Equity is flowing to Poland, which offers secure investment opportunities and high yields despite a recent hardening. Investors have changed their thinking about Poland, seeing it as a mature and developed market, says Paweł Nowakowski, Head of Capital Markets at Cresa Poland.
Office yields on the Warsaw market have fallen below the magic threshold of 5 percent, the shopping centre market is likely to be the next in line. Is investing in Polish real estate becoming less profitable?
Yield compression is a natural consequence of rising transaction prices, driven by growing demand and seller expectations. Compared to Western Europe, Polish yields are still relatively high. Prime office yields in Germany, for instance, are approximately 3 percent, while in Poland they stand at approximately 4.65 percent. Retail and warehouse yields in Poland are also much higher than in Western European countries for similar class assets. But Germany, France and Spain are in a different league. Can we compete with them?Yes, we can! Stable economic growth and the steady development of the Polish real estate market have changed investor perception of Poland, which has joined mature and developed markets. Secure investment products that generate steady income in the long-term attract investors to Poland. Each market segment is experiencing strong investor interest. In the first half of 2018, investment volumes exceeded €3.2 billion, which represented more than a twofold increase on the same period last year. Even if we exclude Griffin Real Estate’s billion-worth acquisition of a portfolio of 28 shopping centres from a consortium of Apollo Rida / Axa / Ares, this year has so far outperformed 2017. According to the current outlook, 2018’s overall investment volume is likely to exceed €5.5 billion.
The warehouse market is also doing quite well, alongside traditional assets such as office buildings and shopping centres, isn’t it?
That’s true. The logistics sector has been on investor radars for long. It powers ahead benefiting from growing private consumption, the expansion of e-commerce and manufacturing, and an increased inflow of foreign direct investments. This market continues to expand and yields stand at approximately 6.5 percent. The hospitality market has also been gaining momentum for some time. Overseas hotel chains are increasingly targeting Poland to take advantage of the growth of business and leisure tourism. Given the strong demand coming from hotel chains and the growing supply of office space, some developers are converting office projects into hotels.
New market sectors or subsectors such as the private rented sector are also emerging. In your opinion, what’s their potential?
Investing in rented apartments in an organised, institutional form is becoming increasingly popular. Global active players have recently emerged on the market with a goal to acquire such property portfolios. Given our society’s deep-rooted need for home ownership, we should ask ourselves how deep this market is. Purpose Built Student Accommodation and inexpensive flats for young professionals at the beginning of their career have a big potential, in my opinion. Polish halls of residence are in a state of disrepair and demand for student housing remains strong. Another notable trend is in the retail sector. A group of overseas investment funds is seeking to acquire portfolios of retail parks across Poland. But such investment products are not available for now. That’s why developers and investors are focused on building scale through new developments and single retail park transactions. Once they’ve built an appropriately-sized portfolio, they will sell it to investment funds.
You say that Poland is seeing an increase in secure investment assets that generate steady income flows? Do they attract a particular type of investors?
Investment opportunities for core and core plus investors are indeed plentiful. Such market players include pension funds targeting prime assets that guarantee security and diversification of real estate income and a relatively smooth divestment. Large office buildings and retail schemes in city centres are high on their investment agendas. Other assets attracting investor interest include new office buildings under construction or commercialisation in Warsaw and regional cities, shopping centres, portfolios of retail and industrial parks, and hotels operating under leading global brands.
What about more opportunistic investors? Do they stand a good chance in Poland?
The situation is not so clear in their case. Today, the market offers no straightforward opportunities to buy a distressed property, to repair or upgrade it, and to sell it quickly at a profit. Such opportunities are, however, available to opportunistic investors through banks whose portfolios also include underperforming or unsuccessful assets. That’s why we liaise with many banks to assist them in “exit” from problematic investments and to deliver interesting projects to opportunistic investors. Close cooperation between all stakeholders: the bank, the debtor and the investor is important in such projects which also benefit from amendments to the 2016 Bankruptcy Law and new tools such as pre-pack (prepared liquidation of an enterprise). New regulations substantially facilitate and speed up acquisition of non-performing assets.
Do large global investment funds still dominate the real estate market?
Yes, for the time being. This is due to large equity investment requirements, particularly in the commercial sector. In addition to German, US, UK and South African funds, Poland has recently witnessed an increased interest from entities coming from the Far East, including China, Malaysia and Singapore. Polish investors claim a 3-5 percent share of the investment volume. High Net Worth Individuals have recently, however, stepped up investment activity. These are wealthy individuals who operate in non-real estate sectors and invest any cash surplus on core business activity in real estate. HNWIs invest directly or through platforms and vehicles bringing together smaller investors who with an appropriate size of equity are able to compete against global market players and acquire large retail or office buildings. The Polish real estate market is attractive to large international players as it offers relatively high yields compared with their home markets, but for smaller Polish investors real estate is a good alternative to treasury or corporate bonds. The recent turmoil on the financial market caused by a leading debt collection firm has confirmed that the real estate market has been and will be a safe haven for investors.
From what you say I gather that the market powers ahead at full steam. Is this trend likely to continue in the longer term?
All the signs point to it. In the post-global financial crisis recovery period, the Polish investment market has posted an average annual growth of approximately 14 percent, one of the best performances in Central and Eastern Europe. I believe it will maintain an upward trend provided there is no major turbulence on global financial markets resulting from economic or political shocks. This will be driven by three main and overlapping factors: Poland’s economic performance, investor perception and the appeal of the local property market.
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