Investing in Commercial Real Estate in Poland – heyday or mayday?

Just over a month after the Property Investor Europe Poland and CEE Real Estate conference in Warsaw, sponsored by TMF Group, it appears Poland is firmly on track to become a leading real estate investment destination.

On 30 June a Wall Street Journal article becomingly entitled “Foreign Property Investors Flock to Poland” went into some detail to highlight a comparatively new trend.

With US companies having bought $1.4 billion of commercial property in the preceding 12 months – thereby dethroning the perennial leaders, German funds – it is obvious that the Polish market has grabbed the attention of investors outside of Europe. For example, Bank of China and South Korea’s National Pension Fund have spent a combined $1.1 billion over the past two years, the latter having acquired amongst other things, the Galaxy shopping centre in Szczecin for $233 million. Indeed, with an internal market of almost 40 million people and continuous economic growth well above the European average (3.4% in 2014), Poland has made itself attractive particularly in the retail segment.

Poland does have another trump card in play (as do many CEE countries) as the price of property rises throughout most of the Western world; Polish commercial property is comparatively affordable, which ultimately means higher yields.

The country also provides both fiscal and legal maturity, and it is probably for this reason that it has been attracting more investment than, say, Bulgaria or Romania, despite the fact that it cannot offer investors yields and margins as high.

Complaints to this effect could be heard at the PIE Warsaw Conference from investors and bankers alike (the latter mourning the era when interest rates were significantly higher), but this only means that the Polish Commercial Property market has reached maturity and will tolerate, as a rule of thumb, only well thought out and quality projects.

Nowhere is this trend more obvious than in the logistics market, which was the topic of another WSJ article (also published on June 30). Warehouses and outsourcing centres appear to be going hand in hand, and what better example than Amazon, which opened fulfilment centres in both Poznan and Wroclaw in 2014. According to CBRE, the total stock of modern logistics space in Poland will reach the magical figure of 10 million square metres very soon, especially as the country’s road and rail infrastructure is constantly improving. The fact that Poland has a 99% EU Funds absorption rate also speaks volumes.

In fact, returning to the PIE conference, a measure of true concern could have been detected solely amongst those investing in and brokering Polish office space. According to a Savills report, Warsaw’s rising vacancy rate (13.3% at the end of 2014) means that office rents will be under downward pressure at least until 2017 (by way of comparison, the average vacancy rate across Europe’s key markets was ca. 9.5%). To illustrate, 758,000 square metres of office space is under construction in Warsaw, of which 78% remains unlet.

The trend is very clear: almost without exception tenants are shopping around for premium property, but are generally sceptical towards unfinished developments (unless these are truly being built in super-prime locations) and are not willing to commit to long-term leases. In other words, developers and especially agents know exactly what their (potential) tenants want: ‘fashionable’ locations, superb fit-outs, five star amenities and plenty of parking space. The question is, can they afford giving it to them? The answer is probably yes, only they will undoubtedly have to redo their maths and settle for lower margins and yields…or put in more (creative) work to achieve the same. Whatever the case, it is hard to escape the impression that this particular tendency has less to do with the idiosyncrasies of the Polish RE market and more to do with the general direction in which consumer desires and habits are heading – universally.

Of course investors should, as always, pay special heed to how they will set up both their holding and tax structure, and how it will be administered – for this might make all the difference in the world, especially in a country such as Poland. The best way to sum up the local regulatory environment is to call it fair but tough. And this is something that we at TMF Group know quite a bit about, on both the administrative and regulatory side.

Contact us to learn more about real estate investment in Poland.

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