The EU "feel good factor"
For some time now there has been an underlying assumption that Polish EU membership equates to a bright and rosy future for the Polish property market. The reasons cited include elimination of country risk, increased demand from (new) institutional investors pushing up values, increased economic activity shoring up rental demand and consumer spending power, and the arrival of new companies and government agencies adding to demand for offices. Parallels are often drawn with Spain, which joined the EU in 1986 after an approximate 10-year transition period from dictatorship to democracy.
Will there be a sudden upturn in the second half of 2004, assuming Poland joins the EU as planned? Are comparisons with Spain relevant?
Before considering these questions, let's remember the hurdle that Poland must jump, namely a referendum, probably in the early part of 2004. The business community that is largely cocooned in the island of Warsaw, where GDP per capita is more than 3 times the national average, would like to believe that this is a fait accompli. While the rural population may have other ideas, Poland has a large and fairly entrepreneurial urban population, and most observers believe that the government should be able to generate just enough support for a "yes" vote. They will need to work hard, especially as recent divisions concerning Iraq may undermine the EU in the eyes of the Poles, and add further weight to the "No" campaign.
Assuming everything goes according to plan, it is doubtful that there will be sudden upturns or overnight improvements. Arguably, some of the perceived benefits of EU membership are already occurring as developers and institutional investors have believed for some time that yields will fall (and hence values increase) as Poland "converges" with more mature markets further west. Indeed, recent investment transactions have shown initial yields in the 9.5 - 10.5% range, some 2% below the levels achieved 2 or so years ago. Yields in the slightly more mature markets of Prague and Budapest are lower still. While some of this drop in yields is attributable to falling rents and the issue of "over-renting" becoming more manageable, it is fair to say that perceived country risks are indeed being eliminated and there are now more institutional investors active in the local market than at any time previously. Other evidence of the "convergence" theory can be seen as interest rates and inflation also fall into line with other EU countries.
What of new demand from government agencies and new companies flocking into Poland? The former may be insignificant, unless the EU itself decides to relocate one of its official bodies or commissions to Poland in which case there could be a large one-off demand for office space. Regarding new private sector entrants, most of the multinationals are already present, so perhaps there will be more of a trickle than a flood of new entrants. Domestic economic growth will be the key to increases in demand, so it must be concluded that the EU per se is not an engine of growth, but rather a catalyst or positive influence that may help create better conditions for growth.
What of the comparisons with Spain? Demographics are broadly similar - around 40 million people with a number of large urban centres - and there was also a 10-year transition period between the fall of a totalitarian regime and EU membership. There are many reasons, however, for exercising caution when comparing the economies and property markets of these two countries. For one, the EU itself is very different from 1986 and in 2004 there will be a "big bang" of new entrant countries all joining at once. Consequently, the rules (i.e. the amounts!) for funding and subsidies will be different, and I for one cannot imagine driving along kilometre after kilometre of new Polish motorway or taking the AVE/TGV or ICE high-speed train to Kraków or Poznań within the next 10 years (but would dearly like to be proved wrong!). Spain in 1986 was also very different from Poland in 2003, with the economic bases of the two countries being quite different with Spain, for example, more reliant on tourism and agricultural rather than manufacturing exports. Likewise, EU and global economic cycles during the past 15 years or so, and the arrival of new technologies, means that the starting point for Poland and other new entrants in 2004 will be very different than for Spain in 1986.
In conclusion, the EU is surely a good thing for the Polish commercial property market, but in reality it is difficult to distinguish specific effects and advantages from those that would in any case accrue from becoming a "normal" democratic, market based economy - something Poland has already achieved on its own. The EU "feel good factor" will obviously underline these positive changes and eliminate any nagging doubts, which surely only the most pessimistic or ill-informed may still have.
Will there be a sudden upturn in the second half of 2004, assuming Poland joins the EU as planned? Are comparisons with Spain relevant?
Before considering these questions, let's remember the hurdle that Poland must jump, namely a referendum, probably in the early part of 2004. The business community that is largely cocooned in the island of Warsaw, where GDP per capita is more than 3 times the national average, would like to believe that this is a fait accompli. While the rural population may have other ideas, Poland has a large and fairly entrepreneurial urban population, and most observers believe that the government should be able to generate just enough support for a "yes" vote. They will need to work hard, especially as recent divisions concerning Iraq may undermine the EU in the eyes of the Poles, and add further weight to the "No" campaign.
Assuming everything goes according to plan, it is doubtful that there will be sudden upturns or overnight improvements. Arguably, some of the perceived benefits of EU membership are already occurring as developers and institutional investors have believed for some time that yields will fall (and hence values increase) as Poland "converges" with more mature markets further west. Indeed, recent investment transactions have shown initial yields in the 9.5 - 10.5% range, some 2% below the levels achieved 2 or so years ago. Yields in the slightly more mature markets of Prague and Budapest are lower still. While some of this drop in yields is attributable to falling rents and the issue of "over-renting" becoming more manageable, it is fair to say that perceived country risks are indeed being eliminated and there are now more institutional investors active in the local market than at any time previously. Other evidence of the "convergence" theory can be seen as interest rates and inflation also fall into line with other EU countries.
What of new demand from government agencies and new companies flocking into Poland? The former may be insignificant, unless the EU itself decides to relocate one of its official bodies or commissions to Poland in which case there could be a large one-off demand for office space. Regarding new private sector entrants, most of the multinationals are already present, so perhaps there will be more of a trickle than a flood of new entrants. Domestic economic growth will be the key to increases in demand, so it must be concluded that the EU per se is not an engine of growth, but rather a catalyst or positive influence that may help create better conditions for growth.
What of the comparisons with Spain? Demographics are broadly similar - around 40 million people with a number of large urban centres - and there was also a 10-year transition period between the fall of a totalitarian regime and EU membership. There are many reasons, however, for exercising caution when comparing the economies and property markets of these two countries. For one, the EU itself is very different from 1986 and in 2004 there will be a "big bang" of new entrant countries all joining at once. Consequently, the rules (i.e. the amounts!) for funding and subsidies will be different, and I for one cannot imagine driving along kilometre after kilometre of new Polish motorway or taking the AVE/TGV or ICE high-speed train to Kraków or Poznań within the next 10 years (but would dearly like to be proved wrong!). Spain in 1986 was also very different from Poland in 2003, with the economic bases of the two countries being quite different with Spain, for example, more reliant on tourism and agricultural rather than manufacturing exports. Likewise, EU and global economic cycles during the past 15 years or so, and the arrival of new technologies, means that the starting point for Poland and other new entrants in 2004 will be very different than for Spain in 1986.
In conclusion, the EU is surely a good thing for the Polish commercial property market, but in reality it is difficult to distinguish specific effects and advantages from those that would in any case accrue from becoming a "normal" democratic, market based economy - something Poland has already achieved on its own. The EU "feel good factor" will obviously underline these positive changes and eliminate any nagging doubts, which surely only the most pessimistic or ill-informed may still have.
