Based on recent activity and the economic reality of being the only European country to avoid recession, the situation on Poland’s property market has begun looking brighter as of late.
Real estate investment in Poland heating up

The interest institutional investors are showing in some recent projects, particularly shopping centers, has moved beyond the looking stage to substantial acquisitions.

One project that could end up among the recent acquisitions of Polish shopping centers is Hungarian real estate developer TriGranit Development Corporation’s Bonarka City Center (pictured) in Krakow, Poland. Finished in November 2009 the shopping center of 90,000 square meters gross leasable area is the first of three phases of a major urban redevelopment of Krakow’s Podgórze district that is expected to cost up to €500 million (Kč 12.73 billion) in total. TriGranit was reported to be putting all or part of the shopping center on the market, estimated to be worth around €200 million. Simon Bayley, chief development officer at TriGranit Development Corporation, confirmed the company’s intentions to CBW.

“We are interested in selling 50 percent of the project and we are currently under exclusivity with an investor. Given the high-quality and dominant nature of the project combined with the strong position and growth potential of the Polish economy the sale process attracted a lot of interest,” Bayley told CBW. The website of magazine Property EU last week reported that German fund manager CommerzReal, the real estate subsidiary of Commerzbank, was engaged in talks to acquire the stake in the property.

The return of investors

There are more deals on the horizon, according to Jarosław Wnuk, head of investment at property consultant King Sturge in Warsaw. Another potential deal that was reported by Property EU is the approaching sale of Trinity Park III office scheme in Warsaw’s Mokotow district by Ghelamco Poland to an unnamed German investor. The deal is reportedly for almost €100 million.

“There are a number of transactions where investors have been granted exclusivity and are currently doing due diligence. As this is very sensitive subject I cannot be specific. … There are a few other office buildings in Mokotow under consideration. When the deals are completed I am sure that the parties involved will announce it. The truth is that investors’ activity is definitely back in Poland. Funds which have already invested here are back; more importantly new funds are coming to Poland as well,” Wnuk told CBW.

Investment in Polish property in 2009 came in under €700 million, an almost 60 percent drop on 2008 figures and only a fraction of the over €5 billion of investment the country experienced in the peak year of 2006. Projections for this year see the momentum of fourth-quarter deals continuing as the market returns to growth.

Commenting on the release of its real estate market report for Poland—Marketbeat–Spring 2010—Aleksander Loster, senior surveyor from capital markets group at Cushman & Wakefield, stated that prime property, as opposed to “riskier products,” is attracting growing interest.

“In the first quarter of 2010 the investment activity on the Polish commercial property market was clearly picking up. In January and February the transactions volume was close to reaching the levels recorded for the whole of 2009, with some further transactions still in the negotiation stage. If this trend continues into 2010, total volume may be nearly three times as great as in the crisis year 2009, to exceed €2 billion,” Loster said.

Another factor helping facilitate deals is sellers reaching more realistic price expectations. “A number of owners showed a willingness to accept new, lower price levels, seeking financial resources for new investments—which should also help improve the liquidity of commercial real estate,” Loster added.

Regeneration

The next two phases of the project comprise office and residential components. While many Central and Eastern urban redevelopment projects, particularly in secondary cities, have seen the office and residential parts of the project postponed or scaled back Bayley says the second phase of four A-class office buildings is going ahead. “We have just secured financing from a bank to finalize the office project B4B, which is phase two of the Bonarka City Center project.  We expect to start construction again within the next three months and given that the project is already pre-leased to 65 percent we are in a strong position,” he said.

In spite of the success of its landmark project TriGranit has also experienced the bumps the Polish market has been going through, with 2009 real estate investment and new development activity sinking precipitously. The company has two other projects in the Polish regions—in Bydgoszcz northern Poland and Poznań, west central Poland—that are in something of a holding pattern, according to Bayley.

“They are both progressing in the pre-development stage but given the problems in the banking sector debt finance is not yet returning to development projects and signing pre-lease agreements with retail tenants is difficult at the moment because most of them have delayed their expansion plans,” he said.

Healthy man of Central Europe

In its recently released report Emerging Trends in Real Estate Europe, the Urban Land Institiute (ULI) indicates the degree to which Poland is viewed as an exception to the recent drop in investor sentiment towards Central and Eastern Europe (CEE) as a whole. With GDP growth expected to outperform the rest of Europe and strong domestic demand the market is considered a better bet than its CEE neighbors. In this year’s ULI rankings Warsaw maintains its ranking as the 13th best city investment prospect for existing property performance while for new property acquisitions it ranks eighth. Among almost half the survey respondents, retail accounted for the most attractive sector for acquisitions. For its longer-term economic prospects Warsaw ranks fourth for its development prospects.

Nevertheless, development is still subdued and it could take some time before the process gains any momentum. “Development is very slowly picking up; however, a lot depends on the tenants. As long as the occupiers market will not become active, I do not expect many changes in the development. There are more and more good signs coming from the economy and therefore tenants’ activity has increased since the beginning of the year,” said Wnuk.

Retail spur

The emphasis on retail for current and future plans can largely be accounted for by the size and number of Polish regional cities. According to Wnuk, there are almost 40 cities with a population of over 100,000 people. “All these locations are relatively attractive for developers and tenants, so if the right product is there investors will follow. Poland has an impressive forecast of gross domestic product (GDP) growth for next ten years of 4.4 percent on average and even more importantly, retail sales are expected to grow in this time period by approximately 8 percent yearly on average. This makes investing in retail in Poland very interesting for investors,” he said.

For Bayley, it is also a function of the country’s size relative to other CE countries, but as investors step back into Poland they will inevitably begin looking further into the region. “ [Poland] is the healthiest, but by the nature of the size of its economy and the number of existing projects it will always attract the most interest.  Moving toward the end of the year we will see more investors returning to CEE and other countries in the region will also get more attention.  The CEE region still has a strong story of structural growth, increasing spending power, relatively low levels of private debt, higher rates of urbanization and a better capacity to attract foreign investment. We believe that by the end of the year we will see more interest from investors in development projects as the key assumptions in business models stabilize and they begin to look for opportunities to secure future projects at better returns,” Bayley said.