractive cap rates to investors from Western Europe and the city itself is an excellent location as can be seen from its macroeconomic figures,” believes Andreas Schultz, the international transaction management director at Warburg-HIH.

Perhaps investors would take an even closer look at Polish office buildings if they came to the same conclusions as Jeroen van der Toolen: “We are experiencing a situation in which it is the tenants that are having problems finding vacant space. The demand is so high that we even could rent out Warsaw Spire twice. Because of this we have started the construction of other large projects. The demand for office space in Warsaw Hub, for example, is twice has high as at the same point of the leasing process for the Warsaw Spire,” claims the managing director of Ghelamco in CEE.

Boom time for sheds

An unprecedented boom has been taking place on the warehouse market – developers have upped their building rate dramatically in order to satisfy the growing demand from tenants. However, investors tended to sit on the fence in H1, transacting a volume for this year of only EUR 64 mln by the first week of September, which does not in fact look so impressive. Still, it has to be added that the impression we are getting is slightly deceptive. We are still waiting for the finalisation of the acquisition of Logicor by China Investment Corporation from Blackstone. It has 28 warehouses in Poland with a combined area of 900,000 sqm, while the value of the portfolio is estimated at app. EUR 600 mln. But this is not all that could take place before New Year’s Eve. “We are expecting many important transactions to take place by the end of this year, including a large logistics portfolio and potentially three warehouses with single tenants and long-term lease contracts. The forecast for the warehouse sector in 2017 is that the transaction volume will reach app. EUR 1 bln, which will be the largest ever total for on the Polish industrial and logistics investment market,” predicts Soren Rodian Olsen, a partner in the capital markets group at Cushman & Wakefield.

Money from around the world

While domestic capital in Poland is responsible for a small number of transactions in the country, around a dozen or so per cent, if we take into account the entire region, the capital from Central and Eastern Europe has now started to scoop up take a substantial slice of the real estate cake. According to Colliers’ calculations, as much as 37 pct of the capital invested in our region in H1 came from domestic sources in six Central and Eastern European countries or were cross-border investments between CEE countries, which represents a 16 pct growth on the figure in 2016. Other European countries that are the traditional sources of capital for investment in our region were responsible for a total of 26 pct of the volume transacted in H1. Regional investors have also started to make their presence felt in Poland. In August 2017, a Czech fund bought the Proximo I office building in Warsaw for EUR 116.6 mln. “ČSNF is currently balancing its investment portfolio in terms of the risk. The purchase of Proximo I from Hines is an important step towards the further regional diversification of the fund’s assets. Thanks to this we have acquired a prestigious asset – and these are becoming harder and harder to obtain on our local markets in the Czech Republic and Slovakia,” explained Tomáš Jandík, the investment director at REICO IS ČS.

However, it is not only European money that is flowing into Polish real estate. “Over the last decade most of the capital invested in Poland was by German players. Strong activity by South African investors has also been evident over the last few years. There is also American capital and European capital. As far as Asian capital is concerned, this is mostly invested indirectly, through fund managers,” says Agata Sekuła. Over the last few years, the streams of cash flowing in from the Far East have been noticeable and there is no sign of this drying up, although these are rather unique investors. “We are seeing the gradual establishment of the presence of Asian investors. They usually need some time to feel comfortable on a given market, but the trail-blazers are then followed by others,” explains Anthony Selman, the CEE head of investment properties at CBRE. “After CEFC’s investment in the Czech Republic and then Ginko Tree followed by EPF in Poland, we expect that Korean money will have a significant impact on the perception of these markets and thus we are expecting that there will be a further influx of institutional funds, particularly insurance funds from other Asian countries that are now evaluating the CEE markets while preparing for investments,” predicts Anthony Selman.

Others are also expecting funds to come from this direction. “I believe that the activity of Asian investors will continue to grow. They have some rather substantial capital surpluses and Europe still remains a safe market to invest in for them,” believes Stanislav Frnka, but his confidence is not unconditional. “Looking at the size and potential of the market, I believe that Poland will regain the top spot soon. It is a more mature market with strong development activity, top quality buildings and stable demand from tenants. Regaining its leading position will, however, depend on the ordering of the legal and tax environment, the disruption of which has recently raised many questions about investing in this market,” admits the head of HB Reavis Poland.

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