Temporarily on top?

Research shows that Poland currently attracts half of the region's real-estate investment capital, meaning Warsaw will be a major target for foreign companies over the next five years. However, with office yields in the city center refusing to budge off the bottom of the barrel, investors have been anxious of late, while developers claim the city's urban planners are ignoring them. So is the city set for a rapid cohesive development or will it be case of every man for himself?

In its recently published European Cities Monitor 2005,  Cushman & Wakefield Healey & Baker (CWHB) lists Warsaw as the top city on the continent for costs of staff, with Eastern Europe the favored destination for planned outsourcing. The report says Warsaw is the fifth best city at improving itself, just behind Budapest, with Prague in second and Barcelona seen as the most active in improving its offer. For these reasons, Warsaw can also expect the biggest influx of companies over the next five years, and if company managers hold good on their promises Warsaw will take sixth position in the report's ranking with regard to representation of international companies in the city.

Outstanding options

Some 45 percent of companies that have already outsourced operations did so in Central and Eastern Europe (CEE), making it the hottest destination for relocation. This trend is set to continue, with more than half the companies that intend to outsource in the next two years saying they will do so in CEE. Already 20 percent of the firms interviewed had offices in the Polish capital, making it the regional leader.

The trend is costs-driven. Despite ranking 18th for ease of access to markets and 25th for transport links, the government seems to have curried favor among international decision makers thanks to taxation and financial policies: Warsaw is viewed as fourth-best in terms of climate for business. On this question Dublin came out on top, followed by Prague and Budapest. Still, Warsaw is viewed as the cheapest place to hire staff, and offers the second-best value for money in office space, which means more companies intend to locate here than anywhere else in Europe.

But how are developers reacting to all this potential business and what can companies expect when they get here? Recent research by the Warsaw Research Forum backs up the CWHB research with regards to value for money. A protracted struggle between city-center and non-central landlords has meant tenants could barter for low rents.

The hard work appears to have paid off and companies are now making their way back into the city center. According to Anna Kot, head of the office agency at Jones Lang LaSalle (JLLS): "Half of the take-up this year is for deals in the city center."

"There was a very high vacancy rate in the non-central market in 2002 - close to 20 percent - which forced the rents in non-central locations to decrease heavily," says Tomasz Trzósło, head of Polish investment and corporate finance at JLLS. The exodus to the suburbs has now largely been halted, as the gap between central and non-central rents has narrowed.

Investors could be doing well to sign their leases now, according to JLLS. In its Warsaw City Profile 2005 report, it says that rents have or are bottoming out, but this refrain is starting to sound very familiar. In April this year when presenting JLLS research on the office market in Warsaw, Ben Bannatyne, managing director for Central Europe at JLLS, found himself repeating much of what he said at the same event the previous year, albeit with more caution. At that time Bannatyne claimed the office market was at or approaching rock bottom. "Warsaw nets will bottom out according to the JLLS short-term rental cycle," he said. "I'm not sure if we have got to the very bottom; I hope so."

Bottom of the curve

Since then yields have dropped further, but hope springs eternal at JLLS. "We are convinced they are going to bottom out," says Karina Kreja, a research analyst with the firm. It puts Warsaw near the bottom of its office short-term rental cycle, meaning yelds should be at a nadir and is set for growth acceleration. 

This acceleration could take a while to kick in, however. "This is a very dynamic situation," warns Trzósło, so much so that the statistics in the Warsaw City Profile may already be out of date. "This City Profile was compiled four to six weeks ago and now probably we would be seeing yields of 6.5 to seven percent. I have seen a number of offers made well below seven percent in Warsaw," he says.

Traditionally, Warsaw was behind the regional leaders of Prague and Budapest in the property stakes, but the CWHB research tells a slightly different story, with which Trzósło largely concurs: "Historically there was a difference between Prague, Warsaw and Budapest with Budapest and Prague being probably a step ahead; they had more investment early on with international tenants, and Warsaw was second choice. This is now all at the same level and rental rates are very comparable." Despite the low yields in Warsaw offices at the moment, investors are so keen to get a piece of the CEE action that more money is chasing very little product, which has made speculators less discriminating in their choices, allowing Warsaw to catch up and even overtake its regional rivals. The decision to invest in Warsaw "is not coming purely out of the economical calculation of the risk versus the return," says Trzósło.

Though Poland is absorbing fully half the money invested into real estate in the region, in Warsaw's city center the next 12 months will prove even tougher for landlords, with a huge amount of space due on the market. However, Trzósło believes now would be a good time to start a city-center development.

"Yes there are two big buildings being delivered to the market in 2006 but hopefully the vacancy rate will be low by then because there will be a limited number of buildings that you can pick up from. It probably makes sense to start a city-center project in the next 12 months or so because there is a good chance that the building will be delivered to the market at a time when Rondo 1 and Lumen [Złoty Tarasy's office arm] will be getting into reasonable occupancy rates."

Foreign investors coming into Poland over the next few years will see many changes, and Karina Kreja believes the very fabric of the city is going to alter. "Złoty Tarasy will generate an urban change in the city. We will have the situation where we have a well-established eastern part of the city next to the area around Galeria Centrum and then Złoty Tarasy and Rondo 1 as a counterbalance and then a big emptiness in the middle. Let's hope the master plan around the Palace of Science and Culture is prepared soon, otherwise we will end up with two city centers with a big space in between."

Government action

Few will be holding their breath for that particular piece of urban planning, and the latest missive from City Hall, Warsaw's Strategy for Development until 2020, has earned the ire of Kreja. Urban development, she says is "hugely underestimated in the newest study. There is no developers' perspective in the strategy of development."

It's not just at the municipal level that the government is found wanting. According to Anna Kot, when it comes to offering packages to foreign investors, Poland's offer is very often below that of its regional rival. Referring to one recent major deal which Poland lost out on, she says: "The entire package [the investor was] given by Slovakia was much more popular."

Unless the government wakes up to these realities, Warsaw won't find itself on the top of real-estate investment rankings for long.