Piotr Flugel, managing director and board member of CTP Poland, talks to the BPCC’s Michael Dembinski about finding growth opportunities in the Polish real-estate sector.
CTP is a well-focused business with industrial and logistics real estate across Central and Eastern Europe at its core. Since CTP went public, it has had to weather the effects on the region of Russia’s full-scale invasion of Ukraine and economic slowdown across Western Europe. More recently, the tariff wars have injected more geopolitical uncertainty. How do you see the prospects for factory and warehouse development in Poland in this context?
Uncertainty is for those not fully from here. CTP has from the beginning been used to such situations – there’s nothing that’s not unexpected. We invest here, we know the approach of people living here. The tariff wars – I don’t know how it will end, it might be in a few days, it might be a big mess, but I think we will adjust to the outcome easily and quickly like we did during Covid. This is a time for opportunistic investment – driven by new opportunities, new ways and new products. Manufacturing is coming back from China, it needs assurance that it has enough capacity to serve Europe. And Chinese companies are going abroad to compete. China is no longer cheap and nasty – it offers good product at a good price. Chinese cars are transforming in the way Japanese and South Korean cars did. Chinese car manufacturers are coming to CEE, bringing along their supply chains.
CTP’s rental income has grown by an average of 16% per year since 2019; where do you see the sources of such high growth in the coming quarters and years? Which specific areas – geographic regions, business sectors, which niches, do you consider to still be able to drive growth at that pace in the current climate?
We’re developing new products, specifically for SMEs, small business units, not necessarily in industrial parks – in smaller and smaller towns. Clients for these would be e-commerce, garages and small businesses in small towns wanting nice offices or leased space for workshops. Towns of 50,000 population start to make sense for us. Affordable housing – regular flats and hostels. Nothing new for us here; smaller locations, one or two buildings, 500m2, 800m2, we can ask for a higher rent that’s €1 or €2 higher than existing properties older properties of lower standard. Towns like Toruń or Gorzów Wielkopolski, for example. We construct buildings that we lease to our tenants. What will we do with a data centre after 15 or 20 years? Plus, there’s the risk that some new technology will come along, maybe from China, which requires far less energy and cooling than computing does today, which would make the current generation of data centres redundant. If it takes two years to get all the permits needed for a data centre – how much can change over that time?
The BPCC’s Real Estate & Construction Group has noted a fall in investment from the US since the start of the current war in Ukraine, while seeing more investment coming into Polish real estate from its neighbours and nearby countries – the Baltics, Czechia, Scandinavia or Germany – countries with a more realistic view of the risk of conflict. Looking at investment flows into Poland, which countries are most active right now? How does the fact that Poland does not have its own real-estate investment trusts (REITS) affect the market?
Poland is a strange market in that domestic capital represents such a small proportion of the investment in its real estate. We see Americans pulling out, but then Czech investors are moving in; Poland is a larger and more mature market than any in CEE; valuations here are higher than in, say, Serbia or Romania, though yields are lower. Poland is seen by its neighbours as big and stable. Lack of REITs in Poland means the gap is covered by private investors buying flats, rather than institutional investors. REITs will give the market better access to money, but the private investors in Poland have developed a specific mindset since the end of communism. They tend to invest their surplus capital in flats which they rent out, or they buy second homes or retirement homes – Poles are among the biggest buyers of second homes in Spain, for example. They know how to do it, how to do buy-to-let.
The real-estate sector has a growing fear of stranded assets – properties that fail to meet current standards required by tenants, in particular ones which make no economic sense to modernise. Looking at factories and warehouses, is this as big an issue as it is with office and retail space? How is CTP coping with the regulatory ESG demands made on real estate?
Corporates, reporting their ESG outcomes, need to invest, but no one wants to pay premium. We only build a 100% BREAM-certified portfolio, which gives us access to cheaper money, green bonds. Banks don’t finance projects with a negative impact on the environment. Buildings must be future-prepared; in logistics this primarily means insulation. If you have a 15-year-old building, what are you going to do when a tenant leaves? Will it still be A-class? So, we invest in better quality insulation, heat pumps, solar panels, within the base rent. We are ESG-prepared in the longer perspective. We invest in multiple solutions – BMS [building management systems], smart metering, PV panels, battery storage, chargers for electric cars and trucks. This means costs, but at the same time, higher revenues. However, PV panels will need to be replaced after 30 years so you need to be very careful. Social aspects are important too. Logistics parks with common areas, access to public transport, common amenities, sports centres, events for families; trees and bushes, grass; people can socialise in our parks. We even have beekeepers on our payroll! When employees are happy, they tend not to move; a client whose people aren’t leaving won’t be leaving either.
Looking at the supply side of the Polish construction sector, are you finding the increases in building materials and labour costs a problem when it comes to developing new projects that are commercially viable? CTP’s growth has been predicated by a high percentage of speculative builds without pre-lease; is this strategy going to continue into the future?
Construction costs right now are quite reasonable, they’re only slightly higher than before Covid. The situation is mostly driven by contractors who are compromising on margins due to lack of investments compared to the previous four or five years. Building materials are cheaper; not all – the two key ones, concrete and steel are more expensive as their cost is directly linked to energy prices. A tonne of steel, for example, costs around 9,500 złotys; it was 16,000-17,000 złotys during Covid, but it cost 5,000 złotys before. We pay our contractors frequently; because of our business model, we don’t have to wait sell a building to pay the builder. Often, contractors are waiting up to a year for cash. As for labour, it’s city by city.
How do you assess the current state of planning permits in Poland? In particular, how does this affect the development of last-mile logistics in urban areas? How is e-commerce affecting the Polish logistics sector?
Bigger cities are very challenging, especially when it comes to obtaining construction permits. Cities are no longer hungry. For example, if you want to build a 10,000 m² unit targeted at SMEs, it may be strategically important from an investment perspective, but it doesn’t always align with the current priorities of local administrations. So we tend go where there’s nobody else present, where new developments are positively sought after by the local authorities, to provide jobs, taxes and growth. In bigger cities, such projects often require additional infrastructure – new roads, sewage systems – making the approval process more complex. Poland was easier to get permits, now it’s harder – much harder.
To what extent will decisions taken by the monetary policy council as to the cost of borrowing influence supply and demand in the Polish real-estate sector?
Cheaper money on the market will have an influence on us. We finance at group level. The group issues bonds, stocks and refinances its buildings; we don’t rely on local rates. So when the NBP starts cutting rates, it will tend to drive up inflation. So the cost increases will consume any benefits from lower rates. If interest rates are high but stable, you can calculate. But if they go up and down, you consider only very safe businesses. Risk equals real growth. The cost of money is something you can’t control; cheaper money means more investors on the market, so it’s harder to achieve growth.
