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The Warsaw Voice » Real Estate » April 28, 2011
Special Section - Real Vienna 2011
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Commercial Real Estate Market Recovering
April 28, 2011   
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Poland has become one of the most attractive destinations in Europe for those investing in commercial and residential real estate.

Global property investment markets are expected to continue recovering this year, according to Cushman & Wakefield’s International Investment Atlas 2011. A rising level of investment activity “will include a broader focus on emerging and second tier markets, not just the core gateway cities which were the winners in 2010,” the report says. It forecasts that an increasing focus on the occupier will characterize the market this year, with rent and income growth to take over from yield compression in driving performance.

The report, which monitors investment flows in commercial property in 56 countries, says that global investment volumes jumped 42 percent to $564 billion (430 billion euros) in 2010. Dealing volumes are still only around 50 percent of their peak but they are over 80 percent of their five-year average. Asia held the top spot as the leading region for investment, accounting for more than half of all global activity for the second year running, followed by the United States in second place and Britain in third. London was the leading global city for investment, followed by Tokyo, New York and Paris.

EMEA investment rose nearly 50 percent in 2010 to $155 (120 billion euros), with Central and Eastern Europe up 60 percent and the West by 56 percent, the report says.

Investor demand picked up late last year after a slow summer period due to sovereign debt worries. Demand has focused on the most liquid markets, with Britain, Germany, France and Sweden seeing most activity and aggressive bidding on core assets. However, as yields in these markets have fallen, some investors have begun to look at other areas such as Poland, Russia and Turkey.

Poland: regional leader
Aleksander Loster, a senior consultant with Cushman & Wakefield’s Capital Markets Group in Warsaw, said, “Poland has become one of the most popular countries in Central and Eastern Europe to invest capital in, which is reflected both by the number of completed transactions (48 in Poland, and only 44 in the Czech Republic, Romania and Hungary combined) and the total value of investments in commercial real estate (about 2 billion euros in Poland, and only 935 million euros in the Czech Republic, Romania and Hungary combined). An analytical look at the transactions reveals a noticeable increase in demand among both local and foreign investors, while foreign companies (especially German and Austrian) still clearly dominate on the Polish market. Foreign funds are responsible for over 92 percent of the total value of transactions.”

According to the spring edition of Cushman & Wakefield’s Marketbeat report, the retail sector was the most popular segment with investors in 2010 and accounted for more than 50 percent of transaction volume. Office investment deals made up around 32 percent of the total volume, while warehouse deals totaled 215 million euros (11 percent). Last year’s high level of activity is likely to continue in 2011, which should produce further moderate yield compression, according to the report. Polish investors still claimed only a small share of last year’s total volume.

Wojciech Pisz, associate and head of the Capital Markets Group at Cushman & Wakefield, said, “The investment market staged a remarkable recovery in 2010. Following the stagnation in 2009, investors opted for new purchases. The most sought-after properties were offices in downtown Warsaw, but due to the very limited supply of such schemes investors focused on acquiring office buildings in non-central locations, mainly in the Mokotów district. The retail sector recorded the largest volume of deals, largely on account of the sale of two shopping centers in Warsaw, Arkadia and Wileńska. Several transactions were also made in smaller towns, which revealed price differences compared to prime schemes in the best locations. Investors were also quite active in the warehouse sector which typically showed relatively little liquidity. The volume of deals reached 215 million euros, mainly due to several portfolio transactions made by Panattoni. The transaction volume in Poland totaled approximately 2 billion euros. Buyers and vendors appear to have come to a satisfactory compromise on price levels with yields of approximately 7 percent. The purchases are likely to continue if prices remain stable this year.”

The latest edition of a market report by Jones Lang LaSalle, CEE City Report Q4 2010, confirms that the commercial real estate market in Central and Eastern Europe is recovering. John Duckworth, managing director of Jones Lang LaSalle in CEE, said, “The CEE commercial real estate market is now in recovery mode although there are widely differing speeds of recovery depending on where you look. With more than 280 million euros transacted throughout 2010 in Croatia, this market demonstrated some initial signs of recovery and increasing levels of interest from investors. Hungary is still experiencing some uncertainty [...] Romania is still fragile but the recovery may be a surprise in 2011/12 and confirm a view that certain markets can reemerge as rapidly as they can decelerate. [...] The Czech and Slovak markets are proving their resilience and maturity as they emerge from the difficult 2009/10 period. We are seeing more activity in Q1 of 2011 than for the whole of the previous two years and investors seem to be increasingly convinced by the current cycle. Finally, Poland continues at a confident pace in the region. Underlying fundamentals and growing corporate activity mean that vendors and buyers are able to transact in a market that stacks up well when compared to many European alternatives. The only issue is that product is limited, but that in itself is stimulating new development and financing opportunities. Poland’s relatively advanced position in the cycle underlines the increasing maturity of the market and is demonstrating leadership in the region as a whole.”

Growing demand for offices
Jones Lang LaSalle’s new quarterly Global Office Outlook report lists Poland among the most attractive office markets worldwide. According to the report, corporate confidence is boosting activity in top-tier office markets around the world, leading to accelerating early cycle rental growth and robust capital value growth in prime assets, especially where new quality supply is limited.

The report points to several hot spots emerging with high growth prospects, including the E7 (Brazil, India, China, Russia, Indonesia, Mexico and Turkey), Hong Kong, Singapore and Poland—the only European country to be given such a rating.

Tomasz Trzósło, Head of Capital Markets in Central and Eastern Europe, Jones Lang LaSalle, said, “We’re seeing increased interest in the Polish real estate market among global funds and investors. This is exemplified by investors from the Middle East. Global funds are looking for alternative and safe options to invest their capital. Poland, as a country safe from all kinds of natural disasters as well as stable macroeconomically, offers such an option.”

Commenting on why Poland has been classified among countries with the biggest growth potential in terms of the office market, Anna Kot, Head of Office Agency at Jones Lang LaSalle in Poland, said, “Poland is the only country in Europe that has been rated so high. There are many reasons for that. The most important of them is strong and stable demand for office space among international corporations wanting to standardize and optimize their business processes. Many corporations already have service centers in Poland that are expanding their range of processes, thus generating employment and demand for modern offices.”

Retail chain expansion
The retail space market seems to be no less attractive. Continued interest in defensive retail assets and the completion of some prime transactions in Central and Eastern Europe (CEE) resulted in the region’s 2010 retail investment turnover reaching 1.8 billion euros, twice the level registered in 2009, according to the latest report by global real estate adviser CB Richard Ellis (CBRE). Poland claimed more than 50 percent of all retail investment, 926 million euros. Moreover, Poland and Romania were the most attractive markets in terms of the number of newcomers in 2010. CBRE expects that Poland will remain the key destination for most retailers, followed by other core CEE markets such as the Czech Republic, Russia and Hungary.

The total supply of modern shopping center stock in CEE increased by 1.6 million sq m from the end of 2009, but the level of annual completions in 2010 was down by 20 percent year on year, the report says. New developments have started mainly in Poland and Slovakia on the back of strong and/or improved economic fundamentals. Currently there is about 1.27 million sq m of shopping center space under construction in Poland, with nearly 800,000 sq m scheduled for completion in 2011.

Patrick O’Gorman, CB Richard Ellis Director of Capital Markets, CEE, said, “The Polish retail market is one of the most attractive sectors for European investors in today’s market and we expect growing investor interest in CEE.”

Poland was unusual in escaping recession in 2010 and remains an attractive market for international retailers, according to the latest edition of CB Richard Ellis’ report How Global is the Business of Retail?

Although the global economy emerged from the shadow of recession in 2010, retailers still faced a testing time, according to the report, with consumer spending subdued in many markets and fewer new shopping centers making it more difficult for retailers to access prime space. Despite these challenging conditions, global retailers have continued to grow their store networks in a wide range of international markets. Poland experienced strong growth in retailer presence, with 32 percent of all major international retailers surveyed now located here, up by more than 1.5 percent. With GDP growth expected to reach 4 percent, Poland remains an attractive market for non-domestic retailers. Occupier demand was highest in Warsaw, where the amount of new space is limited and left some retailers frustrated in search for suitable space. Cracow directly benefited from this lack of available retail space in the capital, with eight new store openings in 2010 to rank joint third in CBRE’s top 10 of new entrants by city.

Magdalena Fr±tczak, Director of Retail at CBRE, said, “Poland is a natural target for expanding retailers and saw a high number of new store openings in 2010, with retailers attracted to the high spend per head relative to other CEE markets. The biggest issue for retailers in 2011 will be accessing prime space as the pipeline slowed dramatically last year. With this in mind, some developers are now actively looking to redevelop and upgrade existing space to entice new retailers to the market.”

Upbeat prospects for residential market
The housing market, which has clearly revived after a few lean years, also has considerable potential for development. The Residential Markets in Central European Capitals report by the REAS company, in association with Jones Lang LaSalle, shows that developments on the residential markets of 12 Central and Eastern European capitals are clearly varied, but Warsaw remains the undisputed leader in the region. Among other CEE capitals, Prague and Bratislava have the biggest market potential. The gap between the best and the weakest markets is expected to widen in 2011.

“Warsaw and Prague will certainly be among the most attractive markets,” the report says. “Being the region’s largest market by far, the Polish capital showed a resilient residential market performance in 2010 and is expected to remain the most interesting market in 2011 and beyond. In addition, a few large cities in Poland, including Cracow, Wrocław, Gdańsk and Poznań, showed a strong rebound in 2010 and are likely to continue to expand this year. Prague, the major market in the Czech Republic, will almost certainly maintain its gateway position to the region and will therefore continue to attract domestic and foreign capital investments in residential property.”

According to REAS, worthwhile investments and development opportunities can also be found in Bratislava. Currently the market is not functioning properly due to the fact that most apartments being offered on the market are not adjusted to local demand—here, a further price correction is needed, the company says. However, new supply has the chance to design a better offer both in terms of quality and price. In any event, prices for land plots will need to drop off. Recent developments in Tallinn, Riga and Vilnius also indicate opportunities for developers and investors, though it will be a wise choice to be selective in investment decisions, according to the company.

One must be even more diligent and careful when considering an investment in the remaining residential markets. The more mature markets of Budapest, Ljubljana and Zagreb should generally be less risky but, at the same time, there will be fewer bargains. Bucharest and Sofia may potentially offer interesting deals but the markets are not expected to recover entirely during 2011. Kiev and other large Ukrainian cities remain interesting in a mid-term perspective, according to REAS.
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