The year ahead
Lokale Immobilia talks to the city's agents to see where they think the property profits will come from in 2006.
Last year was, in many aspects, a record breaking year for the commercial real-estate market.
With almost 380,000 sqm in office transactions in Warsaw it was definitely a turning point in the office sector. The first full year after Poland's accession to EU was very good for the owners of office buildings located in the center of the city, where demand grew by 60 percent.
The total supply of A and B+ office space in Warsaw exceeded 2.3 million sqm, about 60 percent being located outside the city center. Increased activity in the city center and limited supply caused the vacancy rate to fall to a level of 12.2 percent at the end of 2005, from 19 percent in 2004.
"Although the vacancy rate is lower than last year, it still amounts at some 193,000 sqm. This is because a small number of new buildings was completed. The vacancy rate will grow again in 2006 as the situation in the city center will worsen, due to the completion of Rondo 1 and Lumen. The vacancy rate might increase again up to 15 percent," says Joanna Mroczek from Jones Lang LaSalle (JLLS).
Yield compression
The biggest surprise for all analysts and real-estate-market players was the drop in yields. Oscillating now at the level of six percent, they are approaching the European average, which is 5.7 percent.
"The yields have decreased to a level that was not expected a year ago. This is ... definitely good for those who owned real estate and had intended to sell it," says Dorota Latkowska, an investment partner and head of corporate finance at Knight Frank.
"This is great news for developers, who are now selling their project with profits. Poland is seen by investors as a country with strong economic fundamenals and good development prospects, which reduces perceived risk," says Aleksander Loster from the capital markets group in Cushman & Wakefield Healey & Baker (CWHB). He explains that even if yields in Poland converge with European levels, it is never the case that an investor locates all its projects in one place, in order to diversify risk.
Paweł Welo, an investment and finance surveyor from CB Richard Ellis (CBRE), points to the fact that with European yield levels, Warsaw will offer products of a much better quality: "This is very good news for the market as it puts pressure on investors to compete more."
Mroczek has a less optimistic view: "When the yields line up with European levels, foreign investors will turn to the more risky markets, such as Ukraine, Russia and Romania. It is difficult to say when this will happen."
Rentbook roulette
Last year was also a record breaking one as far as rent renegotiations are concerned.
In 2005 the owners of buildings in the center of Warsaw started to tempt tenants back to the city center. Headline rents in prime office locations dropped from about EUR 18-21 (zł.69-80) per sqm per month to EUR 15-18 (z.57-69).
"In Mokotów, [landlords have] already increased their headline rents by EUR 1 (zł.3.80). What we are going to see in the city center and the suburban markets is that headline rents will remain stable or increase. What will increase dramatically is effective rents," says Hadley Dean, the Managing Partner at Colliers International. "The inducements ... that landlords have been giving tenants are coming to an end. Effective rents increased by 10-15 percent last year. This happened very quickly over the last third quarter of the year," he adds.
Warsaw undoubtedly remains the country's most dynamic office market, but regional markets have also gained in importance, with low vacancy rates and stable rent levels. JLLS' Joanna Mroczek explains Warsaw's superiority over other regional markets: "Whenever a foreign company wants to enter the Polish market it starts in Warsaw. Other bigger cities are competing against each other, not against Warsaw, to attract those companies that intend to expand their network in Poland. The problem with other cities is that they are deficient in modern office space."
Follow the money
Other records that were broken in 2005 were in the value of capital invested and in the number of purchased buildings.
The total investment value on the real-estate market in 2005 reached almost EUR 2.6 (zł.9.9) billion and as many as 100 buildings changed owners. In 2005, just as a year before, the bulk of investment was in the retail sector, at about EUR 1.5 (zł.5.7) billion. Approximately EUR 950 million (zł.3.6 billion) was sunk into the office market and the remaining part was placed in the warehouse sector or mixed real estate.
Analysts do not expect significant changes in these proportions. "Retail will remain the biggest investment sector, especially that there are around 40 towns with a population of more than 100,000, which are attractive for both developers and investors," says Aleksander Loster from CWHB. There are no doubts that the industrial market will still be the smallest sector, but it is expected to record significant growth by the end of the year.
"Although in 2005 little was going on in the warehouse market, this will change, especially that the yields are still relatively high in the sector, at 7.75-8.5 percent," predicts Mroczek. She is convinced that the industrial market will welcome bigger investment.
Loster also admits that despite the low demand for warehousing, something is brewing in the sector: "Warehouse rents are still low, and developers are offering new products"
Welo is more skeptical on the issue: "Warehouses will remain a niche sector. There will be more transactions, but little industrial real estate is on sale."
Latkowska points out that development in the logistics sector is bound to the development of Poland's infrastructure, and until the road network is improved, the logistics market cannot be expected to grow considerably.
Hedging their bets
Analysts are cautiously optimistic about this year's prospects.
"Many projects are still at the preparation stage, and despite the yields, investing in Poland is still profitable [but] I do not think the investment value will exceed [last year's level]," says Joanna Mroczek from JLLS.
"There is no reason to be afraid of a slump, especially that real estate is very much a local market," says Knight Frank's Dorota Latkowska. "We can have temporary periods that will be less effective, but I would not expect any drastic moments in the next three years."
Aleksander Loster forecasts that the nature of the market may change: "The market might become more complicated. More and more investors are looking for niche real estate. The second-hand market will develop and there is a chance for another record to be broken as far as demand is concerned." He also predicts that there will be more transactions on the market, but their value will be smaller: "This will improve the liquidity of the market.
"There is no need to encourage investors to operate in Poland. Many of those who are already present on the market did not manage to spend all their money in 2005, [so] 2006 and 2007 are going to be good years," adds Loster.
