What to buy?

With a lot of money to spend and a limited supply of real estate assets for sale, investors are increasingly interested in new markets Interview By Beata Socha WBJ Observer: Last year, investors complained of the scarcity of assets for sale, particularly in the retail segment. Will this year see more schemes hit the market? Tomasz Puch: There will likely be fewer warehouse assets available for sale this year. Regional office markets are worth looking into, as an increasing number of prime assets are being delivered there, which raises the number of investment transactions concluded there. Investor activity will also significantly increase in the retail segment. Indeed, regional office markets have had a great year. Will that continue? Warsaw, due to its specifics and size allows for the most spectacular transactions and continues to dominate the Polish office segment. However, investor interest in the largest agglomerations outside the capital has been visibly growing since 2013. In 2014, the total volume of office deals in Poland stood at €1.8 billion, over €440 million of which was recorded in regional markets. That’s a record high figure in the history of the Polish investment market, higher even that the sum of volumes recorded over the past five years. Kraków stood out last year among regional cities, with €260 million in transactions – more than the sum of all office deals over the past seven years in the city. The high activity of investors outside Warsaw is a product of several factors. On one hand, Warsaw is getting more expensive and after several flagship transactions there are fewer products available to buy. On the other hand, regional markets are getting increasingly mature and investors trust them. Their significance on Poland’s investment map has also been increasing with the growing number of attractive investment products, modern office projects with secured long-term leases, as well as with high demand generated mainly by the business services sector. Looking at investor activity and the ongoing talks and considering large transactions that are expected to be closed this year, like the Dominikański sale, which, upon closing, will be the biggest deal ever in regional markets, we expect another very good year for the office segment outside Warsaw. It is possible that last year’s record €440 million could be surpassed this year.We also expect the deal volume in Warsaw to drop. The reason for that is not insufficient interest from investors, but a limited supply of good, large assets for sale. After last year’s spectacular transactions, involving flagship office schemes like Rondo 1 and Metropolitan, as well as deals concluded in previous years, e.g. the sale of Warsaw Financial Center, there aren’t a lot of major assets to purchase right now. What about retail assets? Quite a few large schemes changed hands between 2011 and 2013. Last year this market segment was largely dormant. Will investors look to smaller cities to find assets to buy? The retail market will also be quite interesting this year. Last year’s lower investment volume (of €570 million) was in no way a sign of waning investor interest. Considering the deals signed last year but finalized in 2015, as well as the ongoing negotiations, you can expect to see far more investment deals this year with a far greater value than in 2014. We also expect to see interesting transactions involving schemes located in cities with populations below 150,000. Finally, the warehouse segment. After a spectacular year, is there still room for improvement? The volume of warehouse transactions hit a record high €744 million last year. The largest transaction was the purchase of a portfolio of logistics parks by a PZU fund for some €140 million. Portfolio deals in fact dominated the market segment, with an 80 percent share in the total volume. This year, we will see strong investor interest in warehouse assets but we do not expect to see the record broken. Our analysis indicates that the deal volume in this market segment will come in at between €500 million and €600 million this year. We will also see portfolio transactions involving properties from several CEE countries. We could also witness pan-European warehouse portfolios change hands. An example of a transaction involving several Central European countries was the recently finalized acquisition by P3 of three logistics parks in Poland and Romania from CA Immobilien Anlagen AG. The share of Polish buyers in the commercial real estate market increased last year to 10 percent from 6 percent in 2013. Can we expect an increased interest from Polish funds this year as well? What assets are they looking at? The increase in the share of Polish capital in the total transaction volume was mainly generated by PZU’s investment fund which acquired four logistics parks. Other transactions with Polish capital purchasing Polish commercial real estate include the acquisition by Octava FIZAN of six office properties from the portfolio of real estate fund Arka BZ WBK and the purchase of a part of Skanska’s Kapelanka 42 office scheme by REINO Dywidenda FIZ. These transactions show that Polish investors took advantage of opportunities that came along and bought properties representing various classes and market segments – from well-located warehouse properties, through prime office schemes, but also not shying away from value-add projects. We expect Polish companies to remain active this year but we do not expect their share to increase in the total investment volume. Will the cheaper złoty and the dollar strengthening against the euro encourage investors from the US to invest in Poland? The depreciation of the złoty and the strengthening dollar will not, in our view, generate increased interest from American investors in the Polish market. The deciding factors are still the GDP growth, falling unemployment, expected level of inflation, strong domestic demand, market transparency. They will continue to attract office and warehouse tenants as well as retail chains, and in turn investors. Poland will continue to be on investors’ radars, as the biggest market in the region, offering a range of interesting investment options, and at the same time a country that is both economically and politically stable, making it the main business hub in this part of the continent. Investor interest will be further fueled by the fact that Western European commercial real estate markets offer more expensive products with lower yields. Many investment funds now face over-liquidity, which means they have significant amounts of money to spend. A part of these funds may well be invested in Poland. What are the yields in each asset class these days and do you expect to see compression this year? We expect cap rates in the office segment to remain stable at 6.00-6.25 percent for the best schemes. The leading assets in this category could see some yield compression. Cap rates for the best retail assets are currently at 5.50 percent, while prime warehouse assets could see their yields go down below 7 percent, or even below 6 percent.