With investment volumes dropping 40 percent on last year’s results, one can’t help but wonder if Poland still has what it takes to attract serious capital. Experts claim it does. They also say that new sources of money are looking in Poland’s direction
By Beata Socha
Poland’s real estate investment volume in the first half of the year could be described as disappointing: it fell by over 40 percent compared to H1 2014, according to data compiled by Colliers International. Market analysts are however, certain that full-year figures will turn out at least as good as last year’s. According to Colliers, deals worth a total of €1.5 billion were at the due diligence stage at the end of June.
Those in the know point out that the lower volumes are the product of smaller lot sizes of this year’s transactions: the market was dominated by transactions within the €50-100 million price range in H1 2015, accounting for 72 percent of the total volume. As a result, the average transaction value fell in H1 2015 to €40 million, down by a third compared to the corresponding period in 2014, according to DTZ. “The lower value of real estate investment deals compared to 2014 in the first half of the year is not, in my opinion, a signal of a slowdown. The number of transactions concluded between January and June is larger, however, their scale and value are lower,” said Tomasz Trzósło, managing director of JLL Poland, head of Capital Markets, JLL Poland.
Market analysts also seem confident that volumes will rise in H2 2015, bringing it on par with the previous two years, both of which saw over €3 billion worth of real estate change hands.
“We are launching a number of high profile, landmark assets for sale in the coming weeks. Demand and activity is there and the investment volumes will show that by the end of the year,” assured James Chapman, partner, CE Capital Markets at Cushman & Wakefield.
Others concur. “We can expect a few much larger transactions in the second half of the year. One such example is the sale of the Riviera shopping center in Gdynia, finalized in late August and early September – thus far the biggest transaction across all real estate segments this year,” said Trzósło. He admitted, however, that the supply of A-class office schemes in Warsaw, which always generate the highest transaction volumes, is limited.
Regional markets thrive
Office transactions represented the biggest share of all deals (€362 million and 45 percent of the entire deal volume, as per DTZ data) but notably it isn’t Warsaw that has been attracting the most attention. “The overall volume of office investment transactions outside Warsaw could potentially reach even €750 million in 2015, up 70 percent on last year,” said Tomasz Puch, regional director, head of Office and Industrial Investment at JLL.
Regional office markets, mainly Kraków and Wrocław, but also Gdańsk, Łódź, Katowice and Poznań, are increasingly hot for investors. Two of the biggest office deals concluded lately were the sale of the Enterprise Park complex in Kraków, Green Horizon in Łódź. Many more are expected to close by the end of the year.
“The regional office markets are experiencing their strongest year ever for both leasing and investment activity. … Investors have found comfort in strong tenants, long leases and high-quality assets in these cities and there is a constantly growing liquidity for best-in-class properties,” said Chapman.
Warsaw is expected to see a comeback by the end of the year, though. “We are about to see a major uplift in activity to key Warsaw offices due to some new deals being introduced to the market,” he added.
Retail and industrial
At €260 million, retail deals accounted for 32 percent of the entire volume. Some of the biggest transactions were the sale of the Sarni Stok shopping center in Bielsko-Biała, Focus Park in Rybnik and the Solaris Center in Opole.
“The retail market is undergoing a major resurgence with growing demand for strong centers across the country. Some of the best opportunities are currently in catchments of 200,000 – 400,000 people where single shopping centers can absolutely dominate,” explained Chapman.
Meanwhile, industrial assets, which were a hot zone in 2014, also failed to impress in H1of the year. Warehouse deals totaled a meager €149 million in deals, corresponding to 19 percent of the total volume. Only three transactions closed in H1, two of which were generated in 2014. But, again, more deals are in the works. “We won’t beat last year’s record of €744 million in the warehouse sector. However, provided that all the ongoing transactions are closed on schedule by the end of the year, we should see a volume of €600 million or more, which will be another great result, comparable to that recorded in 2013,” said Trzósło.
Chapman claims investor interest is there, but, similarly to the Warsaw office market, the product for sale has yet to arrive on the shelves. “There is still a huge amount of capital looking at the industrial sector. However, the quality of the available assets is generally not at the prime end. Most activity during H2 will involve older assets with the exception of a significant, single tenant long-lease opportunity. The latter will see record bidding but it is an anomaly within the context of the wider market,” he explained. He added that we will see the return of new prime assets and portfolios in H1 2016 with the completion of new construction.
Regardless of what may or may not be concluded this year, experts are also quite positive that investor interest in Polish real estate is not on the decline. According to “CEE Investor Survey” published by DTZ, Polish offices and retail are among two out of the top three segments which investors find the most attractive in the CEE region. In “Investor market update” DTZ analysts also claim that the non-prime sector is seeing increased investor activity.
Besides, why shouldn’t managers of real estate funds be interested in the Polish property market, given that it remains one of the most liquid markets in Europe? In DTZ’s latest liquidity ranking, Poland was the sixth most liquid market in Europe in 2014. Granted, it fell from the second position it had occupied in 2013. However, it was still the next best thing after the UK market for non-European capital. “Last year, Poland was Europe’s second most liquid market when it comes to investors based outside our continent, whose share in the transaction volume amounted to 55 percent,” said Craig Maguire, head of Capital Markets, DTZ.
“The Polish investment market continues to be dominated by global funds: these are American and Canadian funds, but also Asian and South African. German and British capital remains active as well,” explained Trzósło.
Even though the sources of capital remain the same, the profile of the investors is changing. “The global appetite has changed in 2015. It had been primarily US-based opportunistic capital but now we can see long-term investors looking to make Poland a strategic part of their investment portfolios. Such investors are able to pay higher prices for assets that offer long-term value,” said Chapman.
Where to next?
On the one hand, investors remain highly interested in Poland and value its liquidity and size, but on the other hand, the scarcity of available assets may have turned their gaze towards other CEE markets. Can other markets in the region outperform Poland in terms of investment volumes? The Czech Republic already has. With €1.2 billion in deals closed in H1 2015 it accounted for some 47 percent of the entire CEE investment volume, beating Poland by nearly €400 million. Hungary (with €280 million and 11 percent) and Romania (7.5 percent) were next in line.
“There are some very strong pull factors that are attracting investors to the Czech Republic, Slovakia, Hungary and Romania. Investors see good value in these markets with strong fundamentals. The Czech Republic has the highest GDP growth in Europe at the moment, Hungary has had positive occupational stories and limited new supply,” said Chapman. He assured, however that Poland remains a priority for most money managers and that it shouldn’t fear competition from other CEE countries. On the contrary, any attraction towards CEE is good for Poland. “Overall, the effect is positive because many investors consider CEE as a region and it generates more interest and focus,” said Chapman.
Trzósło also added that Poland’s undeniable and inherent advantage is its size. “The scale of the market is very important – there is and always will be a concern in the case of smaller markets as to their liquidity and potentially limited ability to divest. There are no such concerns in the case of the Polish market,” he explained. One cannot forget however, that while being more secure, Poland is becoming increasingly expensive. “The expected and actual yields for the best office schemes in Warsaw are significantly lower than in Budapest and Bucharest,” he added.
The overall appeal of Poland therefore, continues to lie in a unique combination of being less mature than Western countries but more liquid than other CEE markets. Let’s hope it remains right there in the middle.