The former Huggerow brewery in Poznan, built in 1876 and in use until 1980, has been a shopping centre since 2003.
Maciej Kuszela / Stary Browar, Poznan, Igor Mitoraj's sculpture

It doesn’t always have to be Warsaw

Stable economic growth, a well-educated population and increasing consumer demand: Poland is attracting the interest of more and more investors. The focus of this investment is on second-tier cities.

Anyone who has spent a balmy spring evening enjoying a beer and bigos, the Polish national dish, on the magnificent “Rynek Glowny” (Main Square) in Kraków will not soon forget the beauty of the erstwhile Polish royal residence. And Wroclaw with Cathedral Island and Gdansk with St. Catherine’s Church are also considered first-class tourist destinations. But it is not only tourists interested in culture who are out and about in Poland’s regional cities – an increasing number of real estate investors are on the move looking for a good deal as well. Because Kraków, Wroclaw and the “Trójmiasto” or Tricity (Gdansk, Gdynia, Sopot), and also places like Katowice, Poznan, and Lodz, are gaining importance as real estate centres. 

While the market for shopping centres in the capital Warsaw is seen as very attractive, experts are more critical of the local office market. “Despite a strong occupier demand on Warsaw office market, massive new supply expected in 2015-2017 brought some uncertainty to the investment market, shifting investment capital towards regional cities, where higher yields compensate for risk of investing in local markets and there is more stability in rental levels,” explains Marcus Lemli, Head of Investment Europe at the consultancy firm Savills. This unusual (in comparison to many other European countries) shifting of interest to secondary cities is in part to do with developments on the capital’s office market. “The Warsaw market is going through a classic pork cycle,” says Karl Bier, Chairman of the Management Board of Austrian project developer UBM, which is very active in Poland. “The completion of numerous new projects has sharply increased the vacancy rate, which has put some serious pressure on rental prices.”

Strong rental demand in smaller cities

Around 14 percent of all office space in the capital is vacant, while the figure is only about 4 percent in Kraków. According to real estate advisors at Colliers, the battle for office tenants in Warsaw is set to intensify because an additional 660,000 square metres of office space will come on the market in the next three years. Conversely, letters in secondary cities are seeing strong demand. For example, Hewlett Packard has rented 17,000 square metres of office space in the Dominikanski office building in Wroclaw. The structure, which was developed by Skanska and now belongs to Union Investment’s property portfolio, was already 85 percent let before completion. “Wroclaw and Kraków have a large supply of affordable office space and well-educated employees,” says Philip La Pierre, Head of Investment Management Europe at Union Investment Real Estate GmbH, citing two important reasons why these university towns are attractive for tenants – and especially for major international groups, which have started locating shared service centres here as part of business process outsourcing plans. According to the most recent report from Tholons consultancy firm, Wroclaw is ninth on the list of the top 100 locations worldwide for outsourcing back office activities.

There is a general shortage of quality product available for sale.
Marcin Medrzecki, Associate Director Investment Services, Colliers

Advantageous yields

In addition to stable consumer demand, investors particularly value the yield advantage in secondary cities. Investors can expect a yield of between 6.5 and 7 percent for high-quality office properties in regional cities, while the yield in Warsaw is at most 6 percent. In this respect, “from real estate investors perspective, Krakow, Wroclaw are the most attractive because of the size (availability of potential investments) and relatively high liquidity,” says Boleslaw Kolodziejczyk, valuation expert at Cushman & Wakefield. But Lodz is also attracting capital, as the sale of the Green Horizon property demonstrates: this 33,000 square metre major new office building was acquired from Skanska by the investment company Griffin Real Estate in spring 2015. In spite of this, the transaction volume in these cities is relatively low. “That is why divestments outside of Kraków and Wroclaw are still proving to be very difficult,” explains Karl Bier from UBM. This applies primarily to B locations in secondary cities. According to Philip La Pierre, this is another reason why Union Investment restricts its involvement to the best locations and properties in each city. In any event, the Polish investment market is rather small for a country with over 38 million inhabitants. According to preliminary figures, €3 billion worth of commercial real estate changed hands across Poland in 2015; in Germany, with more than twice the population, the sum was around €55 billion. “There is a general shortage of quality product available for sale,” says Marcin Medrzecki, Associate Director Investment Services at Colliers consultancy firm in Poland, explaining the low transaction volume.

Union Investment secured Gdynia’s Riviera shopping centre, which was expanded to provide 70,000 square metres of renting space in 2014.
Daniel Sumesgutner / Union Investment
In Lodz, Griffin Real Estate acquired the Green Horizon office building in spring 2015.

Marcus Lemli highlights an additional peculiarity about the Polish market: in the first three quarters of 2015, more than 80 percent of the transactions were made using foreign capital. German fund companies, US investment companies, and British, French and Austrian investors were especially active in these deals. They are also keeping an eye on the retail market. For example, Deutsche Asset & Wealth Management acquired the Stary Browar shopping centre in Poznan, while Union Investment secured the Riviera in Gdynia, a shopping centre which was expanded in 2014 and now has more than 70,000 square metres of renting space. Smaller major cities are also attracting interest. “We always ensure that a centre has a supraregional presence,” emphasises Henrike Waldburg, Head of Investment Management Shopping Centres at Union Investment Real Estate GmbH. 

The Warsaw market is going through a classic pork cycle.
Karl Bier, Chairman of the Management Board at UBM

Active hotel market

Union Investment is also active in the hotel market. Among the latest acquisitions is the Holiday Inn Warsaw – City Centre, a hotel with 254 rooms that UBM Development is set to complete in 2018. “Poland’s popularity among tourists, both foreign and domestic, has been growing and there seems to be no end in sight for this positive trend,” says Adam Konieczny, Country Head Poland at hotel services company Christie + Co. Konieczny identifies Kraków, Warsaw and the Gdansk-Sopot-Gdynia Tricity as especially lucrative targets for hotel investors. And Poland will remain attractive for users, project developers and investors in future. “The Polish economy is still strong,” argues Ullrich Müller, Central Europe expert at the Aengevelt consultancy firm. Economists expect economic growth of 3.5 and 3.4 percent in 2016 and 2017 respectively, once again exceeding the EU average. The transparency of the Polish market also has a positive impact, says Union Investment manager La Pierre.

Political turbulence

The debate about the policies of the national-conservative government of the Prawo i Sprawiedliwosc (PiS – Law and Justice) party elected in autumn 2015 is unlikely to change this situation to a great extent, even though many of the new cabinet’s decisions are encountering a lack of understanding outside Poland. For example, the intention to levy an additional tax based on sales on retail space measuring more than 250 square metres could significantly impact the real estate sector. It is unclear whether retailers will be able to pass on the taxes to their customers through higher prices or whether they will demand that their letters share the costs. Joanna Mroczek, Head of Research at CBRE in Poland, remains confident, however. “Undoubtedly, however, Poland ist functioning within the European Union reality. Irrespective of the changes in terms of the alignment of political forces, it is thus provided with a large degree of stability, which is what counts the most from the economy´s point of view.” Michal Cwiklinski, Managing Director at Savills in Poland, is also convinced: “In the long term Poland is envisaged to remain a core investment market in the CEE region.”


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