H1 breeds quiet confidence in CEE
To this end, CB Richard Ellis (CBRE) and Colliers both recently published in-depth research on the property market in Central and Eastern Europe (CEE), which was prepared with help from the Warsaw Research Forum.
The CEE region's property market is on-track for a record investment year. Some EUR 2 (zł.7.8) billion was put into the region in the first half of this year, almost half the record EUR 4.1 (zł.15.9) billion invested in the whole of 2004. Since 1998, the majority of investments (85 percent) have been in the office and retail market and this trend continued in H1 this year, with retail making up 50 percent of the investment volume and offices following hot on its heels.
The Czech Republic, Hungary and Poland continue to be the core markets in CEE, but some more adventurous investors are pushing into Bulgaria, Romania, Russia and Slovakia. Prime yields are now about 7.25 percent in the Czech Republic, Hungary and Poland, with CBRE expecting them to drop further. CBRE says that thanks to strong fundamentals and a "healthy development pipeline of institutional quality product in most markets," there will be further opportunities for investors. It warns, however, that supply will not be sufficient to meet ever-increasing demand.
The Polish picture
The attitude among Polish realtors seems to be quietly confident. According to Colliers, the office market in Poland continued its strong recovery in H1 2005. Transactions totaled 175,214 sqm, more than half of which was in the Central Business District (CBD). Vacancy rates dropped overall, by 2.27 percentage points, from 12.52 percent in Q2 2004 to 10.25 percent in Q2 2005. Suburban vacancy was down to 7.61 percent from 8.27 for the same period, but CBD stock saw a much more dramatic fall, from 18.6 percent in Q2 2004 to 13.97 percent in Q2 2005.
Supply in the next six months could be the fly in the ointment, however. New supply in Q1 was 50,637 sqm and Q2 saw no new completions. However, a massive 188,000 sqm is expected on the market by the end of the year. Landlords have been working hard to stem the exodus to the suburbs, and cutting rents and better conditions have largely worked. Colliers reckons that effective rent levels will rise for the first time in six years. But with masses of new supply just around the corner, landlords won't be counting any chickens just yet.
Market activity began the year strongly, with 108,773 sqm changing hands, but tapered off to 66,441 sqm in Q2. New lease agreements made up 66 percent, with renegotiations a further 22 percent. CBD was the most active sector. Rental rates were fairly stable and landlords are still offering a number of incentives to get and keep tenants, which means effective levels can be as much as 20 percent less than headline rates.
Shop 'till you drop
The retail market is of major importance for investors, perhaps even more so than the office market. In CEE, average lot sizes for retail transactions in CEE are almost double the average office transaction, according to CBRE. Almost 60 percent of the EUR 506 (zł.1,974) million invested into institutional property in Poland was in retail property.
Colliers say the retail market is at or approaching saturation levels in most of the large cities, such as Warsaw, Poznań and Wrocław. This has meant many renegotiations and tenants looking for more favorable leases. Retail parks and factory outlet centers are proving increasingly popular and many investors are also going back to the high street. However, this presents its own problems, due to a lack of large retail space, unclear ownership rights to properties and a lack of management on the high streets. Local malls are springing up with an area of 2,000 sqm. Local cities are also on the up, with a growing interest in towns with a population of less than 150,000.
A number of 'next generation' shopping centers were opened in the first half of the year, including King Cross Marcelin (GLA 34,173 sqm) and Poznań Plaza (GLA 29,687) in Poznań and Galeria Kazimierz (GLA 36,200 sqm) in Kraków. Silesia City Center in Katowice is due before the end of the year (GLA 54,300 sqm), but Manufaktura in Łódź and Złote Tarasy in Warsaw have both been delayed until 2006. Rents have had somewhat of a downturn. In Warsaw they are now at EUR 7.50-18 (zł.29-70) per sqm per month, and at EUR 6-15 (zł.23-59) in other cities. Medium-sized units command EUR 12-21 (zł.47-82) in Warsaw and EUR 9-17 (zł.35-66) outside, and small shops are earning EUR 30-60 (zł.117-234) and EUR 20-45 (zł.78-176) outside of the capital.
Logistically speaking
The warehousing market has been attracting serious interest, with investors keen to cash in on its potential as a logistics hub for the region. Warsaw still dominates and market activity came to 145,000 sqm in the first half of the year, but 124,320 sqm of new supply meant a rise in the vacancy rate to 8.93 percent. Another 430,000 sqm is in the pipeline with 121,722 sqm under construction. Total new supply for the year is expected to top 220,000 sqm. Class-A rents in Warsaw are around EUR 3.50 (zł.14) per sqm per month, which is still very competitive for CEE.
In the regions total logistics activity came to 144,806 in H1 and demand for regional warehousing is growing. Rental rates are much lower than Warsaw and come in at EUR 2.80-3.50 (zł.11-14) per sqm per month. Rents have stabilized, according to Colliers, and are not likely to fall further.
EU membership continues to benefit Poland and has boosted investor confidence in the country. With vacancy levels in the Warsaw office market dropping, investors are keen to get a piece of the pie, with retail also attracting strong interest. The warehousing and industrial market is slightly behind in terms of maturity and still has a lot to offer, according to Colliers. It warns, however, that for the property market as a whole, "increased transparency in the Polish market and the lower risk premiums on real-estate investment which result will bring about further yield compression in the future."
