PL

Warehousing for the world

Investment
John Palmer, the head of industrial investment at Savills, explains the reasons behind the current boom in warehousing and why it still looks set to continue.

Alex Hayes, Eurobuild CEE: Is Poland now becoming a warehouse hub for many of the surrounding regions?

John Palmer, head of industrial investment, Savills: That’s exactly correct. We’ve been seeing this develop over the last five years. Within the short to medium term Poland will be recognised as a leading warehousing, production, light assembly and e-commerce centre in Europe and primary supplier of space for Germany. Poland will become increasingly recognised on the world stage as there will be an influx of more and more Asian capital and goods coming in from the east.

But why is this happening to Poland specifically?

Because Poland is one of the few countries left in developed Europe that can offer land and offer relatively quick build times. There is a shortage of land now in Western Europe for very big developments, which makes it very difficult even to find sites. Land shortage and high pricing makes it economically challenging for developers and for the tenants to pay the rents that would be required to match the land prices in Western Europe. This is even the situation in the Czech Republic, where land is very tight. Poland is one of the few countries where you can identify sites that are zoned ready for warehousing and industrial use, build them out and have a completed development within about two years from looking at a site. In most of Western Europe it’s completely different. Land prices are a lot higher and it’s very difficult to get plots above 10 ha that are free for development. So when you put all those factors together with the much improved infrastructure, itʼs hard to find anywhere comparable to Poland.

The infrastructure system is relatively complete now?

Yes. The critical infrastructure is in place and itʼs very efficient, very streamlined and very good. We’re not just talking about roads. There are different elements to transportation. One is the deep water container terminal in Gdańsk. This is one of the few ports in Europe that can accommodate supersize tankers from Asia. From Gdańsk freight is often taken by train to Łódź and then goes out into Europe. Then there is the freight railway coming into the European industrial hub within Łódź. This is now receiving two to three trains per day from China. Then there is the motorway system. In conclusion it’s easy now for companies that are offshoring their production or warehousing just to locate over the border from Germany or other Western European countries and have their centres built in Poland.

About seven years ago I was told that the level of warehouse development was marginal compared to that in western Europe. Is Poland still behind in its warehouse stock or has it now caught up?

It’s certainly not lagging behind. Just to give some figures the modern developer built stock in Poland is about 16.8 mln sqm, and that compares to 20 mln in Spain, 16 mln in Italy, 23 mln in France, 22 mln in Belgium, and 26 mln in the UK. Probably within about five years Poland will be moving up the rankings and in terms of stock will be second or third behind Germany and the Netherlands! There’s 2.5 mln sqm of new stock arriving every year and the amount has doubled in the last five years.

Who is now investing in Poland and who will be investing here?

The big story is that Poland is now attracting money from across the globe. What we are seeing is that Asian funds are very comfortable and happy investing here, as well as Korean funds, Malaysian funds, money from Singapore – they all are interested in investing in Polish properties. The big change is that before they were looking for drier investments, by which I mean investments with one tenant on a long lease that were very easy to manage. But now they’re so confident in Poland they’re willing to look at assets that require a bit more asset management with more tenants and some leasing risk.

What sort of yields do you expect from warehouse investment in Poland?

The warehouse sector can be divided into three or four categories. You can’t really mix them because the division in yields and how the investments work are very different. You have what we call the e-commerce type investments and these are the most sought after dry – often long lease Amazon-type – deals that the Asian funds like. These now attract yields of below 5 pct, and there are transactions that will happen this year that will bring the yields down to 4.5-ish, if not below. The next sector would be what we call big box logistics and these are the very big distribution centres such as those around Łódź that are often over 100,000 sqm. They are so big because they are a consolidation of other warehouses and act as regional distribution centres. These don’t just serve Poland but other countries as well. They would have a single tenant on a ten year lease and will achieve yields somewhere around 5.5 pct this year. This is sustainable because the rental levels with big box retail logistics are low in comparison to Western Europe, so the tenant is likely to stay there because they are getting a very good deal on rent. The next category is multi-tenant logistics parks. These would be parks of about 50,000 sqm split between, say, ten different tenants. This is the sector generating the highest demand at the moment, largely because investors can see that there is great value and the yields are coming in. At the beginning of the year yields for these multi-tenant parks were something like 6.8 pct. Now they are coming in to about 6.2 pct or below.

Are there any important segments we haven’t looked at yet?

Well, one sector we haven’t really talked about is all the activity generated by foreign direct investment, which is coming into Poland at around EUR 8 bln per year. Production halls are being built and assembly halls for the big corporates. There are companies like Mercedes Benz, which has decided to open a new engine factory in Poland, VW has opened a truck factory in Września, while LG is going to have a battery processing plant built in Poland – and these are huge investments, each of around EUR 1 bln. Perhaps the most important driver for space is domestic spending. Poland can be viewed as quite a balanced economy. With domestic spending increasing and people buying more just for their homes, again warehousing and storing goods just to serve them has moved up a whole gear. People are shopping more and more online and this is causing a very big increase in the requirements for warehousing as stores realign their strategies to be more online. The knock-on effects for warehousing are substantial. Around 3 sqm of warehousing space is required for e-commerce retail for each 1 sqm required by normal retail. Also, a lot of the centres serving e-commerce are not designed to serve just Poland, but also Germany, the Czech Republic, Western Europe, Scandinavia and the Baltics.

How sustainable is this current boom in industrial assets?

I truly believe it’s very sustainable. Although we’re seeing 2.5 mln sqm being built every year, vacancy rates aren’t moving up and are sticking at about 5 pct. Despite this large volume of stock coming to the market, it is already pre-leased and therefore vacancy is stable. There is rental growth now, although not like that seen in the UK or Germany. So headline rents that were, for example, EUR 3 are now EUR 3.30. That’s only happened in the last twelve months and is another reason why investors want to come into the market now. If an investor is buying a multi-tenant park with leases coming up for renewal, there’s a feeling that they can do very well with rental increases from lease renewals. Rental increases can bring a massive upside to an investment. ν

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