Poland to remain a ‘quality market’ for real estate investment

Krzysztof Misiak, head of Cushman & Wakefield Poland, talks to the BPCC’s Michael Dembinski about how Covid-19 is reshaping Poland’s real estate markets, and where the new hotspots for investors are likely to appear.

The real estate sector will experience a major shake-up globally with winners and losers across the board. Different sub-sectors will feel the changes in different ways. The shift to home working will reduce demand for office space; continued need for social distancing will affect retail, in particular shopping malls; whilst the rapid shift to e-commerce will impose profound change in warehousing requirements, in particular last-mile logistics. What's the more nuanced picture around the post-Covid trends for real estate, in particular in Poland?

We can make several conclusions. As for the office sector, aspects to do with employee well-being are important. The fact that we come into the office, meet and interact with one another helps us maintain self-discipline in our lives and feel better. Lack of exercise and working from home in the long term may lead to deterioration of many people’s physical and mental health.

As regards retail trends, we anticipate greater market diversification. Shopping malls surrounded by office buildings in city centres will respond differently compared to smaller retail schemes in the vicinity of housing estates. There’s no doubt they differ; the latter are in a much better situation and facing smaller challenges. As a result, they are likely to be perceived differently by prospective buyers. Information about how well a shopping centre has been performing and how resilient it is to demand fluctuations will be critical to investors and – once the situation stabilises and investment activity resumes on the market – this will be thoroughly reviewed.

As for the whole commercial real estate market, logistics will maintain its growth momentum and attract the strongest investor interest.

We also expect a shift of focus among leading developers towards housing, with more residential units being built at the expense of office projects. They will redirect their workforce and financing to the residential market. By no means will the office sector come to halt, but it will certainly come under pressure, at least over the next two years.

Among the most significant groups of investors in real estate are pension funds; with a sharp drop in yields in commercial and retail property expected, how are investors going to recoup their losses in this asset class? Do you envisage investor sentiment in real estate as an asset class weakening?

Pension funds focus mainly on rental rates and long-term value growth; the latter can be hardly justified in the current situation. Rent collection in retail properties differs from rent collection in office buildings. Shopping centres have been experiencing difficulties for some time and Covid-19 has merely accelerated some processes. They have been transforming in recent years. The more ‘aggressive’ owners who were prepared to turn their shopping malls into entertainment centres with a stronger food and beverage component are now faced with the challenge of reinventing them. For retail schemes, this is undoubtedly a very difficult situation; it’s a bit different on the office market, there’s more stability there. Investment funds are facing bigger or smaller challenges, depending on the commercial real estate sector in which they have invested most of their capital. But looking at the market, we do see that shopping centres that reopened on 4 May are doing better and better.

Central Business Districts (CBDs) in major Polish cities have been attractive locations for new office investments – presumably the land banks earmarked for development will be mothballed for quite a while now? Or will there be a shift in usage?

We do not anticipate any repurposing in Polish CBDs. Developers say they remain committed to carrying on with most of their existing real estate projects. Completion of some projects may however take some more time than originally thought. I haven’t seen any developer changing plans for lands earmarked for office or residential projects in Poland yet. These two types of properties are usually developed in completely different locations. As I said, developers will be redirecting some of their resources to housing, but they will certainly not earmark plots in the city centre where office buildings were originally planned for residential projects.

Turning to residential real estate in the context of urban planning – do you anticipate a 'flight to the suburbs' as people seek what they perceive as the relative safety of districts with lower population density? Future lockdowns will be more bearable in a house with garden on the edge of town than in a city-centre flat... What would such a shift mean in terms of planning, public transport and infrastructure provision? And what would effect would such a trend have on future commercial and retail developments?

Client experience is key, that is the effect it will have on people’s comfort of living. Although another lockdown is likely, we still don’t know whether it will actually happen again at all. And it is also too early to say whether the lockdown was a good idea. Considering such a solution, we must think whether people will want to spend an hour or an hour and a half on commuting to the office. Although it’s late June, traffic is heavy now, traffic jams are back. In addition, when talking about public transport, we mustn’t forget it’s a large number of people in a small space. We are, however, seeing more social interest in personal transport modes such as a car, bicycle or scooter.

Infrastructure projects take time to complete. We are informed about planned investments long before they are finalised. Locations where such infrastructure already exists can be promising in the future, but locations lacking such infrastructure are unlikely to attract more interest.

Looking ahead, more home-office work is more likely than another lockdown. It might be a good idea for an employee who is able to work from home more and needs to commute to the office twice a week for example to move from a small city-centre flat to an out-of-town terraced house. Even if another lockdown is put in place, it will be a lot more diversified.

As regards retail properties, there is no boom in new locations on city outskirts on the cards. However, according to preliminary analyses, stores in the suburbs appear to have fared the best during the pandemic.

Recent years have seen investors from around the world moving into the Polish real-estate market; as well as traditional investment sources from Western Europe and North America, Poland had started becoming attractive to funds from the Far East, Middle East and Latin America. Do you see this trend intensifying or weakening in the coming quarters and years? How do you judge the attractiveness of Poland compared to other real-estate markets in terms of yields?

This trend is likely to intensify, because the positive experiences of previous funds attract more investments. From my perspective, Poland is an attractive market as it has new buildings, large corporations and – first of all – tenants who tend to be growth-oriented. This is a positive signal especially for investors wanting to acquire office buildings, because the risk of vacancies is lower. Office buildings in the West frequently require huge outlays and are of inferior quality in spite of similar pricing. There’s no doubt that the quality offered in Poland is a market driver. Thanks to many international corporations that are very demanding and have set certain quality standards, office buildings – the mainstream of the Polish real estate market – are very modern and leased to tenants focused on growth. Even if home-office work gains more traction, its impact on the Polish office market may be considerably weaker than in Western Europe.

Polish regional city markets are even more attractive in terms of acquisition costs of modern office buildings, with the difference with Western Europe being far greater. We anticipate that the yield gap will tend to narrow in the long term.