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The Warsaw Voice » Real Estate » November 26, 2008
Special Section: MIPIM HORIZONS
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Polish Office Market Alive and Kicking
November 26, 2008   
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Despite the dark clouds gathering over the world's economies, Poland's commercial real-estate market continues to develop healthily.

While there has been some slowing down of activity compared with the boom period between 2005 and mid-2007, analysts concur that the current financial crisis will only mildly affect, if not bypass, the Polish real-estate sector, its office segment in particular. The same is true of the housing market where developers are coming forward with new offerings despite falling prices.

Transactions in the commercial real-estate market in Poland in the first half of 2008 were worth some 97 million euros in total, or 57 percent less than in the same period of the year before but a 0.89 percent rise compared with the second half of 2007.

According to the latest Marketbeat, Autumn 2008 report by international consulting firm Cushman & Wakefield, the office real-estate sector was the most active in the first half of 2008 as opposed to the retail sector, which had been the most active sector in previous periods. The office market noted 10 sales transactions in the first six months of the year to a total value of some 392 million euros. Sales in the capital accounted for more than 87 percent of this figure. The number of transactions was 55 percent lower than in the same period a year earlier, but compared with the last six months of 2007, it was 25 percent higher.

Cushman & Wakefield analysts say it is likely that in the coming months the situation will stabilize with regard to the value of transactions. C&W expects a potential increase in investor activity. Because demand is higher than supply, practically all the main office markets in Poland have noted an increase in rents and a drop in the level of vacant office space.

However, Michał Małecki, a negotiator with real-estate firm King Sturge, says that although demand continues to be high for prime office locations and developers will complete projects already under construction, the market situation may soon demand more careful decision making.

"Priority will be given to projects with the highest rates of return and minimized risk, such as those in prestigious locations," says Małecki. "But some tenants will be choosing cheaper locations to lower their firms' operational costs."

Warsaw still top for office space
Warsaw remains Poland's most developed office real-estate market, and prime office space in the capital at the end of the first half of 2008 measured over 2.8 million sq m. According to data from Colliers International, Warsaw has currently a total of 2,960,700 sq m of office space. The third quarter saw the completion of the biggest area of new office accommodation to date this year. This was a total of 102,800 sq m of offices in 11 buildings.

In its report on the Warsaw office market in the third quarter of 2008, Colliers notes that the majority of new office space in the last quarter appeared in the city's upper southern zone, or 55,000 sq m, and the biggest completed building was North Gate, with 29,900 sq m, in the northern zone. In Warsaw hardly any office accommodation stands empty. In the last three months, the percentage of vacant office space in Warsaw rose slightly to 2.28 percent. According to Colliers, the majority of empty offices were in the very heart of the city, as was the case in previous quarters. The city center noted 4.7 percent of its offices standing empty, while the lowest percentage, or 0.3 percent, was in the western zone.

Among the most prestigious office projects that were completed in the capital in the first half of 2008 are the Harmony Office Center (15,000 sq m), Marynarska Business Park (43,000 sq m), Grzybowska Park (10,400 sq m), Equator (17,000 sq m), Tulipan House (17,900 sq m), Marynarska Point I (11,400 sq m), and Nefryt (15,240 sq m). Locations outside of the city center accounted for the majority of new supply, or 92 percent. The largest number of new offices appeared in the Upper Mokotów district of the city, where almost 103,000 sq m was completed, or 73 percent of supply.

When looking at rentals, of significance is the rental of 8,000 sq m by Saturn Media Holding in Blue Office; 8,000 sq m by Millennium Bank in the Polifonia Office Center; and 6,100 sq m by ING Bank Śląski in Esta II. When taking transaction size into account, the biggest transaction was the purchase of 50 percent of the stock-worth some 160 million euros-in Warsaw's Rondo 1 office tower by Australian fund Macquarie Global Property Advisors. Warsaw's Renaissance Tower, which has just one tenant, the mobile telephony operator Orange, also changed hands for 60 million euros. Tulipan Park, a new project in the Służewiec industrial area, was sold for a similar amount.

Cushman & Wakefield analysts say that although the first half of the year did not see any portfolio transactions, the situation by the end of the year will certainly change due to significant investors such as telecom giant Telekomunikacja Polska (TPSA) and construction company Skanska selling their portfolios.

Regional offices and office buildings
According to Cushman & Wakefield, the first half of 2008 saw a continuation of good moods on the office market throughout Poland. Much demand came from foreign investors, particularly firms from the IT sector, banks and financial institutions, but also from corporations searching for premises for business process outsourcing (BPO), those wanting to expand their headquarters, and investors attracted to the opportunities inherent in the Polish market. The most developed regional markets are in Cracow and Wrocław, followed by the Gdańsk-Sopot-Gdynia Tricity area, and Poznań, both with lower supply and demand. Meanwhile, Katowice and Łódź are two cities with huge development potential. Among regional cities, Cracow and Wrocław, as well as the Tricity and Poznań, noted the fastest rate of growth in the office real-estate sector. Modern office space in six of Poland's largest regional cities measured over 1.4 million sq m. According to the Marketbeat report, Polish firms accounted for supply more frequently than in the past. The end of 2008 and 2009 are likely to be a good time for the office market, C&W says. In line with the firm's estimates, supply of modern office space is likely to increase by another 500,000 sq m, or over 30 percent.

Shopping Centers: Moderate Optimism
The trend in Poland toward building new shopping centers in medium-sized and smaller towns and cities with a population of 50,000-400,000, which first appeared at least a year ago, will gather momentum this year and in the next few years. At the same time, convenience stores, factory outlets, retail parks, and strip malls will become more popular in big cities.

After the first six months of 2008, the Polish market could boast of 7.75 million square meters of modern retail space, or 202 sq m per 1,000 inhabitants. Of this total area, over 65 percent was to be found in eight of the country's largest cities and the remaining 35 percent in medium-sized and smaller towns and cities. In this period some 200,000 sq m of new modern retail space was added, almost 50 percent less than in the same period a year earlier. However, more than 1 million sq m of new retail space is still under construction, of which most is in shopping centers.

Many projects are in the pipeline for Wrocław and Poznań. According to real-estate firm Colliers International, when taking into account all the modern retail space that is due for completion by the end of 2010, these two cities will top the league for market saturation, with some 1,200 sq m of retail space per 1,000 inhabitants.

Smaller cities continue to attract investors
With regard to market saturation of retail space, Warsaw still comes top of the list with 758 sq m per 1,000 inhabitants. Wrocław comes a close second with 748 sq m, the Tricity is in third place with 618 sq m, and Poznań is fourth with 605 sq m. Real-estate consultants concur that one of the main trends in the near future on the Polish retail-space market will be growing interest from developers, retailers and investors in medium-sized and small towns and cities with more than 50,000 inhabitants. Colliers' analysts say the trend results from not only changing market trends but also the search by developers for alternative locations to achieve maximum profits.

Colliers' latest report on retail space in Poland in 2008 reads: "In the biggest cities, where the market is saturated to a significant degree, investors are being forced to introduce innovations to make their projects stand out from the competition. Excellent architectural design and an increase in customer comfort very often achieve this. Past months have confirmed that developers are currently focusing on the smaller cities in their expansion plans. Poland's biggest cities currently account for some 70 percent of all the country's modern retail space, a drop of almost 10 percent compared with a year ago. By the end of 2010 this percentage is likely to fall to some 60 percent from just over 1.3 million sq m, but the rate of development of the capital's market in the last several months is negligible."

It is estimated that during the next two years the supply of new retail space in towns and cities with a population of 50,000-100,000 will double from 6 percent in April this year to 12 percent by the end of 2009. Just 43 percent of new supply will be located in Poland's eight biggest cities in 2008-2009; the rest will go to medium-sized cities and small towns.

"Smaller towns and cities have currently two strong magnets: a greater availability of attractive investment sites and less competition from existing retail centers," says Anna Federak, a research analyst with CB Richard Ellis, a commercial real estate advisor. According to CB Richard Ellis, small cities in the eastern part of Poland such as Lublin, Rzeszów and Białystok are attracting much interest. In the last year several developers from the whole of Poland have shown interest in the eastern real estate market because of the area's potential thanks to a lack of competition.

New projects in emerging cities
One of the most interesting emerging markets in the country is Wałbrzych. This is a typical industrial city in southwestern Poland that has huge potential for development thanks to large tracts of disused industrial land. Developers are falling over each other to build new shopping centers in Wałbrzych, and rents in the planned retail centers are soaring to 28 euros per sq m.

Galeria Pestka in Poznań, RE Project Development's Ferio Konin in Konin, Parkridge CE Retail's Focus Park in Bydgoszcz, Mayland's CH Karolinka in Opole, Galeria Agora in Bytom, Gemini Park in Bielsko-Biała, Pogoria in Dąbrowa Górnicza, Solaris Center in Opole, Galeria Wisła, Galeria Płock and Galeria Mosty in Płock, Focus Park in Zielona Góra, Forum Koszalin and Galeria Kosmos in Koszalin, Galeria Słupsk and Jantar in Słupsk, Galeria Focus in Jelenia Góra, and Zgorzelec Plaza in Zgorzelec, a city that has just 33,000 inhabitants, are examples of recently opened new retail centers in cities with a population of less than 400,000.

A new retail center is opened in Poland almost every month. The Ferio Center opened in May in Konin, which has a population of 120,000. The developer, RE Project Development, a subsidiary of Austria's Raiffeisen Evolution Project Development, built Ferio Konin for some 40 million euros. The center's two buildings have a combined usable area of 23,000 sq m, but this will eventually be increased to 30,000 sq m. Ferio Konin has more than 60 stores, including a BOMI supermarket and clothing stores H&M and C&A, covering an area of over 14,000 sq m; a 9,000-sq m Castorama DIY store and offices. This is the fourth center in Poland in the Ferio chain after Ferio Gaj in Wrocław, Ferio Galeria Zielona in Puławy and Ferio Legnica. RE Project Development plans to build two more Ferio centers in Koszalin and Szczecin. Other retail-center projects in the pipeline for the near future include Galeria Częstochowa, Pogoria in Dąbrowa Górnicza, Forum Koszalin and CH Oliwa in Gdańsk.

There will also be new retail outlets cropping up in city-center locations on main shopping thoroughfares such as Warsaw's Trakt Królewski (Royal Way) and Nowy Świat and Chmielna streets, and Cracow's Floriańska Street. New trends emerging in the real estate market will be for the introduction of new types of stores, the modernization of existing disused industrial premises, and the restoration of listed buildings in city centers.

Demand for warehousing continues to rise
Despite some negative signals from the global economy, the modern logistics property market in Poland continues to develop significantly. At the end of 2008, the level of modern warehousing space stands at over 4.2 million sq m, which represents some 14-percent growth on 2007 (over half a million sq m delivered during the first six months of 2008).

According to the latest report by consulting firm DTZ, regional locations (which means those outside of Warsaw) continue to expand and they currently account for almost 53 percent of total stock. Current logistics hot spots-Greater Warsaw, Central Poland, Upper Silesia, Lower Silesia and the Poznań Region-remain popular, with some other cities gaining in importance and attracting the attention of both developers and occupiers. Central Poland, Lower Silesia and Zone 2 of the Greater Warsaw area were the fastest-developing locations in the first half of 2008. Zone 3, however, continues to be the largest local market, with one-fifth of total stock located there.

Construction activity continues to be resilient and construction had begun on over 800,000 sq m of modern warehouse space by the end of June 2008. The tendency to deliver speculatively continues as the vast majority of space is leased prior to completion. According to DTZ's estimates, another 5 million sq m of modern stock is expected to be delivered in the medium- and long-term.

Demand has never been so strong.

As much as 920,000 sq m was transacted during the first six months of 2008, which was an unprecedented volume. DTZ expects some slowing by the end of 2008, but that total annual take-up will reach over 1.5 million sq m, which will set a new record. Central Poland and Lower Silesia are the leaders among other local markets, with 21.7 and 21.3 percent respectively. Leasing activity in the Upper Silesia, which has been the strongest location over the few last years, has slowed, which is due to the limited amount of modern space available there. DTZ has observed increasing demand for smaller units of less than 2,000 sq m and consequently an increasing number of projects meeting such requirements.

King Sturge analysts subscribe to the optimistic forecasts for Poland's warehouse and logistic space markets. Marzena Pobojewska, associate director at King Sturge, said, "Despite the recent changes in the world economy, the warehouse and logistics market in Poland has proved robust. Poland has continued to see sustained growth in demand for logistic space due to its strategic importance in Europe and as a result developers continue to invest in the region. This, coupled with consumer spending growth and a growing number of suppliers and manufacturers moving east to Poland, Ukraine and Russia, means the market remains attractive.

Michał Ćwikliński, associate director at the King Sturge Investment Consultancy, said, "There is a relatively strong demand for the acquisition of logistic centers among investors. Both foreign and domestic property investment funds have allocated some of their capital to be spent on such properties. As there are not many logistic centers available for sale, investors seem to be tendering heavily, to put their hands on those assets, and therefore the yields offered by investors remain relatively stable in Central and Eastern Europe."

Agnieszka Domańska



COMMENTARY

Poland Better Off Than Other EU Members

Chris Conner, Director of Investment, Land & Development for DTZ Poland:
There have been some negative analyst views recently on Central and Eastern Europe, but these have largely ignored individual markets and focused on areas of concern such as the Hungarian economy or the Austrian banking sector. However, Poland continues to look attractive as a place to invest because the economy and government finances here appear to be better than in other countries at the moment. The EU recently held Poland out as one of the countries most likely in Europe to resist recession.

This view is reinforced by a recent report from Merrill Lynch which shows there has been a surge in Credit Default Swap (CDS) prices. These are the derivative contracts investors take out to protect themselves against the probability of a debt default, or an inability to meet debts that can be associated with deleveraging, fund redemptions and general risk aversion.

The list of CDS spreads and the implied five-year probability of default shows that, for instance, Russia, which still boasts the world's third largest foreign exchange reserves, is now trading as if there was a 48-percent probability of the country defaulting on its sovereign debt. Ukraine on same basis is at 78 percent, Bulgaria at 32 percent, and Hungary at 29 percent probability.

By comparison Poland is shown in a very positive light with only a 14-percent probability-one of the lowest of the 26 countries with developing economies which were considered in the survey. Poland also has a competitive advantage as the growing economy here has so far seen new offices fully occupied and new shopping centers opening full of retailers, which has also stimulated the logistics sectors as storage for goods of these expanding retailers is also required. This strong occupational demand is continuing to hold up in Warsaw and the strong regional Polish cities where unemployment is now very low.

This will attract property investors to commercial property which is occupied, and also to the residential sector as these cities need more housing for expanding populations.


Can Shopping Centers in Smaller Cities Be Successful?

Maciej Krenek, RE Project Development board member:
For years we have gotten used to the idea that shopping centers must be confined to large cities. Nothing could be more wrong. Shopping centers in recent years have left the confines of big cities and, what is important, have been successful. Our firm specializes in the building of retail-service centers in smaller regional towns and cities. It seems we hit the big time since almost all available retail units are rented out even before construction is completed.

Let us remember that the division of the country into Poland A and Poland B is becoming more and more anachronistic. The inhabitants of towns and cities with a population of less than 100,000 have similar expectations to consumers in Warsaw. They also want to shop in stores of popular brands and want the comfort of shopping in a mall. Manufacturers want to reach these customers. Many firms in recent years have increased their capital resources with thoughts of expansion. To be able to achieve this goal they must reach new customers and the development of shopping centers makes the job significantly easier for them.


Fewer Transactions, But No Recession for Now

Michał Małecki, Negotiator, King Sturge, Site Finding and Development:
2008 has seen huge changes on the world's financial markets and on the real estate markets. Poland is no exception. These changes will significantly affect all sectors, commercial (offices, hotels and retail real estate) as well as industrial (warehousing). Developers are clearly slowing down their activities and already today the number of completed transactions is falling. However, there is yet no sign of a deeper recession. For example, in the case of the retail sector, because in Poland there is still strong demand for high-quality retail space and the fact that the Constitutional Tribunal rejected a bill that was unfriendly to large retail centers, shopping malls will continue to be built. We can only assume that because of financial problems projects may see changes of ownership. Projects are likely to sell for significantly reduced prices.

Another example of a sector that is to some degree resistant to deep recession, or at least has been to date, is the logistics market. Poland's strong economic growth and the consumption of fast moving consumer goods (FMCG) are boosting demand for logistics services. The market remains strong in Silesia and Warsaw, as is investment development in the eastern part of Poland in Rzeszów, Lublin and Białystok. Completion of projects started this year is slated for some time in 2009. However, real estate purchase decisions will certainly be postponed to an unspecified time in the future. Developers will want to wait for landowners' reactions since the latter will be forced to reduce their prices. In all certainty development will concentrate on build-to-suit projects. Speculative projects currently carry too much risk. The biggest players have many ongoing projects being built on sites that were purchased earlier at lower prices and it is these projects that will enter the supply chain.
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