The risk paid off

Last year’s investment volume of €4.1 billion might seem a lot for Poland. But with all the investor interest and capital coming its way, one can’t help but wonder why there aren’t more transactions taking place. Piotr Mirowski, head of Investment at Colliers International, explains how Poland’s markets are developing and which cities and assets are on investors’ radars right now Interview by Beata Socha WBJ Observer: Is Poland a mature market compared to Western Europe? Piotr Mirowski: 2015 was an exceptional year as far as investment volume is concerned. The €4.1 billion brought us to the levels we saw in 2005-2007. We saw price increases in all asset classes, as well as growing liquidity and a larger number of investors, who were also more geographically differentiated than ever. Until recently, the main market makers on the Polish market were German investment funds and insurance firms. Last year saw a significant widening of the investor pool, including Far Eastern investors from Hong Kong, Singapore, China and South Korea, as well as interest from Australia. The market has also witnessed strong interest in high-profile corporate acquisitions, the largest of which was the purchase of a stake in Echo Investment S.A. by a JV of Griffin Real Estate, Oaktree and PIMCO. Poland has proven itself to be a mature market. Still, the investment volume could be higher. On the one hand, €4 billion is 45 percent of the entire CEE volume (including Russia), but on the other, it’s less than 1 percent of the entire European volume. There are limitations that are difficult to overcome, mainly the availability of investment-grade product available for sale. How will the current political changes influence the real estate market? Investors are looking at us more carefully, but not much has changed. The Polish context pales in comparison to what is happening in the world and in the EU. Brexit, China’s slowdown and the immigration crisis are all much more important in the macroeconomic context, and in turn, for the real estate business. Both investors, as well as financiers are convinced the economy’s foundations are strong. We should not expect a breakdown. As far as the investment volume is concerned, this year should also see strong results. The thing that could potentially limit the investment volume is the availability of properties for sale. Last year we saw €4 billion of real estate assets change hands. But if we’d had more best-quality assets for sale, it could easily have been €8 billion. Europe and global investors are all looking for yield. Europe, especially the CEE, still offers higher yields than Asia or Western Europe, for instance. That’s why those that have purchased properties here are in no rush to resell them. Since real estate prices in Poland are going up, and yields are getting closer to those in Western Europe, is Poland still attractive compared to Western markets? The gap has indeed decreased. But, there is still some cushion between yields in Poland and in Western Europe. I don’t expect prices to go up as much as they did last year. Which assets increased the most in price? Logistic assets gained the most and, consequently, saw the highest yield compression. The volume of transactions in this asset class was €400 million, (11 percent of the entire value), which is significantly smaller than the year before (when €750 million of logistics assets changed hands), however, demand and competition remained very high. The main transactions included the sale and leaseback of Amazon’s distribution center in Wrocław, while there was also substantial interest in performing multi-let properties with strong tenant retention, such as MLP’s warehouses in Tychy and Bieruń, which were successfully sold to Deka Immobilien, one of the largest players in the Polish market. Last year showed that there is strong investor interest in performing properties, there was also very strong demand for office properties. Similarly to warehouse projects, what investors pay the most attention to is the duration and quality of cash flow generated by such properties: the longer the lease agreements, the higher the pricing of such schemes. The largest transactions involved Skanska on the selling-side, including the office portfolio in Katowice and Kraków (four buildings in total) sold for ca. €160 million to a Swedish fund NIAM, and Dominikański office building in Wrocław sold to a fund managed by Union Investment. Well-leased, modern shopping centers that are dominant in their respective catchment areas, located in regional cities, were coveted by investors and benchmark yields were set along the way. Let’s look at individual markets then, starting with Warsaw. On the one hand, we have growing oversupply in the city, on the other hand, some of the most interesting properties are located here. For many investors, Warsaw is the first point on Poland’s investment map. While in early 2015 the development pipeline did seem to outweigh the demand, later on in the year demand picked up significantly, so much so that the vacancy rate has in fact decreased over the past 12 months. The market saw not only the highest gross take-up, but also the highest net absorption. Over the past five years, net absorption stood at an average of 180,000 sqm, while in 2015 it reached a level in excess of 280,000 sqm. This did have an impact on investors and their perception of the market. Aren’t the figures slightly obscured by the fact that some major tenants, such as Samsung, which consolidated its office space leasing 21,000 sqm in Warsaw Spire, are technically leasing both the new and the old space? It’s true, statistics don’t cover that, and therefore it might reflect on the vacancy rate later on. Notwithstanding the above, the level of net absorption was a highly positive factor. Where did this absorption come from? It’s predominantly expansions of tenants already established on the Polish market, and we are also seeing new tenants from the financial and hi-tech sectors. They usually establish large hubs here, leasing several thousand sqm. What are the prospects for the market this year? The vacancy rate could increase towards the end of the year, given the fact that a few major projects are approaching completion. However, last year’s high tenant activity has already proven analysts’ forecasts wrong. Those forecasts saw the vacancy rate approach 20 percent. We already know that won’t happen. Now, let’s focus on regional markets. They seem to have taken center stage last year. It’s true. Until recently, the proportion between Warsaw and regional cities in terms of investment volume was more balanced. Last year, deals in regional markets amounted to 80 percent of the entire volume of €4.1 billion! That’s an amazing result, which clearly displays strong investor confidence in these markets and their fundamentals. We saw some record-breaking transactions in the retail market, including the sale of Riviera in Gdynia for €291 million, Karolinka and Pogoria in southern Poland for ca. €221 million, Stary Browar in Poznań and Bonarka in Kraków (as part of the corporate acquisition of Trigranit by TPG). The buyers behind these transactions are of different provenience: Germany, South Africa and the US. This shows how diversified capital sources are, and that they are targeting smaller cities. The office market is where the most has changed. Two years ago the feedback we got most frequently from investors was: “These are all shallow markets. They have yet to develop.” Meanwhile, over the past 18 months they have proven to be very active, with a lot of tenant demand. This has changed investor sentiment. There is a lot of tangible evidence. Companies such as UBS, Hewlett Packard, CapGemini and ABB are entering the regional markets and expanding their centers there. That’s the reason why all the major institutional players are eager to take advantage of the opportunity and acquire assets outside of Warsaw. What assets are they looking for in regional cities? Buyers put a lot of emphasis on location fundamentals during their underwriting. The buildings they are looking to acquire mustwell connected by public transport, close to universities and the city center. We’ve taken part in a number of such deals over the past year, including the Dominikański scheme, a transaction that was initially signed in late 2014 at the early construction stage, as buyers are ready to commit to transactions on a forward-purchase basis. The deal was finalized in late 2015. The risk paid off: Skanska delivered a high-quality scheme, well leased to HP, UBS and other international corporate occupiers. NIAM, which acquired the portfolio of Skanska had confidence in the regional markets story: they have the right demand-supply dynamics, appropriate critical mass and deep labor markets. The latter is what attracts the BPO industry: young, well-qualified people with knowledge of foreign languages and displaying high work efficiency, entering the job market. Other investors, including GLL Real Estate Partners, Warburg HiH-Invest, TPG, Griffin Real Estate and Tristan Capital Partners had a similar approach, and subsequently concluded their respective deals in Wrocław, Kraków and Łódź. Wrocław and Kraków have long been considered the dominant regional centers. Now we can see the other regional cities opening up: Poznań, Łódź, the Tri-City. Are these cities and their assets considered “core”? In my opinion new buildings delivered to the market by the most renowned developers can be classified as “core.” They have all the elements a “core” asset needs: great locations, excellent technical specifications and typically strong cash flows underpinned by reputable tenants. They require very little asset management and that’s why they are coveted by passive investors who are looking for very low exposure to risk. Would you say that investors put Polish regional cities on a par with other CEE capitals: Prague, Bratislava, Budapest and Bucharest etc. Definitely yes. These regional cities are established CEE business centers. What should we expect this year? Higher liquidity and more capital coming into Poland. Whether or not we will repeat last year’s result of €4 billion is not certain, while we will likely see some transactions outside the official channels on an off-market basis, it largely depends on the availability of properties for sale.