December 06, 2017

Investment funds appreciate Poland’s strengths

Investment funds appreciate Poland’s strengths

Poland is the primary destination for capital and it is where investors spend far more on commercial real estate than in any other CEE country. The Czech Republic has also become attractive to investment funds, but what does Poland have that enables it to outbid its neighbour’s offer? Jędrzej Sucholowec, Senior Advisor at Cresa Poland, compares the two markets.

What are Poland’s undeniable strengths compared with the Czech Republic?

Jędrzej Suchowolec, Senior Advisor at Cresa Poland: Poland offers at least as many investment opportunities as the Czech Republic and will most likely remain the powerhouse of Central and Eastern Europe in the long term. Key to this are the market size and the number of new and existing schemes. Poland is the eighth largest EU economy, has several dozen large cities, four times more consumers than the Czech Republic and over 350,000 university graduates entering the job market as high-skilled workforce each year – these are magnets attracting investors to Poland.

Is it more expensive in the Czech Republic than in Poland?

Commercial property prices are slightly higher in the Czech Republic than in Poland. Price differences are most pronounced in the case of retail properties in high streets. Yields for record transactions in the Czech Republic stand at less than four percent. This means that assuming the price is the same, income generated by such a property in the Czech Republic and the initial yield could be 25 percent lower than in Poland. This, however, might be compensated by higher rents in the future.

Both the Czech Republic and Poland have strong economic fundamentals.

In Q3 2017, the Czech economy grew by a seasonally adjusted 5 percent compared to the same period last year. The key real estate market drivers in the Czech Republic include the country’s low unemployment rate standing at 2.7 percent, the lowest in the EU, a 2.8 percent increase in salaries, adjusted for inflation, and rising consumer spending.

Poland is also performing well. Its GDP increased by 4.7 percent and unemployment fell below 7 percent in Q3 2017.

Is the Czech Republic now more politically stable than Poland?

The Czech Republic enjoys political stability. Analysts do not expect any restrictions to be imposed on real estate investments in the upcoming years. ANO, a centre and right-wing party, came to power in October 2017 and is expected to support pro-market and business-friendly policies.

Relatively low financing costs are another strength of the Czech Republic according to domestic, including private, investors. Despite a recent increase, the country’s reference rate remains low at 0.5 percent.

Any major transactions on the Czech real estate market?

Retail was the leading sector, just like in Poland. Two largest deals were made for single assets: the acquisition of the Olympia Brno shopping centre by Deutsche EuroShop for €374 million and the Letnany shopping centre bought from Tesco by CBRE GI for €226 million. Other deals comprised portfolio transactions, including CPI’s acquisition of a portfolio of properties owned by CBRE GI.

As a result, in the first three quarters of 2017, the investment volume totalled more than €2.6 billion, of which €400 million was transacted in the third quarter. Investment activity is, however, unlikely to match that figure in the near future due to a scarcity of prime properties for sale on the Czech market.

Meanwhile in Poland, more than €800 million was invested in commercial real estate in Q3 2017. Some analysts expect investment volumes to set a new high in Poland this year, but investors are concerned about unpredictability of the legal environment.

Compared to the Czech Republic, Poland may seem to be a relatively more difficult market for investors due to tax rulings on real estate acquisitions and the announced introduction of regulations that will have a major impact on the commercial real estate market.

Political risk should, however, be properly estimated. For now, it has not led to any discernible yield movement or slowdown. That’s why this year’s volume of investments into Polish commercial real estate is likely to match that recorded in 2016, in which Poland attracted €4.6 billion worth of capital.

What else is important to investors targeting Poland?

Consumers’ rising purchasing power and the untapped potential of many Polish cities are key drivers behind retail developments. This year has seen several large openings, less common in the Czech Republic, including such shopping centres as Galeria Północna in Warsaw, Wroclavia in Wrocław and Serenada in Krakow. An interesting thing here is that Serenada was sold under a preliminary sale agreement signed with South Africa’s NEPI Rockcastle before it was even opened.

What’s the outlook for the retail market for 2018?

We expect large-scale shopping centres to be delivered to the Polish market in 2018 as well, including Forum Gdańsk, Gemini Park Tychy and Nowa Stacja in the Warsaw agglomeration. Czech developers tend to focus on convenience schemes in secondary cities and towns.

Poland’s southern neighbour will see an increase in supply of big-box projects after 2019, when several large openings are expected. By that time, a number of new large-scale schemes may change hands in Poland.

Is the Polish office market stronger than its Czech counterpart?

Yes, Poland has more high-quality office buildings representing prime investment opportunities, both in Warsaw and in regional cities.

In Central and Eastern Europe, demand for office space is being increasingly driven by the BPO/SSC sector, in which Poland is the largest player. Poland has attracted nearly four times more SSC businesses than the Czech Republic.

Offices leased to global corporations are attractive to investors, evidenced by recent transactions, including NIAM’s acquisition of the Axis office building in Krakow from Skanska and Triuva’s purchase of Greenday from GLL with yields at less than 6 percent in regional cities now being close to the level seen in Warsaw.

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