The Polish commercial real estate investment market is currently enjoying the best season it has had since the recession. Nearly €3.3 billion was invested into the real estate market in 2013, the highest it has been since 2006. As of the first half of this year, €1.4 billion had been invested, which is 27% higher than what it was over the same period last year, according to a report by Cushman & Wakefield. This is in line with the forecast of €2.9bn – €3.3bn in investment expected for the year. The Polish market has been in high demand recently as it is relatively stable economically and politically. While most of Europe is still struggling to find its feet, Poland has been rising steadily. Commercial investments have grown rapidly since 2009 and though 2014 may not see the big leap witnessed in previous years, it is still exceeding expectations in various ways and is breathing new hope into Europe.
What Investors are after
More than half of the transactions in H1 (51.5%) were in the office sector. The retail sector came next with 26.5% and the warehouse sector had a strong showing of 22%. In 2013 the retail sector was the main attraction, raking in 43% of all investments. The office sector followed with 36%, warehouses and logistics had 18% and hospitality 3%. The retail sector last year also saw the largest single transaction, which was the sale of the Silesia City Center in Katowice for €412 million by a consortium led by Allianz of Germany. A lot of new shopping centres were opened in various locations in 2013, thanks to growing consumer spending and consumer confidence. The office sector was the best performer in terms of transactions with 27. The largest of these was the €127 million purchase of New City office complex by US Hines Global REIT. This has been dwarfed by the largest office purchase for this year so far with the acquisition of Rondo I by DeAWN for ca. €300 million. The second largest deal for the year was the purchase of Lipowy Office Park for €108 million by W.P.Carey.
The warehouse sector has picked up steadily as companies expand and new distribution centres are being set up in Poland. Last year Amazon leased three distribution centres totalling 300,000 sq m. Poland’s strategic position in Central Europe geographically and economically has made it a major attraction for companies seeking to expand distribution activities in the area. This is evidenced by the €307.6 million invested in warehouses in H1 of this year, a 77% increase from the same period last year. Portfolio transactions with large average lot sizes have been the main transactions so far.
The Increasing Role of International Investors
What is clearly evident from the transactions is the role of foreign investors. Germany, US and Austria accounted for about 56% of the investments last year. Polish investors accounted for about 8% of total investments last year, and are on track to do the same this year. Increased interest by UK this year has seen it replace Austria as the third largest investor. Together these three nations accounted for about 85% of the transactions in H1. Germany is the clear leader, thanks in part to its involvement in the largest deal of 2013 and being the sole investor in the largest deal of H1. These countries have invested broadly in Poland, with interests in the different sectors. Foreign interest is expected to stay strong, as long as the Polish economy keeps outperforming its neighbours. The scarcity of investment options in Europe has certainly helped the Polish cause, but the quality of real estate in Poland is also a major selling point. With the modern offices, retail centres and warehouses being built, the country is providing contemporary real estate that appeal to both local and international investors and consumers.
With the consistency of demand and returns, there aren’t a lot of places in Europe more attractive than Poland. Prime office yields in Warsaw have been stable over the past few years at about 6%. Warsaw’s steady returns and strong consumer base have helped it attract a bulk of the investments, with the city receiving 44% of total investments in H1. Prime office yields in the other top office cities are slightly above 7.5%. The highest rate is for offices in Warsaw’s non-central locations, which is close to 8%. The yields for prime shopping centres in Warsaw were about 5.75% last year, and about 6% for the top regional shopping centres. Prime yields in retail remained at about 6% for H1, just as it has been for the past two years. Consistency in prime yields carried on in the industrial sector, where it lies above 7.5% for single-tenant properties and 8.25% for multi-let assets.
Unlike the office sector, the key attraction for warehouses isn’t the nation’s capital. Upper Silesia attracted 35% of total transactions in H1, followed by Central Poland with 28%. The increase in retail activity outside of Warsaw is a good sign of balanced growth and exactly what the government is trying to encourage. The growth in investments outside the capital is expected to keep increasing over the years, in all three major sectors. Warsaw’s office stock of 4.3 million sq m is ranked 21st in Europe, ahead of Istanbul and Prague. Improvements in the capital’s transport infrastructure will continue to aid this growth. Total office stock in regional cities is 2.6 million sq m and rising. The rent payable in Warsaw is €25/sq m per month, which is almost twice that of regional offices. As the economy grows and transport links improve, there would be a steady increase in demand for properties outside of Warsaw, an expectation which many developers are preparing for now.
This shame shift is expected and is being experienced by the warehouse sector. The retail sector is also following a similar pattern. Six shopping centres were opened in H1, none of which were in Warsaw or the other major cities. Secondary markets were and continue to be the centre of attention for 2014, unlike 2013 that saw major cities take the bulk share.
The outlook for Poland keeps getting better. The Polish economy is expected to grow by 3.2% this year, significantly higher than the 2.5% forecast by the government in January, thanks in part to the property sector growth. It is unsure how long the real-estate boom in Poland will last, but with the continued growth of the economy, the slow recovery in Europe, we can expect a lot more. Interest from international investors should continue to rise, as the US and Asian markets seem to have taken as much as they can handle and the African market is not as stable. The rest of 2014 will see some high profile developments come on the market, and this should carry into 2015. The periods of monumental growth are probably past, but the Polish market is getting back to what it was pre-depression and this is good not only for the country, but for all of Europe and its external investors.