BRICKS & MORTAR: Putting some Polish on the portfolio

By bne IntelliNews April 22, 2013

Jan Cienski in Warsaw -

The idea that Poland could be a safe haven would have been laughable for the past few turbulent and war-torn centuries, but growing numbers of real estate investors are not smirking as they plough money into Poland - and particularly into Warsaw - seeking higher returns than those available in Western Europe at similar levels of risk.

"Investors are saying that the supply of core product is drying up," says Brian Burgess, Poland managing director of Savills, the real estate consultancy. "The UK is very expensive, Italy and Spain don't have the climate to invest, and there is a lack of product in Scandinavia. Where is the next market? Poland."

Over the last few years Poland has pulled away from the rest of Central Europe as an investment destination, in large part because the Warsaw market is large and deep. That allows investors the security of being able to find a buyer for their property in the event they want to exit the country.

In 2011, Poland pulled in €2.6bn in new real estate investment, out of €6.1bn for the whole of Central Europe, according to Cushman & Wakefield, the real estate firm. Last year was grimmer for the region, with CEE investment falling to just €3.7bn, but of that Poland accounted for €2.8bn, increasing its dominance. "Poland has worked very hard to separate itself from the rest of the region," says Miroslaw Januszko of Peakside Polonia Management, a real estate investment company. "Poland is supported by strong internal demand and there is no political turmoil like in Hungary. Prague is a bit similar but much smaller, while the rest of the region is simply for opportunistic investors... Over the next 10 years we should think only of Poland."

Joining the elite

In a new survey of investors' perceptions by CBRE, the real estate firm, Warsaw now ranks in the top five among European cities, following London, Munich, Berlin and Paris. The reason for that is yields in the Polish capital are around 6.5%, about double what is achievable in Western Europe. Although returns are much higher, risk is falling; Poland is the only EU country not to have fallen into a recession in 2009 and, despite a recent slowdown in the economy, is still one of the EU's best performers. Investors also have the security of a politically calm country where the centrist government seems to be in no danger of being ousted, and where the legal code and issues like corruption fit EU norms. "Over the last years, investors have perceived Poland not as part of the CEE but as a core European market," says Maciej Zajdel of IVG Poland, the Polish office of the German property fund.

Investor interest has focused on the core of downtown Warsaw, the Central Business District, chosen by growing numbers of international companies for their regional headquarters. There the rents are about €25 per square metre, almost double what they are in suburban Warsaw and higher than in Polish secondary cities and in the capitals of the rest of Central Europe, except for Prague. "Our favourite asset class is offices in the Warsaw CBD and other secondary city CBDs. Cities we like are Krakow, Wroclaw, possibly Szczecin, Gdansk and Lublin," says Ben Habib, CEO of First Property Group, which invests in UK and CEE real estate.

Two big office transactions last year included the €210m sale of the Warsaw Financial Center to Allianz Real Estate and Tristan Capital Partners and the €148m sale of Warsaw's International Business Center to Germany's Deka.

There was also appetite for retail properties - even those outside of Warsaw were snatched up, as long as they had a solid market position and a good list of tenants. ING sold its 77% stake worth about €475m in the Zloty Tarasy shopping mall in central Warsaw, while the Manufaktura shopping mall in the city of Lodz changed hands for an estimated €350m-400m.

Investors also woke up to the potential of Polish logistics as the country finally moved forward on completing its highway system, which made it possible for retailers and shippers to build centralised warehouses serving the whole country. Last year, investment in logistics and industrial properties came to €460m, accounting for more than 16% of overall investment, the highest level in years.

While Poland is riding high, there are hopes that the rest of the region will start to catch up if and when the Eurozone crisis starts to abate and growth returns. In the first quarter of this year, the region attracted €958m in investment, of which the Czech Republic accounted for €237m and Hungary for €159m, significantly more than in the same period a year earlier. "I don't share the view that core central Warsaw is the only way to go," says Eric Assimakopoulos of Revetas Capital, a regional real estate investor.

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