PL

A pandemic but no panic

Feature
How are the individual sectors of the real estate market reacting to the Covid-19 outbreak – and will it ever be the same again?

A month ago the spectre of the Covid-19 virus in Poland was still a rather vague and abstract prospect. Press releases were generally littered with such phrases as “if it comes here at all” or “if it impacts us”. At the time of writing, March 20th, there were more than 400 confirmed cases in Poland and almost 30,000 people in quarantine. Large events have been cancelled, and schools, cinemas and shopping centres shut, while many companies and offices have closed for the duration and most employees are now working remotely. The country has gone into lockdown and the economy is operating at half speed. However, it turns out that the impact of the pandemic when it comes to the real estate market has taken on a variety of forms – from catastrophic through neutral to... even favourable. It all depends on the sector and the scale of a company’s operations.

Office sector disinfected

Office buildings have been emptied after most companies switched to a home office model – but not everyone can work remotely. In order to guarantee their safety, the owners of office buildings are introducing stricter access control and have increased their expenditure on hygiene. For example, Globalworth, which – even before the first official case of the coronavirus in Poland was announced on March 4th – introduced more stringent cleaning procedures in all of its 22 buildings in Poland. The staircases, lobbies, lifts and public toilets are now disinfected daily with virus-destroying agents that are, however, safe for humans. Cleaning services are now carrying out cleaning and disinfection procedures at least every four hours. In addition to this, public hand disinfection stations where hand sanitising fluid is dispensed have been installed in the lobbies of each building. This regime has also been imposed in all of Globalworth’s properties in Romania.

Office buildings may have temporarily been emptied, but this does not yet seem to have had any impact on the construction and investment sectors, which are still motoring on. With the prospect of the ‘supply gap’ that is expected for the Polish market in the next few quarters, the demand for office space will continue to be high, and so ongoing and planned projects are not at risk. One exception could be flexible space (especially for office buildings with a significant proportion of coworking space) – a hot market that has recently seen a huge amount of new supply. This could suffer as a result of the pandemic – as could the entire sharing economy: the lockdown has short-circuited coworking, co-living, car sharing and many other manifestations of the ‘use rather than possession’ ideal. “The smallest operators that offer short notice contracts for an indefinite period to mainly small companies and freelancers will face the biggest challenge. Some of these operators are beginning to offer their members additional incentives, such as the suspension of membership agreements or the removal of charges for additional services, like using the kitchen or car park. Meanwhile, the flexible space giants, which have corporate clients who account for much of their revenue – often as much as 40 pct – can still operate under their original terms,” points out Adam Lis, the flexible office solutions manager at JLL.

Retail losing out but not losing everything

Even before the first Polish case of coronavirus was recorded, Cushman & Wakefield was warning of possible disruptions to large-scale retail. Such caution might have seemed a little exaggerated at the time, but now everyone can now see how prudent this was. “Depending on how the coronavirus spreads in Poland and how effective the action taken by the relevant authorities is, we could be faced with a significant reduction in the footfall of shopping centres, including the possible mandatory closure of public places, and thus with a significant temporary decrease in the turnover of stores across basically all sectors,” warned Joanna Kłusek, a partner in the retail asset services department at Cushman & Wakefield, as early as in the first few days of March.

This is what happened – a government decree imposed the closure of all but a few stores (such as food and DIY stores) and services in shopping centres starting from March 14th. Several retail chains were infuriated by this, seeing it as treating some as ‘more equal than others’, that is, the large retail chains. “The limiting of the operations of shopping centres is not an attempt to generate additional profit for the larger chains, but is purely to ensure the public’s access to necessary goods,” explains Radosław Knap, the general director of the Polish Council of Shopping Centres. “And despite the fact that they were allowed to open their stores, some tenants decided to close them anyway for the safety of their customers and their employees, even though they were not bidden to do so under the new regulations,” he adds.

Shopping centre owners have since come to their tenants’ rescue – especially the smallest traders who are certainly going to find it very hard to survive the forced break. For example, Napollo offered a 10 pct rent reduction in March and a 14-day rental holiday in April to all tenants whose units have been closed since March 14th. “Our decision has been prompted by a sense of business and social solidarity with our tenants. Our desire is to help tenants maintain their financial stability as well as to avoid lay-offs,” explains Sławomir Zawadzki, the CEO of Napollo Holding.

Sheds maybe the only winner

One sector that could actually benefit from the pandemic is logistics and warehousing. Despite the obvious difficulties stemming from the closure of borders and the widespread lockdown, e-commerce has been given another injection of energy with the opportunity to take another (and hardly insignificant) slice of the retail cake. “The trade in fast-moving goods is experiencing increased demand. People have been stocking up for the uncertain times ahead, but they are also buying more because they are spending more time at home. Medicines, food and household cleaning products are all experiencing increased demand. The demand for meals, which was previously met by restaurants, bars and canteens, has now been entirely replaced by food prepared at home and by ‘home delivery’ services,” explains Renata Osiecka, the managing partner of Axi Immo.

Couriers are also busier than they had been previously. InPost has responded to the increased use of parcel stations by introducing a weekend service for the first time, while Amazon and other e-commerce companies are also making additional changes to order processing. The initial effect of the pandemic on retail was to interrupt the Chinese supply chains, which is now gradually recovering. However, as the epicentre of the pandemic shifted to Europe, production here became more restricted. “The growing demand for online shopping in Poland is reflected by the latest search trends. According to Google Trends, the popularity of the phrase ‘online shopping’ in searches increased twenty-fold in Poland in the second week of March,” adds Damian Kołat, an associate in the industrial and logistics department at Cushman & Wakefield.

Will suppliers, in taking on board the Chinese supply problems, move to ensure that they not only have alternative sources of supply but also higher volumes of stock requiring additional locations? It’s difficult to give an unambiguous answer to this question right now, according to Damian Kołat. Consumers who are currently staying at home and making online purchases to avoid the risk of infection will certainly also have a more favourable attitude towards e-commerce when the pandemic is over. This will mean not only the growth of sectors that are already popular online (e.g. clothing and electronics), but also those that have been marginal up until now, such as the e-grocery segment, which had previously only accounted for 1 pct of all e-commerce transactions.

According to ‘Covid-19 and Implications for Logistics Real Estate’, a special report just published by Prologis, the demand for space in the warehousing sector could actually decrease in the short term, resulting in its greater availability. “However, this opportunity could be short-lived as some [users of warehousing space] race to gain lost ground and expand their needs for facilities in support of business continuity and higher service levels,” write the authors of the report. “While financial market volatility and the headwinds against economic activity are near-term risks, interest rates have experienced a compensating decline. [Users of warehousing space] and capital markets are likely to see a boost to logistics real estate demand resulting from inventory levels and e-commerce, even as other property types face demand headwinds. Consequently, sentiment towards the sector should remain positive, though near-term denominator effects could impact investment decisions,” reads the report. Prologis also states that there will be three main long term trends that could stimulate demand after the crisis is over. One of these is a likely growth in inventory levels: “In the past, events such as natural disasters and work stoppages at ports have led to step changes in inventory practices. In the wake of Covid-19, customers are likely to reassess ideal inventory volumes and business continuity plans – which could translate into greater demand.” Another projected trend is the further popularisation of e-commerce: Last year, online shopping “grew by 16.7 pct globally. Covid-19 doesn’t seem likely to change any of that; instead, it may increase the speed of adoption and the number of consumers who shop online. Given its value proposition, especially in the hardest hit markets, e-commerce may rise in even greater importance in the basic functioning of everyday life.” The other change the report predicts is the diversification of production locations: “Covid-19 may accelerate another structural trend: pushing manufacturing to new locations (…) Strategies that focus on the consumption end of supply chains will not be affected by these trends. While production-end locations alone are not a major investment strategy, this broadening of manufacturers creates second-order demand through both suppliers and networks that serve blossoming consumer markets,” believe the authors of the report.

The general conclusion from this report and others, is that if any real estate sector is going to emerge from this calamity relatively unscathed, then it has to be warehousing...



“Some commercial properties are more exposed in these adverse market conditions – but these are generally in the retail and hotel sector. I believe that office and warehouse assets are more secure,” says Katarzyna Zawodna-Bijoch of Skanska

Homes a refuge from the virus?

... and it might also be the residential market, too. Homes have always been a real estate ‘necessity product’ and the demand for them is so high in Poland that even a pandemic is unlikely to put the brakes on it. If there is a dramatic increase in the number of cases, it could slow down construction work, but this would be the only realistic threat to the sector. “If interest rates fall, it will strengthen the impulse to buy homes, while any further turmoil on the stock exchanges and in the tourism sector – for example, impacting condo- and aparthotels – could direct even greater investment volume to the residential market. People need homes to live in, so they won’t stop buying them,” insists Michał Sapota, the CEO of HRE Investments. According to him, the decline in sales can only be short term: “First of all, we all have more important problems to contend with right now; secondly, sales offices are closed at the moment; and thirdly, following the advice they have been given, potential buyers are avoiding viewings. But judging by the number of inquiries and visits to pages advertising homes for sale, there has been no decrease in parties interested in buying them. The current situation would have to continue for many months to dampen the demand, which is unlikely,” he says.

In spite of all this, one of the largest residential developers, Atal, has announced that it is reversing its intended dividend policy this year and will propose to shareholders that the entire profit generated in 2019 is transferred to its cash reserves.

Hotels on the front line

The hotel sector was the first real estate segment to be hit by the pandemic – almost all tourist and business trips over the last few weeks have been cancelled, and so occupancy has plummeted. The flight ban and the significant reduction in rail traffic as well as the closure of land borders are also likely to compound the impact. Does this mean a long term decline in revenues and investment is on the cards for this sector? “We have recently been speaking to many business owners, investors, funds, hotel chains, tenants and suppliers. The conclusion we drew from these meetings was that the market is not yet panicking,” reveals Andrzej Szymczyk, an associate director in the hospitality department at Walter Herz. Most hotels have decided to close for business over the next few weeks – both for security reasons and also due to the lack of guests. Despite having ceased their normal operations, many hotels are currently busy processing reservations and making changes to them while maintaining their relationships with customers so that they can make a smooth return to business as normal once the pandemic is over. “The key to minimising losses over the next few weeks or months could be by ensuring that the hotel is managed well in the meantime by maintaining the healthy profitability of services and cash flows; or by investing in renovations or in investment funds, not only to create a financial cushion in a difficult moment but also to show that the owner or hotel manager has embraced a long term approach,” suggests Andrzej Szymczyk.

According to that company, if Covid-19 in Poland can be successfully brought under control by the end of April or mid-May and the restrictions lifted, there’s a chance that hotels will be able to make enough money to survive during the summer. But despite this, an unoccupied room (or, for the catering sector, an unsold meal) today will not earn twice as much tomorrow to cover the initial loss of revenue. “When it comes to investment in this market, two approaches to the current situation have become evident. One is for established investors to scale back their activities for a certain period until the market and its prospects can be properly assessed. The other is for potential investors from other sectors to make opportunistic purchases given the current lack of liquidity and owners’ willingness to sell their hotel assets,” believes Andrzej Szymczyk of Walter Herz.

According to market watchers, serviced apartments and short term rental apartments may have the most serious difficulties regaining their customers. In previous crises tourists and businesses have tended instead to head for safe havens – staying in hotels that operate under familiar and recognised brands.



“People need homes to live in, so they won’t stop buying them,” believes Michał Sapota of HRE Investments

Investing in a foggy but bright future

What long term effects could the pandemic have on the investment market? Even the market experts at Eurobuild’s recent investment conference at the end of February (before the first Polish case of the contagion was recorded) were aware of the gravity of the situation, but insisted that the virus would not shake the foundations of the market. “We do not foresee any major impact from the Covid-19 virus on the interest in the investment market in the CEE region. Investors will be more selective, but as long as very cheap financing is available and the bond markets do not offer more attractive alternatives, the rush to invest in real estate will continue. The resilience of this segment in turbulent times is one of the key reasons that high-quality real estate is an attractive investment,” argued Marko Kohla, the managing partner of GalCap Europa. “I wouldn’t be so sure,” countered Piotr Trzciński of Savills IM, who cautioned that: “Even if the epidemic does not influence investors’ behaviour in Q2 and Q3 of this year, it might do so by the end of 2020 or early 2021. Some capital could be withdrawn and some frozen, while development projects scheduled for the end of the year could be halted. It all depends on when the virus is brought under control.”

In the weeks following the conference, of course, the situation in Poland changed radically, but the experts are still generally offering balanced but rather optimistic forecasts for the investment market. “The commercial real estate market has very strong foundations and was basically in good shape before the outbreak of the coronavirus pandemic. Some commercial properties are more exposed in these adverse market conditions – but these are generally in the retail and hotel sector. I believe that office and warehouse assets are more secure, and so will give the market added stability and security due to their long term lease agreements. The completion of ongoing projects may prove to be the biggest challenge, because it’s difficult to predict the various factors that could have an impact on it, such as the availability of building materials. The situation, however, is still fluid and so it’s too early to be able to predict all of its outcomes,” admits Katarzyna Zawodna-Bijoch of Skanska.

“This certainly applies to Poland as a location for investment in its various sectors. This may be a surprising thing to say, but in my opinion Poland could actually benefit economically from all this upheaval. The reduced interest rates and the further quantitative easing in the US and Western Europe will free up greater reserves of cash for investment, while the billions of euros being pumped into the EU economy will give ours another boost of energy. The Polish government’s legislation related to ​​tax deferrals and loan repayments should also help to restore liquidity. Some businesses will suffer and GDP will fall significantly, but the entire economy will eventually benefit,” predicts Michał Sapota.

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