The real state of the market

Despite what you may think, the focus isn't only on the capital, as regional cities are now catching up with Warsaw in several key areas.

Offices

This year looks set to be another record year in the capital city's strongest suit - the office market - with Warsaw continuing to eclipse all other Polish cities, and institutional investors and funds the driving force behind the boom.

After the first quarter of 2005 some EUR 600 (zł.2,312) million was spent in the Warsaw office market alone, and this figure could hit the EUR 1 (zł.3.85) billion mark by the end of the year. Outside the capital, the office market soaked up around EUR 64 (zł.247) million in Gdynia, Kraków and Wrocław.

The most active investors included a number of funds, including Arka BZ WBK (Alfa Plaza BC, Quattro Forum, Green Park), Aviva Central European Property Fund (Irydion office building, Wiśniowy Business Park A and Prokom headquarters) and Commerz Leasing (Rondo 1).

The exodus to the suburbs that was apparent in the office market last year seems to have reversed somewhat. As city-center rents fell after a large number of companies moved to cheaper, less-central locations, many have now chosen to return to Warsaw's Central Business District. However, most large tenants opted for non-central locations, especially when the firms required a large amount of parking space.

Overall, vacancy rates in Warsaw fell in the first nine months of the year and in September, for the first time since 1999, it dipped below 10 percent. However, as the year draws to a close there is a huge amount of stock due to be delivered to the market, particularly in the Central Business District. A number of much-anticipated developments have begun or are about to open their doors, most notably Lumen in the Złoty Tarasy development and Rondo 1. Thus, vacancy rates will most probably rise somewhat in the short term, and some developers may even postpone delivering their products to the market until later in 2006.

Rents and yields are still proving difficult, however. Although rents rose slightly in the first half of the year, claims of a major recovery seem premature. Landlords are continuing to offer a number of incentives to tenants, although there is evidence that many are scaling back their offers. Average asking rents in Warsaw, according to research firm Colliers International, vary between EUR 13.90 (zł.53.58) per sqm per month in the suburbs to EUR 16.85 (zł.64.95) in central locations, with the average rent in the city at EUR 15.40 (zł.59.36).

Yields are still disappointing. According to Nigel Wade, the managing director at CB Richard Ellis Polska: "Prime yields on the Warsaw investment market are below seven percent. CB Richard Ellis predicts that prime yields for the best investment products will continue to fall and could reach six percent before long."

Retail

Retail is now rivaling offices as the most important sector for property investors. In the first half of this year R506 (zł.1,974) million was invested in property in Poland, and almost 60 percent of this went on retail projects.

With the Warsaw market approaching saturation, many retail investors are looking to regional capitals for profits. According to recent research from Jones Lang LaSalle (JLLS), there are more than 120 shopping centers in Poland, with three million sqm of gross leasable area (GLA). Over 70 percent of this is located in six main cities, Warsaw, Kraków, Poznań, Wrocław, Szczecin, and Łódż, and two agglomerations, Tri-City and Silesia. Downtown locations are consistently the most popular locations.

Investors are also turning to towns with 100,000 to 400,000 inhabitants. JLLS recorded serious interest in Bydgoszcz, Białystok, Bielsko-Biała, Częstochowa, Rzeszów, Rybnik, Toruń, Gliwice, Lublin and Zielona Góra. Fashion retailers are pushing strong demand for large high-street retail units, and the market trend is for companies to set up their flagship stores in Warsaw before branching out into the smaller towns and cities.

There was a marked change this year in the format of retail units. With some regions now boasting a number of competing traditional shopping centers, many companies are turning to alternative retail formats, such as outlet centers and retail parks. Overall, JLLS expects the market to grow by another 1.3 million sqm by 2007.

Industrial and logistics

The regions were the strongest players in the industrial market in Poland this year. Many companies are seeking to take advantage of Poland's central location and are establishing regional logistic and distribution centers here, and the relative value for money offered by warehousing developers outside of Warsaw is proving a very strong lure.

After the first nine months of 2005 the total warehousing and logistics stock came to 1.6 million sqm. The sector is very dynamic with a serious amount of stock coming onto the market. In Q3 alone, 200,000 sqm was delivered to the market, with 294,000 sqm under construction.

The vacancy rate increased slightly, but tellingly the lowest vacancy rate was in warehouse and logistics parks outside the Warsaw area. Take-up was staggeringly high. According to research from CB Richard Ellis, between Q1 and Q3 2005 330,000 sqm of space was leased, which is an 84 percent increase on the same period in 2004.

Pre-lets are continuing to be a very strong factor in the market, with many developers now working on built-to-suit projects. Speculative projects were mainly developed outside the Warsaw area, due to the constant growing demand for quality warehousing space.

Residential

The residential market in Poland is attracting a lot of interest, but mainly from smaller, individual investors, rather than institutions or property funds. However, there are many indicators that the steady increase in prices will continue for some time, particularly in Warsaw. Mortgages and loans are increasingly easy to obtain and the population of the capital is set to increase. Strong real-wage growth coupled with decreasing unemployment will increase demand for housing. And the planned hike in VAT on construction material on January 1, 2008 will have many rushing to buy their homes before the current rates expire.

Prices are on the rise across the board. In Q1 2004, the average price for a sqm in Warsaw was zł.3,892, according to information from tabelaofert.pl. By Q2 2005 this had increased to zł.4,456. In Kraków, for the same period, the figures were zł.2,989 and zł.3,561 respectively.

Currently, demand far exceeds supply in the Warsaw market, and this is the strongest factor in the residential sector. In the run up to the general elections, the ruling Law and Justice party promised to build three million flats in eight years, but the new Minister for Transport and Construction, Jerzy Polaczek, has now scaled this back to a more manageable 170,000-180,000 per year. He also promised to reform construction legislation and to increase and improve spatial development plans to help speed up development throughout the country.