How is Polish real estate perceived as an inward investment destination by global capital?
Poland is on the map for global capital and is viewed positively, and there are many important reasons for this. Most importantly, this is a decent-sized and well performing economy, it’s an EU member, there is a significant presence of international companies with demand for space across various asset classes, or that the rates of return are at a premium over Western Europe. Other CEE countries are also attractive, but they are significantly smaller as markets, which is why some investors may be less interested. Poland’s real estate sector is of the right scale, and therefore provides investors with the comfort concerning future liquidity. Moreover, this scale means diversification, both in terms of availability and variety of product in terms of geographical locations, quality, value ticket, or risk-return profile. One other strength of Poland is its level of education and subsequently the labour market, in the meaning that it gives investors access to some of the best professionals in Europe, especially in the IT or business services fields.
So, for all these reasons Poland continues, and - in my view - will continue to attract new capital, but also offers those funds who are already present in the country a constant inflow of new opportunities to further develop their portfolio.
Over the past 12 months, we've seen new investors entering Polish market, with most of them moving into the country's office or industrial sector, but there is also a growing interest in the residential or hotel market. Investor confidence in Poland has remained strong, and that helped to lower the prime yields further. This was to some extent driven by very low interest rates around the world, but wouldn’t have happened without the confidence of investors in the Polish market and the economy as such.
Coming back to the topic of new investors in Poland, in the last two years there was a significant inflow of capital from countries that have not invested in Poland before. Clearly the capital from Korea is such example, but there is also capital from other countries, which invested both directly and indirectly, via Europe-based fund managers, into Polish real estate. Capital from South Africa is already active for some time, but funds from China, Singapore, Malaysia, Indonesia, or the Philippines have all significantly increased their investments in the last few years. The main driver for them is a return premium available in Poland, but also the depth of the market meaning availability of the product, and overall growth prospects. The market continues to be attractive also for players with a longer track record in Poland, like the US, Canadian, or Australian funds, who also look for the right acquisition opportunities.Finally, and that is an interesting development direction, Polish market has also been entered by few funds with Central European origin, and that includes few players from Czech Republic, Hungary and Slovakia, who also compete for product and grow the scale of their assets under management in Poland.
An important feature of new core pension fund type capital is that it is risk averse and therefore seeks projects that do not require a hands-on approach. As a result, they focus on the newly-built projects with long leases in place. This restricts their activity to a fragment of the market, but – on the other hand – creates opportunities for those able and willing to be more proactive, such as investors with in-house teams in Poland, with management capabilities to take care of more demanding assets. A good example of this is Spectrum Tower in Warsaw, bought by UK-based fund Europa Capital as TPSA's lease ran out. The investor took over the building, spent money on refurbishment of the property, leased it out to new tenants, and subsequently sold to a less opportunistic investor.
What's the perception of cities outside Warsaw?
Poland is a country with strong regional cities that offer a significant pool of graduate talent, and similar quality of life to Warsaw. At least six reasonably large cities and conurbations, well communicated in terms of road, rail and air, with attractive supply of well-educated workforce, and finally attractive places for young people to live and work – it means that Poland offers greatly diversified choice for employers looking to expand here. Such city diversification is similar to Germany and unlike the UK or France which both have an overdependence on their respective capital cities. In the office sector, the search for new talent in an era of low unemployment and high staff rotation, has led employers to move to regional cities in Poland, but thereafter also to consider next-tier cities such as Opole, Rzeszów, Olsztyn, Lublin, Szczecin, etc – all of which are university towns with not insignificant graduate communities.
The Polish government has recently sent out the message that it intends to move some of its offices (probably not ministries, but various agencies and service offices) to third-tier cities – I'm in favour of this. Such locations offer greater staff loyalty, and within certain competence areas it should be easier to recruit people there. Without a doubt, it would also be a great impulse for such cities.
And on the subject of government real estate – if you ask me, there's such an ineffective use of space in some of the greatest locations in Warsaw! Ministries are housed in large, impressive buildings but very poorly utilise these locations. More public sector tenants in private real estate would make more sense; and at the same time these big ministerial buildings could be repurposed as, say, luxury hotels or quality city centre residential. It is also worth underlining that there could be significant savings for the state budget, achieved from both more efficient use of space, and sales of city centre buildings for hotel or residential use, and further supported by longer term commitment to moving peripheral government activities to mid-sized cities, thus cheaper both in terms of real estate and labour. The UK did this many decades ago. Let’s hope this will be picked up in Poland, too.
How do you see the Polish economy faring in the short to medium term?
There are some recessionary expectations, in particular, pessimism stemming from recent Germany's economic indicators or overall length of the economic cycle. Poland is currently more exposed to Germany, way more than in 2007-08, because many Polish mid-caps are sub-contractors for German firms, and therefore integrated into the German supply chain. With sales going down for German exporters, Polish economy will see the impact, too. However, these Polish firms are predominantly small and private, and because of their size and ownership structure – very proactive and agile, so I trust in their abilities to find new markets or new ways of doing business and continue to do well.
Importantly, I'm not as yet seeing signs of a recession. Real estate firms seem to be optimistically planning for the future, and assuming a continuing market growth. And there are reasons for it - we are contending with very low unemployment in the main urban centres with companies struggling to find people who can work for them. This, in turn, is pushing up salaries and enriching cities. The risk of successive generations of Poles becoming less motivated, and so productivity going down, is mitigated by the constant influx of people from smaller towns and rural Poland, who come to the big cities to make it through hard work. There is also migration from abroad, especially from Ukraine. This is certainly a fuel for the real estate development sector, across residential, office, or retail asset classes, but also a general plus from an employer's perspective. So, as long as migration from poorer rural communities and abroad into larger cities is sustained, the economy should have a solid foundation to grow.
One other aspect supporting the short-term growth is clearly the consumption. It looks healthy in Poland and is expected to continue to be good. On the other hand though, the medium term issue for the Polish economy can be the relatively low investment rate. There is a big task for the government to create and implement stimulus for private investments. We are not seeing enough of this at the moment, for sure.
Do you see public-private partnerships (PPPs) taking off in Poland?
The next EU financial cycle will contain way less money for Poland, and this may suggest an increase in public sector’s interest in PPPs, as an alternative to EU funds. However, I believe that interest rates, very low at the moment, are not working in favour of PPPs. And so, as a consequence, while there still are EU funds – subsidies in effect – and they will continue to be used, I struggle to see why there would be appetite for PPPs instead of lending at very competitive terms, both via loans and bonds issues. Maybe when interest rates and bond markets start heading up this will change, but that is clearly not so likely in the short to medium term.
Is the government helping or hindering the economy?
Regulatory changes are a substantial worry. The end of the ZUS cap, if indeed implemented from January 2020, will significantly increase the cost of skilled employees in Poland and this will undoubtedly slow down appetite for creating new jobs. Even though this change has not yet been fully confirmed by the government, it already has a negative perception effect as the 2020 planning by the companies is clearly well advanced and so the likely government decision, which results in a significant jump in total employment costs, clearly had to be taken into consideration by the management boards of all companies operating in Poland. Your five-year plan is suddenly up to 20% off which is obviously not what you want to hear from your country manager, and on a such a short notice. Foreign investors, wherever they are, expect greater predictability from the regulatory environment. And the same, of course, it applies to Polish owned companies – every business needs stability in regulatory requirements. Naturally, changes can, and sometimes should be made, but in dialogue with the business community, and certainly with sufficient preparatory time. After all, a strong economy is a common goal of all of us.
JLL has its EMEA Centre of Excellence in Warsaw – how's that looking?
I am not personally in charge of JLL’s EMEA Centre of Excellence, but our Polish business works together with the CoE on daily basis, and we share the same office. And so I know that the firm is very satisfied with the quality of Warsaw based CoE team and their work ethos. Although our challenge right now is finding the right talent pool for further growth of services provided by the CoE, we continue to be able to find and hire great quality people. We have many different jobs in our Centre of Excellence right now, there are more than 1,000 people working on shared- or client-shared jobs that are not just focused on the Polish real-estate market, but provide a service on a Pan-European or sometimes global basis. Some of those functions are truly exciting with an access to great global know-how of the firm. We have therefore seen fast growth of employment in the last years in our Warsaw operations. And so as of now, we are struggling with not enough space – imagine that eight floors of the Warsaw Spire are not enough! Warsaw was without doubt the good choice for JLL.
Looking in detail at the Polish office market, what are the main trends that you can see?
Co-working – or more precisely, flex space offering - is here to stay. Why do I believe in this trend? Running a growing company, you need increasing amounts of office space, so once every few years, you move. In the past, you'd have had 100 people and you'd have been looking to grow to 120 over five years. Today, you win a project, or three; each needs another 100 extra people for short-term project teams, so you take flexible space for practical reasons. But you may need more space faster, or not need it instead of expectations to grow, or you win projects that require phased recruitment, and so on. As a result, your longer term leased space is hardly ever going to be optimal. And, in addition, you are not experienced enough to make optimal decisions regarding fit-out. A 'what you see is what you get' product that you can move into with the minimum of fuss, will therefore be attractive – the notion of space-as-a-service which is applicable to every company, even to biggest corporations. In my view - a specialist managed product which is at the right cost premium and margin, and with proper quality, is what's going to be needed, and appreciated by the market more and more.
Right now, there's a heavy price-discounting model on the market as some of the big flex space operators strived to gain market share. This pricing is not sustainable. And so this segment will face challenges, both in terms of operators profitability, and users facing growing costs and therefore perhaps taking a step back from expanding into flex. It may take many years to rectify this, but - for both tenants and landlords - it does make sense! I am personally convinced about the value of flex for the users, and therefore – with the right pricing carefully balancing the cost for users with their benefits – flex will continue to evolve and grow.
Similarly, flex space does also make sense for landlords; let’s imagine that in a building of ten floors, eight are regular offices, and two floors are flexible and managed by the landlord. As firms grow, they can expand painlessly into the flex space. For the landlord, this means more comfort with finding solutions for existing clients, and so simply a better product for occupiers, but also optimising your revenue with a majority of stable long term lease income and some percentage of potentially higher but shorter-term and therefore more volatile income from your flex space.
For all of the above reasons, I believe that flex space will succeed as a model for offices.
Retail is struggling in the UK; what's the situation in Poland?
Retail is being transformed by e-commerce everywhere, though on different pace. Poland still has a way to go before e-commerce hits UK levels, so perhaps there isn't the same amount of pressure on traditional shops, but it is clearly having an impact. In addition, a number of larger Polish cities have reached saturation points in terms of retail space – and the potential for new developments is limited. But all of this doesn’t need to be bad news for our retail. Poland built some great shopping centres, a number of owners delivered attractive entertainment and food functions, and such schemes will continue to attract customers. Importantly, Poland does not have much of a high street, and that is an important difference between us and countries such as the UK, where a lot of sales takes place in high street retail. And so, I believe there's a decent story to be told for Polish retail, which should be doing just fine alongside, and not in competition with, the growing e-commerce.
And e-commerce is clearly not free from its challenges. Probably the biggest one is returns – people ordering five goods and returning four of them. Each returned product needs to be transferred, quality-checked, repacked, and returned to stock. This work is time consuming and costly. Physical, fully-staffed shops that use the click & collect model where you can order online, go to the shop, try it on there and then pay and take it away only if you're satisfied, may be the way to go. Retailers will have to revise their business model to address such issues, and traditional bricks and mortar retail has an important role to play there.
The link between retail and manufacturing is logistics – this is doing well.
Yes, it’s doing extremely well. Poland participates in global boom in logistics, and we see record occupier demand, resulting in heavy growth in development activity, and capital values going through the sky. Not a bad place to be in, if you are a developer.
The logistical central hubs have been built in Poland for the last few years, in addition to what was already there, and current ‘hot topic’ in the sector is the bigger cities’ distribution network, i.e. the last-mile logistics. With more expensive land in the city, the answer might be a multi-floor real logistics centre product – such would deliver multiplied amount of area for logistics goods and so could afford the higher land prices.
Concluding, there is clearly still a lot of potential for investment in logistics real estate, across the country, and both developers and us agents should continue to be busy in this sector.