Tough to beat

Image: Solaris Center

With over €4 billion in investment transactions, the year 2015 exceeded all expectations, but 2016 might bring a cooldown

By Beata Socha

The volume of real estate investment deals in 2015 came in at €4.1 billion, the highest score since 2006, according to data compiled by CBRE. Earlier forecasts put the total investment figure somewhere at €3 billion, but they were readjusted later in the year, “due to a number of very large transactions that evolved during the second half of the year,” explained Soren Rodian Olsen, associate, Capital Markets Group, Cushman & Wakefield.

ramka1Buying retail
The record-breaking result came on the back of particularly strong investor appetite for retail properties, not only in Poland but also in other CEE countries. Altogether, the segment saw a 166 percent year-on-year increase in 2015 and accounted for 43 percent of the entire investment volume in the CEE, as per CBRE data.
In Poland alone, the retail segment brought in as much as €1.8 billion in transactions, according to JLL. Some of the large-scale deals of the past year include the sale of Galeria Riviera in Gdynia for €291 million to German investor Union Investment, and Stary Browar in Poznań for €290 million to Deutsche Asset & Wealth Management.
Apart from the well-established European and American investors, there were also newcomers to the game. South African investor Rockcastle has been buying shopping centers across Poland. Last year it bought four existing malls: the Solaris center in Opole, Karolinka in Opole, Pogoria in Dąbrowa Górnicza, and Platan in Zabrze. The South African investor now has four  completed malls in Poland and two which are currently at the construction stage, including Fabryka Wołomin near Warsaw. It is planning on further acquisitions in 2016.
Asian interest
Other international investors are also eyeing retail properties, not only in Poland but in the entire CEE region. “Given the ongoing transactions that are expected to close [in 2016], the Czech Republic will be the biggest competitor to Poland. Further growth is also expected in Slovakia, Hungary and Romania,” said James Chapman, partner, head of CEE Capital Markets at Cushman & Wakefield.
CBRE adds Serbia, Croatia and Slovenia to the list of potential winners in 2016. “We also expect to see an increasingly diverse investor profile as Asian investors aim to increase their presence within the area,” said Gijs Klomp, head of CEE Investment Properties at CBRE.

Smaller deals

Image: Mayland Properties

Image: Mayland Properties

Meanwhile, the office market in 2015 recorded more deals but smaller in size, as the majority of the purchases took place outside Warsaw,
JLL reported. Both the transaction volume as well as the average deal value fell last year compared to 2014 when a number of large-value assets changed hands, including Rondo 1 and Metropolitan in Warsaw. “A lot is happening in regional markets, but these are transactions of €30-40 million each, so you need ten of these to match the price of one large Warsaw tower,” explained Tomasz Trzósło, managing director of JLL Real Estate Consultancy.
The warehouse space market was less robust than the previous year. “However, one should take into account the fact that 2014 has, so far, been an all-time record. We expect that there will still be very large investor interest in the warehouse market and the turnover is likely to exceed that achieved in 2015,” Tomasz Puch, director of the Capital Markets Department at JLL, pointed out.

Over the bump
All in all, 2015 was a remarkably good year for Poland’s real estate sector, one that will be quite difficult to beat in the coming years. The high investment volume was the product of “investor trust built over the years in Poland as a stable market, the availability of attractive investment products, better access to financing and higher yields than in Western Europe,” explained Trzósło. Interestingly, three out of the four elements listed by Trzósło appear to be in jeopardy this year, which could mean that the 2015 result will be difficult, if not impossible, to repeat.
Firstly, the supply of good investment product for sale has been waning over the past few years. Trzósło admitted that the supply could be lower in 2016 mainly in the shopping center segment. And since retail was the driving force behind the 2015 success, the limited availability of retail assets for sale is more than likely to take its toll this year.


Ratings, taxes, China
But, even if Poland had a plethora of large retail properties ready to be sold, it is no longer certain it would meet with the same demand it did over the past few years. On the one hand, Standard & Poor’s recently lowered Poland’s rating to BBB+, with a negative outlook. On the other hand, China’s underperformance spilling over to the rest of the world is all but inevitable.
“Some international investors could limit their activity. It’s not the direct result of the lower rating, but of investor sentiment as to the stability and long-term perspective of the Polish real estate market (first and foremost economic growth). We saw imilar reactions in 2009, in the wake of the Lehman Brothers collapse and investors feeling wary of the condition of Central European economies,” said Trzósło.
On top of that, Poland’s new government has been implementing a series of new regulations, some of which could adversely impact the real estate business. “Investors are also uneasy about some legislative changes, mainly the tax on financial institutions (which may result in increasing the cost of loaning money in the real estate market) as well as the tax on retail chains (the extra cost will likely be borne by the consumer, but investors are afraid of its negative impact on shopping centers),” Trzósło explained (see story on p. 64).

ramka3Downhill from now
Those more optimistic about the future see the lower rating as the side effect of the current political uncertainties and claim it is unlikely to spill over to the real estate industry.
“The change in Poland’s credit rating is surprisingly linked to the political situation and not the country’s strong economic performance and forecast. We expect that investors experienced in the CE Region are unlikely to change their strategies for Poland,” said Olsen. He did, however, express his concern with the Chinese economy slowing down, saying that, “The situation in China may impact a wider number of western economies – whether that in turn will influence real estate investments in Poland remains to be seen.”
All these uncertainties pose a serious question: was 2015 the peak in the current business cycle and could this year be a prelude to another slowdown, at least for the real estate industry? “I do hope that these fears will not become reality and that the influx of investment capital to Poland remains at levels similar to what we saw in 2015,” Trzósło concluded.
Come what may, even if all the external and internal disturbances don’t curb the capital inflow into Poland, 2015 might still turn out to have been the best year for Polish commercial real estate for years to come. A year that future results will be compared to, just as 2006 will forever be known as the pre-2008 heyday, the likes of which no one expects to see again any time soon.

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