Running out of space?

August 28, 2013 admin

8-28 Warsaw Atrium 1 SkanskaYou wouldn’t have thought it possible, but in Poland investors may be running out of buildings to buy.

Transaction activity in the recent period across Poland has been buoyant, befitting a country that was once the wrong side of the Iron Curtain but that has now ditched its emerging market tag and joined the European mainstream. It bears repeating that Poland was the only major European country that did not slip into recession following the global financial crisis. It is demonstrably not suffering overmuch from the euro zone’s problems; yes, its main export market is Germany, but this euro zone stalwart has just returned a much improved GDP growth rate for the second quarter of 0.7 percent.

Real estate investors saw the value signals that were being given out as part of Poland’s burgeoning economic development and signed deals to acquire prime assets across the sector spectrum. They particularly liked office developments in the capital city, Warsaw, and large retail developments in Poland’s regional centres. Investors are looking a bit further out now, geographically and sectorally, but may be coming across a bit of a brick wall. Brick wall, property — oh, well.

It helps that the earlier signs of a pricing disconnect between sellers and buyers have dissipated. But is the transaction party now over? The Letter – Europe’s September 2013 issue carried a news story titled “In central Europe, Poland is the place to be”, focusing on Cushman & Wakefield’s finding that Poland accounted for 72 percent of the €631 million invested in central Europe in the second quarter and listing the numerous latest deals. That’s as may be, but it’s only worth being there if you can actually meet your investment objectives, and meeting your investment objectives usually means doing the deal. But you can only buy buildings if they’re standing and for sale.

Now Savills has come along and reported that Poland is set to record €3 billion in transaction volume this year — a post-2006 annual high. The firm’s latest investment report on Poland suggests that the majority of deals this year, some 70 percent, will be retail. The office sector accounted for more than half of transaction activity in H1 2013, but retail is expected to take over by the year-end.

According to Michal Cwiklinski, director of investment for Savills Poland, “retail assets will account for up to 70 percent of the annual volume, reflecting the shrinking supply of decent investment product in the office sector, which may only account for 20–30 percent of market share as a proportion of the entire 2013 volume.”

Warsaw remains the preferred destination for office transactions, accounting for 11 of the 14 office deals in H1 2013, but Savills reports that some areas, such as the Mokotów district, are receiving slightly less interest from investors, as many already have assets in this location.

Real estate investors will doubtless be maintaining their interest in Poland as the country continues on its growth path. Oxford Economics expects GDP growth of around 2.5 percent in 2014 and 3.3 percent in 2015, healthy numbers, certainly as seen against particular euro zone laggards. But much will depend on supply — developers completing assets and wanting (and needing) to sell on, and current owners agreeing to sell — and demand — investors seeking to meet portfolio design and return objectives and wanting to buy.

Assuming no disasters or shifts in sentiment, growing economies such as Poland have a habit of becoming self-fulfilling prophecies. Investors like self-fulfilling prophecies; they tend to pay handsome dividends. As long as countries like Poland don’t then decide to spoil things by applying to join the euro zone. Which is a distinct possibility.

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RichardFlemingRichard Fleming is editor of The Institutional Real Estate Letter – Europe.

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