The slowdown in the investment transaction market in the commercial real estate sector, which we can observe both in Poland and globally, is primarily the result of monetary policy tightening around the world. This strategy hits international players mainly, but not private equity investors. Perhaps this is a great moment for a revaluation of the financing system in the real estate sector in Poland and the best time for us to finally introduce REITs, which function excellently in the Czech Republic or the Baltic countries.
The introduction of appropriate legal regulations, including REIT-type funds, which has been talked about a lot again recently, or the involvement of family foundations in the long-term creation of market demand would allow for an increase in the negligible, approximately 2 percent share of Polish capital in investments. It would open up the possibility for individual investors in our country to place funds in commercial real estate.
A market of many opportunities
I believe that current conditions create a unique opportunity for the market to return to its true values, such as location, tenant quality, and construction standard. They provide special opportunities for investors who can look outside the box, seek opportunities, and perceive the hidden potential of real estate. Despite the unfavorable geopolitical and economic environment, the sector carries many opportunities, and Poland is a market of long-term economic growth, which distinguishes it from the rest of Europe.
Yes, in Central and Eastern European countries, as well as in Poland, transactions in the commercial real estate sector are currently carried out mainly with the participation of capital coming from investors from the CEE region. The lack of appropriate regulations deprives Polish individual investors of such an opportunity. Local business initiative is also limited by sluggishness in implementing changes in local spatial development plans, issuing building conditions (WZ) and building permits (PnB), and approving new regulations in construction laws.
Cheaper money as a chance for the return of big players
Market participants are waiting for a recovery, forecasting its arrival this year or next. There are many indications of this, because the GDP declines, high inflation and interest rates, and thus the costs of financing investments, which have been noted so far, i.e., the main factors hindering the transaction market, are beginning to take a direction favorable to investments.
Hopes for improvement are raised by greater predictability of monetary policy and the planned decline in interest rates in Western Europe and the USA, which brings a chance to improve investment financing conditions and the return of leading investors to the Polish market. However, enthusiasm is dampened by the still relative instability of the geopolitical situation. Nevertheless, until REITs appear in the country, which would enable the activation of Polish capital, investors from the CEE region will likely continue to play a key role in acquisitions, taking the place of international investors.
ESG as a major challenge
The market is gradually beginning to adapt to higher interest rates, and the prospect of expenditures on implementing the ESG program and solutions reducing building emissions, which are not adapted to future requirements, gives buyers a better negotiating position.
Adapting some real estate in Poland to EU standards in terms of CO2 emissions, which is already an integral part of the strategy of investment entities, will be a major challenge for owners. Optimizing some older buildings, especially office ones, to new regulations will likely prove unprofitable and will bring a wave of demolitions and changes in the function of facilities in the coming years. This prospect boosts the activity of value-add and opportunistic entities that target real estate with growth potential and double-digit investment returns.
Decline in transaction volumes
The past year brought a significantly lower value of investments in the commercial real estate sector in Poland compared to the average volumes of recent years. The downward trend applied to all asset classes. We could observe it on a global scale. The total value of transactions on the Polish market fell to one-third compared to the result recorded in 2022, slightly exceeding 2 billion euros. However, Poland maintained its position as a clear leader in the Central and Eastern European region.
In 2023, there was a lack of prime-type transactions in traditionally leading real estate sectors. Investment volumes were generated mainly by smaller and medium-sized transactions. The high value of transactions remains a challenge for investors in the context of investment financing costs, which increased unprecedentedly last year. The lack of reference transactions also hinders the real estate valuation process.
Warehouses and production as an investment favorite
Unlike CEE region countries, where offices are still one of the biggest drivers of investment, in Poland, the greatest interest of investors was aroused by the warehouse real estate sector, in which the largest number of transactions was concluded. Warehouse real estate accounted for almost half of the value of the final transaction volume, with a result of almost 1 billion euros. Smaller transactions dominated, but two of the three acquisitions with a value exceeding the 100 million euro threshold took place in this sector.
The Polish warehouse and industrial real estate sector, despite the general deterioration of economic conditions, is doing very well. In 2023, it recorded some of the best results in history, both in terms of demand (5.6 million sqm of space) and new supply (3.7 million sqm). The warehouse segment remains on a path of regular growth at a level of over a dozen percent per year. 2.8 million sqm of space is under construction.
It is predicted that logistics and industry will continue to be an investment favorite and will focus the attention of investment entities more than any other real estate segment this year. The domestic warehouse market offers 31.7 million sqm of modern space, including a large portion of facilities with environmental certificates meeting high emission and energy efficiency standards. Prospects for further growth in Poland and Europe are brought to the sector by the process of production deglobalization and shortening of supply chains.
Offices are waiting for better times
The office sector recorded a significant decline in investment last year. The total value of office transactions, amounting to approximately 430 million euros, was five times lower than the year before. Investors mostly placed capital opportunistically, in value-add assets. Many of the transactions carried out were acquisitions of older-type buildings intended for functional change or modernization. Only 2 out of 18 office transactions last year concerned real estate located outside of Warsaw.
The value of transactions in the retail sector reached 440 million euros last year, slightly distancing offices. Two-thirds of acquisitions involving retail assets did not exceed the value of 20 million euros. Investors focused their attention on smaller retail formats located in regional cities. The greatest interest was aroused by retail facilities with an area of 5-10 thousand sqm GLA with chain tenants, located in cities with over 20,000 inhabitants and rents denominated in euros. One transaction worth over 100 million euros was recorded in this segment.
Above all, retail parks
It is predicted that in the near future, the sector will continue to attract investors with retail parks and convenience-type assets, which generated the majority of the transaction value in the retail segment last year. Rental rates in the best projects of this type have increased over the last two years, as have the costs of construction and investment financing, which caused an increase in capitalization rates.
The PRS sector in Poland is only just developing, but it has great potential. In 2023, the value of closed residential transactions amounted to approximately 150 million euros. The further development of the sector will be influenced by, among other things, legal changes related to spatial planning and revised technical conditions for new buildings.
Noteworthy is the appearance of the first transactions in the hotel market last year. In October, a transaction worth over 300 million PLN was finalized. Ghelamco sold the hotel part of The Warsaw Hub – the Crown Plaza and Holiday Inn Express hotels to the French investment fund Corum. One acquisition does not yet mean spring in this sector, but it confirms the return of investor interest in it, which is supported by very good operating results achieved by hotels. The year 2024 will likely close with several more significant transactions in this market.
Investors are also leaning towards projects previously perceived as niche, such as investments in student housing or senior homes. Last-mile logistics is also gaining importance.
This year, core-type warehouse and industrial real estate will continue to be the most desired investment assets, primarily those that have the potential for rental rate growth. In the retail sector, capital will be attracted by retail parks. A greater number of transactions can also be expected in the office sector, especially in the Warsaw market, where the lowest vacancy rate in Poland is recorded, along with high tenant activity amid a shortage of new supply.
Source: Walter Herz / Bartłomiej Zagrodnik, Managing Partner, CEO at Walter Herz