Poland of opportunity
For the past 12 months the Polish economy has been influenced by the EU accession. After a period of stagnation, Polish GDP rose by 6.1% (year on year) in the second quarter of 2004 while industrial production rose approximately 14%. GDP growth for 2005 and 2006 is expected to exceed 4% anually.
Following the golden year of low inflation in 2003, inflation reached 4.6% in July 2004. Increasing inflation has resulted in proportional adjustment in the base interest rate of the Polish National Bank. In a recent forecast the Bank said it expects inflation to fall to 2.5% by 2006. The unemployment rate in Poland remains the highest among the European countries with the latest figure close to 20%. Unemployment is expected to remain high in the following years due to the relative youth of the population.
The Polish real estate market has been recently driven by the EU accession. Looking back to the boom in Spanish real estate following Spain’s accession in 1986 most analysts expected a significant increase in real estate prices in Poland. What has been noted so far is just the beginning of an adjustment process.
The unification of domestic and EU legislation imposed higher taxation on construction materials (from 7% to 22%) and the same time interest rates dropped to the lowest level in the modern history of Poland. Those two factors had a serious impact on the residential market, which has shown the first signs of an increase in the number of transactions. Prices in good quality residential developments in Warsaw have increased by 10% on average and this trend is expected to continue in the medium term. The most active are residential markets of big Polish cities like Warsaw, Poznan, Cracow and Wroclaw.
Commercial markets have also experienced rising demand from both Polish and international companies. In addition, modern office, retail and warehouse developments have attracted various foreign investment funds that recognise Poland as a stabilized market.
Cross-border investors had been active in Poland before its EU accession. Since 2000 several major foreign investment funds have been active in the market, and each year their number has increased. According to the Polish Information and Foreign Investment Agency three of the top five direct investors in Poland last year were real estate firms: GE Real Estate and Heitman’s Central Europe Property Partners (which bought eleven retail centers from the Casino Group for €200m in 2003), Europolis Invest (Investkredit Bank AG investment company, owner of several office buildings in Warsaw) and Deutsche Bank.
The EU accession date has served as a catalyst for many investment transactions. In 2003 the value of purchased properties was less than €350m, while this year should be a record year with purchases easily exceeding €1bn. The most significant – but not yet completed transaction – will be Apollo Rida’s €750m purchase of 28 shopping centres from the Metro Group.
Some new players have entered the market and increased competition for investment-grade product in the main cities. Limited supply of investment product in various sectors has pushed yields down faster than expected. Yields for prime offices in Warsaw have fallen to 8% and are expected to fall below that level within next 12 months. Shopping and distribution centre yields have been slightly higher due to the different risk profile, management issues and locations throughout Poland.
As a result of falling yields investors have started to look for investment opportunities outside the capital city of Warsaw and begun looking at secondary cities. It is expected that office yields in secondary cities will begin to fall, following the Warsaw trend.
The quality of developments has been systematically improving, as has the size of individual schemes. Poland has been able to attract some of the best architects and developers to high-profile projects. For example, Hines’ Metropolitan office building in Warsaw, designed by Sir Norman Foster, was declared the world’s best office building at MIPIM in Cannes this year. The Arcadia mall, Warsaw, developed by BEG Ingenierie Polska, due to open before the end of the year, will be the largest shopping centre in central Europe., with 110,000m2 of retail space.
Investment activity is not confined to cross-border players; the first domestic investment vehicles are being created. In June the first Polish real estate investment fund ARKA entered the marked after being fully subscribed. A month later the fund had its first listing on the Warsaw Stock Exchange. Successful closing of this fund has given another sign of market recovery and optimism towards real estate. A year before, similar funds failed to incorporate themselves due to the poor real estate market conditions and lack of confidence from potential investors. Following the success of ARKA, two other Polish funds are being incorporated: Skarbiec Rynku Nieruchomosci fund (promoted by BRE Bank), which raised €20m to be leveraged and invested in residential, and HypoVereinsbank’s BPH TFI, which plans to raise more than €90m and will invest in all sectors.
The Polish real estate market looks very healthy. What might deter the foreign investors are the actual conditions of doing business in Poland. Laws are often complicated and retain some elements of communist legal doctrine. The process of company incorporation takes weeks (no shelf companies or same-day incorporation service is available) and involves contacts with over a dozen offices like social security office, national labour inspectorate, and main statistical office.
Another, perhaps more surprising example is a fact, that a foreign individual conducting business in Poland is likely at some point to be asked to apply to the court for ‘PESEL’, a personal identification number introduced for ‘statistical reasons’ under communist rule. Since this never abolished the foreign individual can be forced to spend several weeks waiting for the courts’ decision to privilege him with his own PESEL before continuing relations with the banks or the authorities.
Bureaucracy and corruption are also facts. The Corruption Perceptions Index 2003 placed Poland 64th on the list of least corrupt countries, far lower than the European average. That said, the business framework is being moved towards parity with the rest of Europe.
What are the prospects for the Polish real estate market over the next five years? It should remain attractive for investors; yield compression will produce capital growth. A continuous supply of good quality buildings and increasing inward investment in other sectors of the Polish economy should also contribute to positively to a developing and maturing market.
Piotr Górecki is a corporate finance director for Knight Frank in Poland