Big wheels keep on turning

Poland’s western markets continue to attract big e-commerce and automotive players, but cheap money and improving infrastructure is opening up also new locations for warehouse developers Interview by Beata Socha WBJ Observer: Last year saw 2 million sqm of warehouse space leased, a record-high for Poland. The result is 6 percent higher than the figure for 2013, when Amazon entered the Polish market taking up 300,000 sqm. Do you expect this year to repeat the success? Robert Dobrzycki: I think so. We can see positive trends in leasing. There are new e-commerce companies coming into Poland, particularly from Germany and other Western European countries. Amazon’s entry into Poland in 2013 was a major transaction and that’s great but the real impact of the deal is that it put Poland on other companies’ radars. Amazon is a benchmark of sorts in the e-commerce business – if it decides on four investments in Central Europe, including three in Poland, others are sure to take notice. Large e-commerce firms are now thinking of moving their distribution centers east of the German border, but close enough to service Western markets. We can already see it happening. So these players are also likely to settle in western Poland, near Wrocław and Poznań? Indeed. Western Poland makes much more sense for international companies servicing the rest of Europe. The combination of labor costs and the proximity to Western markets make these locations highly attractive. The Polish e-commerce business is also growing but the size of this channel is still not as big as in the West. There is 700,000 sqm of new warehouse space currently under construction across Poland. Experts say that as much as 1 million sqm of new stock could be delivered this year. Will there be enough demand? I believe so. I think that demand for warehouse space is quite robust. There are of course temporary turbulences, like the one we can see right now. But we have been recording improvement for a number of consecutive quarters, alongside the improvement on capital markets. The cost of financing has decreased and now we believe that we will see the same trend on the tenant market. The capital for real estate usually precedes tenant demand. But that also means that tenants can access cheaper financing as well and thus develop more quickly. Poland has the lowest levels of warehouse rents in CEE, lower than in the Czech Republic, Hungary, Slovakia and Romania. Why is it so? Rents are low because we have a large land supply. It’s a flat country with a lot of land well suited for real estate development. That makes land prices very reasonable. Plus, Poland is an attractive country for investors, so the cost of capital is lower than in other CEE countries. Consequently, the sizable land and money supply pushes rents down. Do you expect downward pressure on yields in the warehouse segment this year? Currently, yields are above 7 percent. They are higher than in Western Europe and in the US. Given the cheap money and the amount of capital flowing in, these yields will likely see some natural compression. You have recently launched construction of a warehouse outside Rzeszów. Analysts say that the emerging warehouse markets in eastern Poland will see rapid growth in the coming years. Do you agree? Yes. This is mainly because of the greatly improved infrastructure, particularly when it comes to Rzeszów. At last, the A4 highway has connected Rzeszów with the rest of the country. Even though the labor market in eastern Poland is far more favorable for labor-intensive, industrial investors than in Wrocław or Poznań for example, the insufficient infrastructure used to push costs up too much. That’s why, until recently, companies were reluctant to locate there. Now, it’s a completely different picture. So you expect mostly industrial investments there? That’s right. It’s not a central region and for that reason it’s not ideal for supra-regional logistics. There are locations better suited for that. So we expect either labor-intensive businesses or local, regional distribution companies to settle there. Last year, as much as 27 percent of the new supply was speculative. That’s a big increase from the 6 percent recorded in 2013. What makes developers so optimistic? True, 27 percent is significant, but in most cases the speculative space was an addition to pre-leased or built-to-suit schemes. I think that this is a sensible level of speculation at the moment, because new tenants keep coming to Poland. New names, new brands, particularly in the e-commerce business. They often need space quickly, within a month or two. Speculative space should continue to emerge in locations where vacancies are significantly below 10 percent. To sum up: which locations are the hottest right now for developers? I would say that the eastern ones are interesting and they have a lot of potential. But they definitely won’t see the largest volumes of new space. Western markets are and will continue to be important, both for the e-commerce and the automotive industries. Businesses located there supply parts and services for a lot of German automotive producers, who have managed to survive the crisis unharmed and are still doing well.