Dollar-based protection
This means developers, who largely borrow in foreign currencies, are insulated from the risk associated with Poland's currency. Instead, renters get hurt by zloty depreciation.
So why do tenants put up with such a situation?
"It is still a developers' market," said Mark Bauer, managing director of Apache Poland, an oil and gas exploration firm that will move into 1,200 square meters in the Pulawska Financial Center this October. "It won't change unless the market turns around and there is excess supply."
Apache will pay a dollar-based rent even though it would rather sign a zloty-based contract. "In a market where the dollar strengthens, every company would prefer to pay in zlotys," he added. "But realistically the real estate market here, both on the residential side and the office side is tied to dollars. That is to the benefit of the owner."
The laws of supply and demand are in the owner's favor, real estate industry members agreed. "Up to now there has been a lack of office space," said Krzysztof Grzesik, a partner with property agent Healey & Baker. "The demand is so high that landlords can afford" to charge rents based in dollars.
"As long as development will be financed by foreign banks and there is a risk of inflation, it will be based in dollars," he added.
This supply-demand imbalance for modern office space is only slowly changing so the practice of renting based in dollars isn't likely to end any time soon, developers said. Only when supply outstrips demand are tenants likely to pressure agents and developers for zloty-based rents.
In addition, because many of the companies renting Class A office space are multinationals, developers feel that there is less resistance to the practice. "Multinational companies can take it, it's part of the risk," Grzesik said.
"It's part of the cost of doing business here," agreed Bauer.
Developers argue that to charge zloty-based rents when their borrowings are financed abroad would subject them to unacceptable risks and possibly endanger projects.
"All developers calculate costs and revenue in dollars because this gives stability," said Michal Kubicki, development director with Echo Investment, a publicly listed development company. He added that this is not surprising because the capital requirements for development are often so much higher than in other industries.
"The investments are costly and the currency differences are risky," Kubicki said. "Stability is the most important thing and that's why it's based in dollars."
If prices were based in zlotys, "the risk for landlords would be too high," Grzesik added.
Many tenants also finance their capital requirements abroad. And if their revenue is zloty based, they are subject to the same currency risk that developers would open themselves to if they based rents in zlotys.
But for now, tenants have had no choice but to bite the bullet and hope that the zloty sticks to the predictable crawling-peg devaluation rate set by the central bank, rather than going through wild swings.
When the latter occurs, as happened over the past four weeks, companies see their operating costs jump. The cost of office space in the Atrium building accounts for about 3% of Commercial Union's operating costs, said Adam Michon, the insurance company's vice president for finance. This will now increase to about 3.3% because of the zloty's plunge due to the Russian crisis.
A landlord isn't likely to be worried about such a cost increase, nor is it likely to sway prices, developers said. "I don't think the prices would go down," said Echo's Kubicki.
The zloty's depreciation also means that even if a tenant is able to relocate for a better rent, it might not be that much lower when calculated in zloty terms. For example, a tenant who rented earlier this year at $40 a square meter and then managed to cut its rent to $36 a square meter last week, would only have seen a 2% decline in zloty terms due to the recent currency crisis.
So when will the supply-demand equation tip in the tenants' favor? That is subject to much debate within the real estate community.
Most developers and agents agree that prices will fall over the next three years from the current highs of $40-$50 a square meter. But whether all the new projects in the works around Warsaw will meet continued high demand is another issue.
The increased supply of office space will drive rents for Class A space down to $32 a square meter net in 2000 from the current average of about $38-$40 a square meter net, according to figures obtained from Couderq & Kubas.
"The prices should stabilize at $30-$32 in the center and $20 in the suburbs in 2000," said Pierre Collette, a partner with Healey & Baker. He added, though, that this decline would not be a problem, saying, "It's still a very exciting rent."
Erik Drukker, senior agent with DTZ Debenham Zadelhoff, estimated that prices for prime locations in the city center will fall slightly to $35-$40 next year. By 2001, he expects them to stabilize at about $34 a square meter. "The new supply puts slight pressure on prices, but I really don't think they will go down dramatically," he said.
They all caution, though, that exact declines will depend on available space. Currently there are about 3.1 million square meters of total office space in Warsaw, according to figures from Henry Butcher real estate agency. This includes everything from Class A space to apartments used as offices, but excludes government buildings.
In terms of modern office space, there is only 611,000 meters of total space in Warsaw, according to Couderq & Kubas. This breaks down to 103,800 square meters of Class A space, 244,800 of Class B and 262,500 of Class C. The firm estimates that by 2000 the available modern space figure will reach nearly 1.6 million square meters.
"There are 800,000 square meters under construction now," Drukker said. He predicted that the supply of office space this year will reach 350,000, next year 460,000 and 350,000 in 2000, adding that the last figure is a "rough estimation."
Others in the industry aren't convinced that so much space will actually come on line. "There are 1 million square meters possible to start, but 90% of them won't begin if they aren't pre-let," Collette said. "If everybody starts tomorrow morning there will be 1 million, but they will not do it."
Collette said he forecasts that 65,000 new square meters will be delivered this year, while there is an additional 210,000 square meters under construction for next year. "2000 is the big question mark," he said, adding that only 100,000 new square meters planned for 2000 are actually under construction. "If they want to build 1 million they should start tomorrow, and where are the cranes, where are the workers? I don't see them," Collette said.
While agents question just how much space will come on line, they are sure that demand won't flag. For 1998, take-up of new office space, which means signed contracts for new space, was at 170,000 square meters, Collette said. Next year, with the appearance of pension funds and new banks and insurance companies, the take-up should climb above 200,000 square meters, he added.
"Still, there is more demand than supply," agreed Brian Burgess, country manager for Henry Butcher. According to his figures, there are 521,900 square meters of office space under construction, including nearly 392,000 in the city center.
Of the city center space, nearly 50% is already pre-leased, Burgess said. "The market is going to stay good for the foreseeable future," he said.
And that means it will probably also stay dollar-based.
So why do tenants put up with such a situation?
"It is still a developers' market," said Mark Bauer, managing director of Apache Poland, an oil and gas exploration firm that will move into 1,200 square meters in the Pulawska Financial Center this October. "It won't change unless the market turns around and there is excess supply."
Apache will pay a dollar-based rent even though it would rather sign a zloty-based contract. "In a market where the dollar strengthens, every company would prefer to pay in zlotys," he added. "But realistically the real estate market here, both on the residential side and the office side is tied to dollars. That is to the benefit of the owner."
The laws of supply and demand are in the owner's favor, real estate industry members agreed. "Up to now there has been a lack of office space," said Krzysztof Grzesik, a partner with property agent Healey & Baker. "The demand is so high that landlords can afford" to charge rents based in dollars.
"As long as development will be financed by foreign banks and there is a risk of inflation, it will be based in dollars," he added.
This supply-demand imbalance for modern office space is only slowly changing so the practice of renting based in dollars isn't likely to end any time soon, developers said. Only when supply outstrips demand are tenants likely to pressure agents and developers for zloty-based rents.
In addition, because many of the companies renting Class A office space are multinationals, developers feel that there is less resistance to the practice. "Multinational companies can take it, it's part of the risk," Grzesik said.
"It's part of the cost of doing business here," agreed Bauer.
Developers argue that to charge zloty-based rents when their borrowings are financed abroad would subject them to unacceptable risks and possibly endanger projects.
"All developers calculate costs and revenue in dollars because this gives stability," said Michal Kubicki, development director with Echo Investment, a publicly listed development company. He added that this is not surprising because the capital requirements for development are often so much higher than in other industries.
"The investments are costly and the currency differences are risky," Kubicki said. "Stability is the most important thing and that's why it's based in dollars."
If prices were based in zlotys, "the risk for landlords would be too high," Grzesik added.
Many tenants also finance their capital requirements abroad. And if their revenue is zloty based, they are subject to the same currency risk that developers would open themselves to if they based rents in zlotys.
But for now, tenants have had no choice but to bite the bullet and hope that the zloty sticks to the predictable crawling-peg devaluation rate set by the central bank, rather than going through wild swings.
When the latter occurs, as happened over the past four weeks, companies see their operating costs jump. The cost of office space in the Atrium building accounts for about 3% of Commercial Union's operating costs, said Adam Michon, the insurance company's vice president for finance. This will now increase to about 3.3% because of the zloty's plunge due to the Russian crisis.
A landlord isn't likely to be worried about such a cost increase, nor is it likely to sway prices, developers said. "I don't think the prices would go down," said Echo's Kubicki.
The zloty's depreciation also means that even if a tenant is able to relocate for a better rent, it might not be that much lower when calculated in zloty terms. For example, a tenant who rented earlier this year at $40 a square meter and then managed to cut its rent to $36 a square meter last week, would only have seen a 2% decline in zloty terms due to the recent currency crisis.
So when will the supply-demand equation tip in the tenants' favor? That is subject to much debate within the real estate community.
Most developers and agents agree that prices will fall over the next three years from the current highs of $40-$50 a square meter. But whether all the new projects in the works around Warsaw will meet continued high demand is another issue.
The increased supply of office space will drive rents for Class A space down to $32 a square meter net in 2000 from the current average of about $38-$40 a square meter net, according to figures obtained from Couderq & Kubas.
"The prices should stabilize at $30-$32 in the center and $20 in the suburbs in 2000," said Pierre Collette, a partner with Healey & Baker. He added, though, that this decline would not be a problem, saying, "It's still a very exciting rent."
Erik Drukker, senior agent with DTZ Debenham Zadelhoff, estimated that prices for prime locations in the city center will fall slightly to $35-$40 next year. By 2001, he expects them to stabilize at about $34 a square meter. "The new supply puts slight pressure on prices, but I really don't think they will go down dramatically," he said.
They all caution, though, that exact declines will depend on available space. Currently there are about 3.1 million square meters of total office space in Warsaw, according to figures from Henry Butcher real estate agency. This includes everything from Class A space to apartments used as offices, but excludes government buildings.
In terms of modern office space, there is only 611,000 meters of total space in Warsaw, according to Couderq & Kubas. This breaks down to 103,800 square meters of Class A space, 244,800 of Class B and 262,500 of Class C. The firm estimates that by 2000 the available modern space figure will reach nearly 1.6 million square meters.
"There are 800,000 square meters under construction now," Drukker said. He predicted that the supply of office space this year will reach 350,000, next year 460,000 and 350,000 in 2000, adding that the last figure is a "rough estimation."
Others in the industry aren't convinced that so much space will actually come on line. "There are 1 million square meters possible to start, but 90% of them won't begin if they aren't pre-let," Collette said. "If everybody starts tomorrow morning there will be 1 million, but they will not do it."
Collette said he forecasts that 65,000 new square meters will be delivered this year, while there is an additional 210,000 square meters under construction for next year. "2000 is the big question mark," he said, adding that only 100,000 new square meters planned for 2000 are actually under construction. "If they want to build 1 million they should start tomorrow, and where are the cranes, where are the workers? I don't see them," Collette said.
While agents question just how much space will come on line, they are sure that demand won't flag. For 1998, take-up of new office space, which means signed contracts for new space, was at 170,000 square meters, Collette said. Next year, with the appearance of pension funds and new banks and insurance companies, the take-up should climb above 200,000 square meters, he added.
"Still, there is more demand than supply," agreed Brian Burgess, country manager for Henry Butcher. According to his figures, there are 521,900 square meters of office space under construction, including nearly 392,000 in the city center.
Of the city center space, nearly 50% is already pre-leased, Burgess said. "The market is going to stay good for the foreseeable future," he said.
And that means it will probably also stay dollar-based.
