Wroclaw booms but oversupply looms

By : TomaszStepien

   Wroclaw was a late starter when Poland threw off the shackles of communism in the 1980s. As the country switched to a free market economy, the city was initially overlooked by large investors, which favored larger centers such as Warsaw, Poznan, Krakow.

   By the late 1990s, however, Wroclaw came under closer scrutiny from outside investors, who saw the city as unlocking the key to the industrial heartlands of Lower Silesia. As an added bonus, Wrocaw also had one of the most benign property purchasing regimes in Poland and by the turn of the new century had emerged as a leading regional economic power.

   "Wroclaw was standing still for a long time, but it has now woken up," said Jerzy Hendrich, who runs Commercial Property Services, a Wrocaw-based property consulting firm.

   As Breslau, Wroclaw was part of Germany before World War II and, along with Lower Silesia, was incorporated into Poland in 1945 after the borders were redrawn. Outside of the downtown, which centers on a medieval market square, the city is a mixture of pre-war German townhouses and post-war Polish-built apartments.

   During its time as a German city, Wroclaw was the focus for local industry and agriculture. The Wroclaw-Berlin motorway was a showpiece development when it was built in the 1930s and has changed little since then. Industry is still the mainstay of the region's economy, employing some 34% of the workforce, and including Europe's biggest copper producer, KGHM Polska Miedz. Lower Silesia is also one of the best developed agricultural regions in Poland, and employs 16% of the local workforce.

   Ironically, it was a disaster that finally helped Wroclaw to develop economically. During the summer of 1997, the Odra river on which the city is built burst its banks and large areas were submerged. The flood swept away older buildings and forced the demolition of dozens of others. The redevelopment of much of the city triggered a construction boom that continues today.

   More importantly, the construction boom helped attract new industrial investments. Swedish giant Volvo, for example, was instrumental in helping draw other companies to the area. During the flood, much of Volvo's plant was ruined, but once the waters receded the company decided on a $60 million expansion plan. It's a scheme that will eventually make Wroclaw the hub for Volvo's bus manufacturing in Europe. At the moment, Volvo employs 300 workers, but will increase this to 1,500 after the expansion is complete, according to city statistics.

   Volvo in its turn has attracted parts manufacturers and suppliers, according to Andrzej Jaroch, vice president of development for Wroclaw. "Lower Silesia is slowly becoming the center of the automotive industry," he said. Vehicle parts suppliers that recently set up in Wroclaw include U.S.-based Wabco, which plans to produce electronic car parts.

   Also following on the heels of Volvo is Toyota, which is developing a $166 million gearbox factory in Walbrzych. Volkswagen plans to invest $120 million to build a diesel engine factory in Polkowice, in northern Lower Silesia.

   Other multinationals currently developing greenfield sites in the area are U.K.-based Cadbury and Cargill, and General Bottlers of the United States. Firms that have acquired existing state-owned enterprises include Canada's Bombardier, which bought local locomotive carriage manufacturer Pafawag from Germany's DaimlerChrysler, while Germany's Siemens, U.S.-based Telect, U.K.-based detergent producer Cussons, Swiss-Swedish giant ABB, Switzerland's Molnlycke and Sweden's Alfa Laval have bought into existing state-owned companies.

   As well as manufacturing, Wroclaw is keen to encourage more IT companies into the city, which has the third biggest technical university in Poland after Krakow and Warsaw, Jaroch said. To do this, the local authorities plan to build the 50-hectare Wrocaw Technological Park, where land sales will be subsidized for high-tech investors. Investors will pay 20% of the land value with payment stretched over 15 years, Jaroch said. The city will also finance transport and utility infrastructure in the high-tech park.

   Jaroch said the incentives, combined with the availability of skilled university graduates, should attract IT investors. He said this would also help curb the brain-drain of university graduates leaving the city. "There are 95,000 people studying in Wroclaw, more than there are job opportunities," he said. He added that with new investment in the area, Wroclaw had become a more competitive place in which to live and do business.

   Industrial/warehouse market

   As an industrial center, Wroclaw has an abundance of warehouse developments, most of them in old industrial premises. Current rents are low and there are very few new warehouse developments coming on the market, according to Hendrich of Commercial Property Services. Pafawag, for example, has 180,000 square meters of low-quality space, he said. Rents for high-quality, new space are as low as $3-$3.5, far too little to attract international developers. Local developer Vat in Dlugoleka is behind the only major commercial warehousing project in the city, a development covering 11,000 square meters, Hendrich said.

   Companies needing space for logistics tend to build their own warehouses, mostly along the A-4 motorway west of Warsaw, said Thomas Doerpinghaus, a partner at Wroclaw-based property agency Doerpinghaus & Dr. Pasler. These firms include discount store operator Plus, which has set up a 15,000 square-meter warehouse.

   Although Wroclaw has attracted little in the way of new warehousing, potential status as a center for distributors could make it an enticing investment in the future, Hendrich said. The European Union is financing a motorway linking Wroclaw with the industrial city of Katowice. This, along with the possible upgrade of a section of the A-4 motorway first built in the 1930s, could put Wroclaw in a strategic location for companies willing to distribute their goods in southern Poland, Hendrich said.

   Retail property market

   During the past few years, the retail market in Wrocaw has developed faster than in any other Polish city. But as more projects start up, property agents are worried that too many things are happening too fast. "There could be a big oversupply problem," Hendrich said.

   Initial retail developments started in the suburbs. Large projects include a 70,000 square-meter development by Sweden's Ikea, a 60,000 square-meter Korona shopping center developed by France's Apsys, and French retailer Carrefour's 35,000 square-meter Borek shopping center. So far, total retail space in Wrocaw has reached 256,000 square meters, Hendrich said. The large number of suburban shopping centers opening have discouraged other developers, such as Germany's Metro, which lost $1 million in collateral after deciding against developing a 17-hectare site worth z 50.2 million ($11 million).

   Other retail operators that have pulled out of the area include France's Extrapole, a video and audio games retailer. The company left the 1,500 square-meter site it was renting at the Korona shopping center, saying it could not break even with rents at $15-$30 per square meter a month, Hendrich said. "This is the first sign of oversupply," he said.

   Industry pundits also predict that competition is going to become even more fierce as large retail developments move from the suburbs to the center. "Wrocaw is the first city in Poland where new retail projects are coming from the suburbs to the city," Hendrich said.

   Wrocaw's German heritage has helped solve many of the land rights issues that have dogged other Polish cities, paving the way for investors to set up. Many properties in downtown Wrocaw were formerly owned by Germans who were unable to stake a claim on them. Consequently the city authorities owned much of the land and have sold it to private developers with few land use right problems. "We are in a better situation than many other Polish cities," Jaroch said.

   As a result, most of the attractive areas in downtown Wrocaw were sold to private investors in 1997 and 1998, said Regina Danek, director of the municipal property department at Wrocaw city hall. Investors who bought the land are now almost finishing their downtown projects, such as Galeria Dominikanska, a 30,000 square-meter retail project located seven minutes on foot from the Old Town square. The project was developed by Germany's ECE Group and is due to open next year.

   Local developer Financial Invest Group is building a 10,000 square-meter Wratislavia retail project next to the Old Town square. Within four years, Wrocaw will have an additional 160,000 square meters of retail space, mostly in the center, Hendrich said.

   Wrocaw could become a test city in Poland for competition between suburban and downtown shopping, according to Hendrich. He said that operators would inevitably suffer from oversupply soon. Already in the center of Wrocaw, many retailers are not able to pay rents averaging $45-$55 per square meter, Hendrich said.

   The hardest hit are clothing retailers in department stores at the Old Town square and along the main high street, Swidnicka, linking the railway station with the Old Town square. These stores include the 30,000 square-meter Galeria Centrum at Swidnicka, formerly owned by state-owned DT Centrum, a retail operator acquired by Eastbridge a couple of years ago.

   "The market is too young for department stores," Hendrich said. He added that customers in Wrocaw are not yet ready to pay premium prices for clothes in department stores and consequently many clothing operators are closing down. "There is a growing change in the type of tenant in the center," he said. With this change of tenant, there would likely be a fall of rents for retail space in the center. Restaurant operators usually wait until rents are down to $30 per square meter before opening up, he said.

   Recently, Wrocaw has also attracted several entertainment operators. South Africa's Ster Century has a multiplex cinema in the Korona shopping center. Germany's Cinemaxx has plans to set up a cinema in a development backed by the Financial Invest Group. Multikino is also developing a site, while another multiplex developer, Portico Development, has now put its project on hold, Jaroch said.

   Office market

   Wrocaw has too much construction, too many empty offices and falling office rents, according to industry sources. The city has 700,000 square meters of office space, but only 55,000 square meters that could be classed as modern, Hendrich said. Most of this space is located in renovated buildings in the Old Town.

   Some 23,000 square meters are currently under construction or being redeveloped and are due for completion over the next year, Hendrich said. The biggest project includes a 17,000 square-meter development by Wrocaw-based Europejski Fundusz Leasingowy (EFL), a leasing company. Much of the building will be for its own use, but 6,000 square meters will be available for rent, Hendrich said.

   "There is a lot of construction but not much is moving," Doerpinghaus said. "Places have been empty for a long time." Doerpinghaus is marketing 750 square meters of office space in Rynek 7, an old building renovated by Germany's ThyssenKrupp Real Estate Group.

   The developer, which has already leased about 70% of the space, is asking $13-$17 for rentals. "It's the very top rate in Wrocaw," Doerpinghaus said, adding that some competitors are asking for rents as low as $7-$8 per square meter. Low rents and low demand for high-end space have prompted ThyssenKrupp to give up any future speculative real estate projects in Poland, Doerpinghaus said.

   Jaroch admitted that as a result of the chronic oversupply of office space, the authorities had decided to postpone the development of five hectares of land in the Centrum Poudniowe area, located between the Old Town and the motorway exit. Large multinational developers including Sweden's Skanska and France's Bouygues had been interested in the developing the area, Jaroch said.

   But regardless of oversupply, Hendrich remains optimistic. He said that homegrown companies and foreign investors arriving in the area would stimulate demand for office space. Local companies setting up and pushing up demand for office space include Lukas Bank, Bank Zachodni, recently acquired by Allied Irish Banks, and American Restaurant Services, the U.S.-owned but Wrocaw-based franchisee of Pizza Hut and KFC. Local telecom operator Dialog has also moved to the area.

   Hendrich said those companies, and larger investors such as Toyota, would create demand for new office space in new developments. "Those companies have problems finding 2,000 square meters of space," Hendrich said.

   Following office projects, hotels have also been opening up recently. Last year, the developer Prime built its first Polish Best Western Hotel. Global Hotels, a Polish developer, has completed a Holiday Inn at Swidnicka, while German hotel operator Dorint is likely to move to a Wratislavia development in downtown Wrocaw, Jaroch said.

   Residential

   Residential developments in Wrocaw also intensified after 1997. Last year saw 2,750 apartments completed, or 43 per 10,000 residents. This places Wrocaw behind Warsaw and Krakow, but ahead of most other Polish cities.

   According to Hendrich, there are 40 different residential projects being built in Wrocaw. These are across the board, from low-end to exclusive apartment projects.

   On the low end of the market, local developer Dach-Bud is building 600 apartments in the city's Psie Pole district, charging z. 1,750-z. 2,150 per square meter. The apartments are planned for completion by summer next year.

   Another local developer, Moj Dom, plans to build 30 high-end apartments in the city's Krzyki district next year at z. 6,000 per square meter.