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edition 3 (238)
March 2019
Feature

The seven billion euro question

The investment market has been in carnival mood since the beginning of the year. But is Lent just around the corner?

Tomasz Szpyt-Grzegórski

The seven billion euro question
“Last year broke all the records and this won’t be an easy feat to repeat,” admits Tomasz Buras, the managing director of Savills in Poland

The record turnover of EUR 7.2 bln on the Polish commercial real estate investment market in 2018 has only sharpened the appetite for even more. 2019 promises to be equally intensive, but clouds may be forming that could dampen the festivities

It was obvious as early as last summer that the investment record set in 2006 was in serious danger of being eclipsed. The forecasts then were for a volume of around EUR 5.5 bln, but by the autumn it was already clear that even EUR 6 bln was achievable. The final figure, EUR 7.2 bln, however, still came as something of a surprise. In spite of this huge volume, some are anticipating that even this could be surpassed in 2019. “Last year broke all the records and this won’t be an easy feat to repeat,” admits Tomasz Buras, the managing director of Savills in Poland. “Strong investor activity has continued into the first few weeks of 2019. Many market players, however, have been worried that a cycle of increasing interest rates might be on the cards. But this is not the case at the moment and you can see the opposite trend in such countries as Belgium and Germany, where interest rates were actually lowered at the end of 2018 and early 2019. We are also seeing a great deal of interest in two asset classes – offices and warehouses. They will be the two main drivers of the investment market this year. The retail sector still accounted for a very large share in the total investment volume last year. It was closely followed by offices, but its position was due to the deals carried out at the beginning of 2018. It’s highly likely that the retail real estate sector will slip back into third position this year,” adds Tomasz Buras.

The Polish investment volume in 2018 might have stunned many of us, but it was actually not exceptional for the CEE region, which itself was able to boast a record turnover. “The total of EUR 13.23 bln transacted in 2018 in the CEE region was an increase of 11 pct y-o-y, setting a new record for the region for the third year in a row,” points out Mike Atwell, the director of the CEE capital markets department at JLL.

New investors on the offensive

Returning to Poland, it’s necessary to note the structural changes in the origin of the capital that has been buying up properties in the country. Research by CBRE shows that Western European investors have, as usual, been investing the most – 40 pct of the total volume (EUR 2.9 bln) and around two-thirds more than a year earlier. But a significant increase in the interest in the Polish market from American capital is also notable. Investors from across the Atlantic invested EUR 1.7 bln in Poland, representing a threefold y-o-y increase. Capital from South Africa has also been very active, with EUR 1.1 bln invested in Poland in 2018 (14 pct more than in the previous year).

However, it is the influx of capital from the Far East that has been the most intriguing for investment market analysts. Asian investors invested EUR 1 bln in Poland last year and, according to the experts, much more is on its way. “I expect that there will be an influx of new investors. There is a great deal of interest in Europe among Asian entities, especially those based in Korea. There is a chance for large deals not only in the office segment, where very large projects are available on the market, but also in the warehouse segment,” argues Tomasz Buras. “Due to inflated real estate prices in Western Europe, the attention of these funds has shifted in our direction. Players from Malaysia, Philippines and Singapore are also interested in Poland,” adds the head of Savills in Poland. He is not alone in anticipating an investment tsunami from the East. “The dominance of Western European capital on the Polish market is set to continue, but the participation of non-European countries will become much more emphatic – and we are seeing this every day in the form of burgeoning contacts with Asian investors, in particular those from Korea or Japan,” reveals Michał Stanisławski, a deputy director in the capital markets department at CBRE.

And yet, an influx of capital is expected from another direction. “The return of prominent German investors certainly can’t be ruled out. Some of the core open funds from Germany have bought almost nothing in Poland in recent years. Now they have substantial free resources and may consider investing in Poland,” suggests Tomasz Buras.

Developers are of the same view as the analysts. “A large amount of new capital has flooded into the Polish market. Funds from Korea and Malaysia are interested in buying Polish real estate. But German and Austrian funds, which have recently withheld their investment, have also returned to the market,” claims Jeroen van der Toolen, the CEE managing director of Ghelamco.

In the next few months we will be able to see whether this river of capital from Germany starts to flow. But the attitude of German players does seem to give more credence to the view that the floodgates will open. “The demand for premium Polish properties has grown further recently, particularly among international investors. Warsaw has become one of Europe’s twenty most important real estate locations. The transactions show that, on the one hand, the market for large shopping centres has also become somewhat saturated in Poland, but on the other, the boom in the logistics market is still going strong in the country. It is also notable that office vacancy is continuing to decrease despite the marked increase in new construction in recent years," explains Sabine Barthauer, a member of the board of managing directors of Deutsche Hypo.

“The demand for premium Polish properties has grown further recently, particularly among international investors,” points out Sabine Barthauer, a board member of Deutsche Hypo


Game of rates

The huge interest in the Polish real estate market at the moment cannot be put down to mere coincidence. The country is considered by investors to be a fairly stable market, with significant future potential and offering better profits than you can find in Western Europe. “When we decided to expand outside Romania, we did an in-depth analysis comparing the scale and liquidity of particular CEE markets. Poland came out as the clear leader in each aspect we looked at. And the country remains on a growth curve and is still generating positive results. Last year’s historic volume of more than EUR 7 bln transacted in commercial real estate only confirms its potential. Poland is now our key investment market,” reveals Dimitris Raptis, the CEO of Globalworth Poland.

Matthias Cordier, the head of German investment at Madison International Realty, also speaks highly of Poland. The company entered the Polish investment market last year through its acquisition of a 50 pct stake in the Warsaw Spire building. “Poland is the most developed, diversified and mature economy in Central and Eastern Europe. Over the last 25 years the economy has doubled in size and now holds the leading position in the CEE region in terms of GDP. The Polish economy is one of the most sustainable in the EU with a positive mid-term outlook,” believes Matthias Cordier. “Over the last few years, Poland – and Warsaw specifically – have developed into a highly liquid investment market and as a result have been enjoying increasingly strong interest from major global investors,” he adds.

There is another factor that has been encouraging investment in Poland. “We are still seeing yield compression in Western Europe. These markets are safe but expensive – and Poland can benefit from this. The record low yields of below 5 pct registered on the office market last year should be maintained and might even be surpassed in 2019,” predicts Tomasz Buras, who adds that the situation in Warsaw's Mokotów district, which went off investors’ radars a few years ago, could change dramatically in 2019 and become an interesting alternative for regional cities. “We have a large number of office buildings for sale in Mokotów and there is also more interest from investors. The vacancy rate is decreasing and the difference in rates of return compared to central locations has increased in Mokotów’s favour, where they can reach up to 7 pct,” insists the head of Savills in Poland.

Investors already appear to have sensed this opportunity. It was Mokotów district that was chosen by Cyprus-based Zeus Capital Management for its entry into Poland, when the company bought an office building on ul. Domaniewska at the beginning of the year. “Graffit is our first office acquisition in Warsaw. It’s part of our investment platform that was launched in 2016 and targeted at commercial properties in the CEE and SEE regions. Although yields have significantly compressed over the last two years in the prime office market, we still believe that the very low yields are applicable to specific properties that have unique characteristics and are not representative of the whole market. Considering the depth of the Polish market, the supply of institutional-type product and the availability of attractive financing terms, we will continue to look for deals in Warsaw,” declares Lila Pateraki, the chief investment officer of Zeus Capital Management.

She’s not the first person to draw attention to the increasing value of real estate properties in Poland and the yield compression, which applies to all segments of the real estate market. “The best office projects in Warsaw have yields of around 4.75 pct, and in regional cities – Kraków, Wrocław and the TriCity – they vary at between 5.75 pct and 6.25 pct. When it comes to warehouse space, the best cap rates available are 6.5 pct, while in exceptional cases, such as leases of more than ten years, they even go below this value,” points out Piotr Kaszyński, the managing partner of Cresa Polska.

“Poland is the most developed, diversified and mature economy in Central and Eastern Europe,” says Matthias Cordier, the head of German investment at Madison International Realty

Offices, warehouses, retail, hotels?

Retail properties currently have the lowest rates of return, however. Last year in Warsaw the average was around 4.1 pct. Many specialists are now arguing that the sector is diminishing in importance relative to the others, with warehousing set to become the second most popular asset class with investors. “Last year the turnover of warehouse transactions in Poland increased by 84 pct, whereas in Europe the growth was only in the single figures. The interest in office and warehouse properties stems from the very high demand for this space from tenants and the resulting decline in vacancy rates. There is virtually no free space in some warehouse locations,” says Tomasz Buras.

Warehouses have never been the most-favoured asset class in Poland – up to now. But the perception of it as the poorer cousin of the big two was shattered last year – and, according to the analysts, this trend is set to continue. “After years of moderate interest in warehouses, a large number of investors have changed their portfolio strategies and are now aiming to increase their exposure to this type of property. Since 2008 there has been a more than tenfold increase in the total volume of investment in warehouses, from app. EUR 173 mln to EUR 1.9 bln last year,” emphasises Michał Stanisławski of CBRE. Nevertheless, it seems that even the three main types of real estate will not be enough to sate investors’ appetites. As the competition intensifies in these sectors, some are looking to other, less crowded fields to operate in. “Funds are also interested in the hotel segment, but the problem is the limited supply of this asset class. Student halls and apartments for rent, which there are still shortages of on our market, are also arousing interest. A joint-venture model in which the investor partners up with a local developer that’s already at the planning stage of a particular project might be the most profitable approach for entering these segments,” suggests the head of Savills in Poland.

Things are good for now, but...

The investment carnival is still in full swing, so it’s still difficult to find anyone with anything a bit more gloomy to say about it. The mood of investors could be described as buoyant, to say the least. “Globalworth’s strategy for 2019 and the next few years involves the further expansion of our real estate portfolio and strengthening our leading position in Poland. We are currently in advanced negotiations for new acquisitions. And we are still concentrating on office projects,” reveals the company’s CEO, Dimitris Raptis. Matthias Cordier of Madison International Realty is equally ebullient: “We are closely monitoring the demand/supply situation on this market and are generally open to pursuing further joint venture investment opportunities in high quality real estate projects in Warsaw. Based on the attractive market and investment fundamentals I’ve already mentioned, Madison believes that the Polish economy, and Warsaw in particular, offer an attractive environment to deploy capital on a differentiated basis,” he says.

The commercial real estate market now looks so promising that all this optimism should come as no surprise. But this does not mean that market players are not aware of the challenges that lie ahead. “We are the leader in the region, but considering the size of the country and its sustainable long-term economic growth one should expect even more interest from investors to emerge,” admits Piotr Kaszyński of Cresa. He goes on to add that the challenge for office and industrial developers will be the growth of project costs, which in some cases may result in some developments being postponed, especially where it is difficult to raise rents. The room for further yield compression, meanwhile, has slowly been shrinking.

In its ‘Markets in Minutes’ report, Savills makes a particularly salient point: we are at an advanced stage of the real estate business cycle – and this could induce some nervousness among investors. They also point out that additional risks could be thrown up by geopolitical uncertainty, a slowdown in economic growth, tenants’ expectations changing and the emergence of new types of real estate.

To complete the picture, it has to be pointed out that this year two elections are to be held in Poland – for the European and national parliament. This is another factor whose impact is difficult to assess, but it’s one that certainly should not be ignored. ν

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