The voices of authority

Few delegates at Mipim 2006 were as confident in the Polish market as John Palmer, managing director with CB Richard Ellis. "From the tenants' perspective it really is an excellent time to enter the market," he says. "[Tenants] can achieve very keen rents, which we really believe are at the bottom, for probably the best quality accommodation you will get anywhere in Europe. Tenants [should] secure a lease now for five or 10 years ... and its very much the same with logistics and light manufacturing - rents are very sharp and its an excellent opportunity for end users to [get] build-to-suit facilities at very good rents."

"Most of the top buildings have institutional-standard leases but there has been a tendency in Poland for short-term rent lengths, which has had an affect on investment," says Nigel Wade, also a managing director at CB Richard Ellis. "However, the market has changed so significantly that it's prompting people to take advantage of a long-term lease today." Wade says there could be modest increases in rents, but contributions and incentives offered by landlords will certainly be curtailed, or even disappear altogether.

Given that the market seems to be on the up, and rents look set to recover, it seems unusual that landlords would now be willing to sign long-term leases at rock-bottom rents. But the added value of a low vacancy rate cannot be underestimated.

"If a developer obtains a five-year or a seven-year lease then he has a vehicle to sell the investment, it's creating value," points out Palmer. "I understand [the perspective that] if the market is going to bounce why would a developer want to tie himself into a low rental level, but on the other hand most developers want to exit."

Exploiting the gaps
There are still opportunities for those not yet in the market. "There is room for developers to come in, particularly in non-central locations where vacancy is below 10 percent and maybe focus on build-to-suit occupier owners. We are seeing a lot of pre-leases in offices in non-central locations," says Wade.
A number of high-class developments in recent months have pushed up the standard of offices in Warsaw, but this doesn't mean everyone is catered for. "Certain buildings don't fit everybody," says Wade. "For instance, if you are a small occupier and you just want 100-200 sqm, it's actually a very difficult task to find any space; landlords want very large occupiers."

Older buildings now face on uphill task in competing with modern office blocks, particularly in the CBD. "I think we will see a repositioning of the standard of building within the city," says Wade. "Those buildings that were completed in the mid-1990s will come away with a different category than those being completed today. There will be a differential in rental levels, and we are seeing it now."
Despite the relatively small size of the market, there appears to be a lot of undeveloped land in the city center, which builders would love to get their hands on. "[The Warsaw authorities] need to become more flexible with regard to investors coming into the city and they really need to have a more defined zoning plan," says Wade. "The attributes that Warsaw has, [namely] there are a lot of sites and a lot of land to develop ... is the major plus, but on the negative side the zoning situation is very unclear," adds Palmer.

Developers' perspective
For developers, Mipim is more about selling their services rather than promoting the Polish market as a whole, and Rafał Nowicki, the vice-president of Apollo Rida, says the event is a good barometer for the marketplace. "Two years ago, we had Dubai and the Middle Eastern countries dominating. This year it's Russia, so its very interesting to see how the flavor of the event changes from year to year," he says.

He agrees that the Warsaw market is at the bottom, but predictions of major growth could be a bit premature. "I am positive [the Warsaw office market] has hit rock bottom. However, I would be cautious on how long will it take to experience any growth. There is still a lot of very good supply coming onto the market .... [and] until that is absorbed I am quite skeptical."

Despite the new supply, there is still strong demand in the marketplace. "We concluded deals in the Warsaw Trade Tower of close to 12,000 sqm in three months, which is great evidence of the market," he adds.

For the moment, Apollo Rida is concentrating its development efforts on the logistics and retail front. "We don't have any pipeline projects with respect to offices in Warsaw. We will continue with the Żerań Park distribution center where we built 20,000 sqm so far and we will be adding another 10,000 sqm this year, and we are looking to start working on our neighboring location that will bring another 30,000 sqm to the market."

Outside the capital city, the company is focusing on its retail portfolio. "We are rolling out a program of expansion at our shopping centers and over the next three years we are hoping to open 70,000 sqm of space. We have a portfolio of 28 existing shopping centers spread all over Poland including the major cities and also tertiary cities of 250,000 people."

A home away from homes
One area the company will be staying clear of in the near future is the residential market. "I am not in great favor of residential [development]," says Nowicki. "The market still lack fundamentals, it's very much speculation driven, especially as far as Warsaw is concerned. The actual occupier demand is still not there [and] we are experiencing a huge supply of new product. These projects are still under construction so the ultimate marketplace has not reacted to that yet. I want to see how [these units] sell in the next 12-18 months."

Many of the delegates at Mipim, including Nowicki, highlighted persistent problems with Poland's taxation regime, which could see the country lose out on foreign direct investment to other countries in the region. "Some of the VAT regulations and the corporate income tax lack transparency and lack attractiveness [compared to], for example, the Czech Republic and Slovakia's offer. The road infrastructure will also hinder any growth in the long term unless it is addressed, in terms of logistics and also [in relation to] people's mobility."

Elbow grease
Monika Dębska, a partner at Knight Frank, was very positive about the Polish market at Mipim 2006, in both the commercial and residential sectors. "Central Europe is one of the hottest investment markets at the moment," she says. "On the commercial side we see an awful lot of opportunities, not so much in prime product, which is pretty scarce, but in adding value to secondary properties and turning them around."

According to Dębska, some office properties and many leases need a bit of work to realize their full potential. "We do a lot of pre-acquisition due diligence and we try to create investment products for the market," she says. "A lot of properties have inherent problems that we try to resolve, such as leases in the wrong currencies, or the wrong use of a property. We are effectively trying to put together a package that will create an investment product, [which is] effectively a repacking process that enables us to then put it on the market."

Dębska says that a lot of older buildings, such as those built in the last 10-15 years, are still attractive for landlords and tenants. "A lot of these properties have very good locations and most of the buildings under our management don't have any vacancies, even [those from] the 1990s. It depends on how skilfully you try to keep your tenants and obviously there are certain upgrades that you have to facilitate." The smaller size of many of these buildings may also make them a stronger draw for smaller businesses looking for offices that cover hundreds of sqm, rather than thousands.

Gimme shelter
Many investors were also asking about the residential market at Mipim 2006. "Developers from various origins are coming to Poland, building land banks and looking at residential development as a long-term opportunity," says Dębska.
In her opinion, the residential market, particularly in Warsaw, is still at an early stage. "We see how quickly the residential units are turning, not just in Warsaw. So far we have seen quite substantial hikes in pricing. [International buyers] are buying in bulk and they are not worried about having a quick return. Some are looking at capital appreciation and hoping to wait a few years before they turn it around." l

See next week's Lokale Immobilia for further coverage of Mipim 2006 and interviews with agents from other companies, including Colliers International,
Cushman and Wakefield, Carrefour Polska and Prologis