The market is seeing a surge in various barter and joint venture transaction structures entered into by investors and developers with landowners, which were not popular during the recent years of the market boom.
The volume of transactions recorded in 2021 and 2022 confirms that interest in the Polish real estate market among investors remains strong and there is still significant room for growth. Despite the global economic slowdown, new capital seeking interesting assets continues to flow into Poland, new investment entities are debuting on our market, and funds that were active previously are returning. Poland remains a price-competitive market, offering higher rates of return than Western Europe. This motivates developers to continue operating even in less favorable market conditions.
Rising costs of financing and project construction, a sharp increase in energy costs, and rising labor costs, offset by the indexation of rental rates and service charges, mean that companies planning new projects face the difficult task of maintaining optimal investment profitability. High inflation, followed by a cycle of interest rate hikes, has forced developers to seek alternatives to expensive and less accessible bank financing for new projects.
We can therefore observe a surge in barter transactions on the market, which investors and developers are entering into with landowners. The most joint venture investments are visible in residential construction and the PRS sector, which recorded a record transaction volume in Poland last year. This form of cooperation in project implementation has also been working very well in logistics for years.
New projects in logistics and PRS
Investors are preparing new projects primarily in these two sectors because they report the largest deficits. High interest rates and bank requirements have made renting the only alternative for meeting housing needs for many people. The shortage of housing in Poland deepened even further after the outbreak of the conflict in Ukraine, when the supply of rental housing dropped drastically, opening up broader prospects for the PRS sector. A negative aspect associated with institutional rental, however, is the legislative and tax risk.
The Polish warehouse market is also still poorly saturated compared to Europe, considering the amount of space per capita, which creates growth potential. Interest in renting logistics space remains high in Poland, as evidenced by the very low warehouse vacancy rate. The greatest activity is shown and the largest transactions are carried out by entities serving the domestic market, as well as European markets from warehouses located in Poland.
Investors are looking for land for projects of various scales. The investment must bring an appropriate profit that will be satisfactory for both the developer and the landowner. The form of cooperation depends on the type and size of the investment and the expectations of the landowner and potential tenants. Most often, transactions with two-stage project settlement are concluded. Part of the payment is made after obtaining a building permit, and the remaining part is paid as a percentage share of the profit from the sale of the investment, as specified in the contract. Various types of premiums and bonuses for achieved higher results or early completion are also taken into account.
Diversity of forms of cooperation
Cooperation is possible in various options. Land for housing is valued and then enters the JV as a contribution, and the transaction is settled, for example, from the profit generated by the company, thanks to which the landowner earns not only on the land for the residential floor area (PUM) but also participates in the developer’s margin. The investment can also be implemented in such a way that the landowner receives a specific package of apartments after they are built. Land for PRS, office, or logistics projects contributed to the cooperation in a barter arrangement, after the investment is completed and sold to a fund at a specific rate of return, is settled, for example, through a fixed percentage share of the investment profit.
However, we cannot speak here of a market standard phenomenon and dominant forms of JV cooperation in relation to individual market sectors. In each, various transaction structures and forms of settlement are implemented, which were not popular during the recent years of the market boom. Now, investment land owners participate in the realization of the developer’s margin, becoming beneficiaries of the entire project.
For developers, this is an attractive opportunity in response to limitations in financing land purchases and the high cost of capital, while simultaneously increasing the scale of implemented investments. The investor brings experience in the field of implementing specific development projects to the cooperation. In the case of office, warehouse, and retail investments, what is essential for the entire process and project safety is the knowledge of the developer, who perfectly knows the business parameters achievable in terms of leasing for a given location.
Searching for potential
Only fully commercialized projects that meet specific parameters guarantee interest from investment funds in purchasing the property, bringing success to the entire venture. The quality of the property and the appropriate selection of tenants and their stable situation are of decisive importance here. It should be noted that commercialization is proceeding more slowly today, especially since rental rates in the warehouse and PRS sectors have risen by 20-30 percent over the last year.
A facilitation for developers, however, is the stabilization of construction costs. A clear slowdown in momentum in the construction sector has caused construction costs to decrease and return to the level from over a year ago.
Before concluding a JV agreement, an analysis of the land’s potential and its use is carried out, during which an architect or planner verifies the potential of the local spatial development plan (MPZP) of the property. They analyze and quantify all kinds of investment risks, as well as potential additional costs that may arise during the project’s implementation. Many plots have a lower value than the owner expects because, for example, the MPZP was drawn up in such a way that it limits the land’s potential. We often encounter, for example, land properties that carry high costs related to so-called relocation or limitations due to running heating networks, power lines, or watercourses located underground.
Knowing the current market realities, we can analyze and calculate the commercial potential of the land, correlating it with current transaction prices, both rental rates and property sales. We advise on numerous transactions where the landowners are individuals, companies, and corporations. The role of Walter Herz advisors is to develop an in-depth analysis of the project’s potential, prepare detailed calculations, and search for a hidden reservoir of real estate. Looking at projects out-of-the-box, we look for solutions that owners or developers have not looked at before. We take a close look at undeveloped land, developed land, and also those where one can analyze a change in function or standard of facilities so that they meet current market expectations.
Source: Walter Herz.