Past event

How has Poland’s real estate sector coped with Covid?

For many years, the BPCC’s Real Estate & Construction events have been a quarterly occurrence, bringing together investors, developers, contractors, subcontractors, engineers, architects and of course representatives of real estate advisory firms to see how the market is evolving. The pandemic has put much on hold, so after a longer-than-usual pause, the BPCC held its second real-estate event on 16 September 2020, together with Savills and Linklaters, in the form of a webinar.


 

The aim was a catch-up to see in what shape the real estate sector finds itself in after the Covid-19 lockdown.
The short answer is – better than might have been expected. A longer answer is – we are seeing the acceleration of trends that were already gaining momentum before the pandemic.

Tomas Buras, CEO of Savills Polska, set the scene in with a detailed overview of market conditions. The first half of 2020 proved to be record-breaking in terms of transactions – up 5% on H1 2019. Despite Covid-19 challenges, it was the second-best result in the first half of a year on record. Pricing in the second quarter saw some rebates, “but not that high,” said Mr Buras. The retail sector was certainly hit.

One trend that Mr Buras has observed has been “the chase for scale”; ten years ago, an investor might have acquired one asset, such as a shopping centre or office block. Now, he is seeing portfolio deals, “the bigger the better”, with investors buying shares in developers’ platforms, and buying several developments in one go. Logistics and industrial space is currently “on fire”, with investors making ever-larger acquisitions.

Mr Buras spoke about alternatives to the traditional sectors of office, industrial, retail, residential and hospitality. Student accommodation is one, although with the sudden shift to online learning during lockdown there are questions as to when demand would pick up. The ‘build-to-rent’ residential sector is likely to see rapid growth, driven by counter-cyclical demographics, and a generation of young workers looking for geographic flexibility, with careers that over the next 20 to 30 years will see them living and working in many cities rather than being rooted in one. Mr Buras predicts the grown of ‘accommodation as a service’, and developers building 2,000-3,000 units – a contrast to the situation in Poland now, where the private-rented sector is mainly composed of individuals buying one or two flats to rent out. New alternatives include data centres as well as land for renewable energy projects such as wind or solar.

When it comes to the office sector, Mr Buras said that far more analysis is being done by landlords before accepting a tenant. ‘Covenant strength’ is important. Landlords need to understand their potential tenants’ model of working – how many staff are anticipated – and able – to work from home in the short- and medium term.

Artur Kulawski and Janusz Dzianachowski, real estate lawyers from Linklaters, gave an account of the sector’s performance from the legal perspective. “Deals have slowed down due to issues with financing and issues with tenants, but generally, compared to the Lehman Brothers’ crash in 2007, the market was prepared. Thirteen years ago, it was a standstill, said Mr Kulawski”. Because of the lockdown, all parties need to be well prepared before their meetings, to meet the technical challenges. With courts and notaries not functioning for many weeks, there is a backlog of cases. But the deal flow is there, the pipeline of new investors is “quite promising”. “The market reactivated almost immediately, there are new deals on the way.” The point made by Mr Buras about investors buying ever-larger portfolios of properties was confirmed by the lawyers, who were seeing less single-asset acquisitions.

China is becoming one of the major investors in the Polish real estate market; with two rail links through Poland forming part of the Belt and Road Initiative, the logistics sector is of interest.

Existing investors, from Germany, the US, the UK, are also visible, with existing investors increasing their stake. Poland is seen as being well-positioned for servicing Europe as a base for logistics activities and fulfilment centres. Planning restrictions are being loosened; the Polish building law is due to be changed within days. Polish developers are seen as being efficient and demonstrating good practice – they have not slowed down because of the pandemic.

Labour costs and building-material costs have not gone down. Public infrastructure projects are going ahead, funded by the EU, but at local-authority level, some tenders have not gone ahead because of lost tax revenue caused by the lockdown. However, help is at hand from central government, which will be supporting local authorities with 6 billion zlotys to make up the shortfall.
In the office-development market, projects which were already underway will be completed (there’s no sign of distressed assets here), but once finished, developers will wait to see how working from home and hybrid working models will evolve before initiating new office projects.

Residential will undergo a change in direction as people will be less willing to live in high-density city-centre apartments, favouring instead single-family houses with gardens, in good locations with transport infrastructure and amenities, with good design and quality construction.

While there have been no major problems between landlords and tenants in the office sector, in retail – especially in shopping centres – there has been the need to restructure lease agreements, given the government’s shut-down. However, cooperation rather than litigation has been the norm.
After the shopping malls reopened, footfall was between 72% to 88% of last year’s levels, but there was less window-shopping – consumers came to buy rather than browse. However, the sharp rise in Polish e-commerce during lockdown was a taste of things to come, with urban logistics, courier companies and parcel machines (‘paczkomaty’, like InPost) becoming the new normal.

Summing up, transactions are becoming more complicated, with landlords and tenants showing more caution; lawyers are busy drafting Covid clauses for agreements. And yet, despite everything, the Polish economy has proved to be resilient, it is one of Europe’s most diversified economies, and growth is expected to return by next year and into 2022.

Policy Groups
2020-09-16, 09:30 am

Venue: Livestream on Webex
Organiser: BPCC, Savills, Linklaters