As war continues to rage in Ukraine, many eyes in the private real estate industry have turned to neighbouring Poland, where the conflict has veered as close as 10 miles to the country’s border.
Of the seven nations that border Ukraine, Poland has been the most heavily impacted by the war, receiving an influx of 2.9 million refugees from the war-torn country as of April 23, according to data from UNHCR, the UN refugees agency. That is more than half of the total 5.2 million refugees that have fled Ukraine since Russia’s invasion in late February – and more than all other six countries combined, the data shows.
Real estate investment activity in Poland also has taken a hit since the start of the war. European commercial real estate investment volumes reached €78 billion in Q1 2022, the second-strongest first quarter on record after 2020, when €90 billion of transactions closed during the same period, according to preliminary data from real estate advisory firm CBRE. But while first-quarter volumes were up year-over-year in most of the region’s markets, Q1 2022 volumes dropped 26 percent in Poland during the same period, the data revealed.
“There are some noticeable changes in the perception of our region by overseas investors from the US or Asia, as the war in Ukraine impacted the general stability of the whole of Europe,” observes Adrian Karczewicz, the Warsaw-based head of divestments for Central and Eastern Europe at Skanska Commercial Development Europe, a subsidiary of Swedish development and construction company Skanska, in Warsaw.
Interest from European investors, however, has remained stable, he remarks: “Capital flows from Western Europe, Scandinavian countries, and general sentiment seem to remain unchanged. We see very strong activity from the CEE markets, especially Czech and Hungarian capital.”
Marcin Purgal, senior director of investment in commercial real estate brokerage Avison Young’s Warsaw office, adds: “Regarding the investors outside the CEE region, there is still appetite for good transactions, but due to the war in Ukraine, some of them have paused and are taking a ‘wait and see’ strategy.”
Prior to the Russia-Ukraine conflict, Western Europe was the largest source of inbound capital to Poland, with €2.43 billion of deployment in 2021, followed by the US with €1.05 billion and the CEE with €563 million, according to Avison Young. In Q1 2022, however, the US led cross-border capital flows into the country with €980 million of deployment – nearly same amount it invested for all of 2021.
Staying bullish on Poland
But while some firms have hit pause on Poland, others remain bullish. Indeed, multiple managers – both within Europe and further afield – have expanded or reaffirmed their presence in the country since the start of the war.
Among them is EQT Exeter, the real estate arm of Swedish private equity firm EQT, which announced last week the acquisition of Pruszków logistic park in suburban Warsaw. The transaction, brokered by Avison Young, further expands the firm’s logistics presence in the country, following the purchase of a five-asset portfolio located near Poland’s key regional cities in September.
Last month, Houston-based manager Hines and Kajima, the pan-European real assets business of Japanese construction company Kajima Corporation, announced their entry into Poland’s private rental housing sector. The joint venture will target development opportunities in Warsaw, Kraków, Wrocław, Gdańsk and other major Polish cities.
Also last month, London-based Savills Investment Management elevated three senior members of its Polish team to head of Poland; head of retail, Poland; and head of asset management, office and logistics, Poland. The promotions came on the back of the continued growth of the firm’s Polish business from approximately €230 million in assets under management in 2017 to more than €1.7 billion as of December 31.
Poland is a key market for many global real estate players. Eight of the top 10 of affiliate title PERE‘s rating of the largest 100 firms, for example, have property holdings in Poland. The country is the dominant real estate market in Central and Eastern Europe, accounting for €6.4 billion, or 58 percent of total transaction volume in the region in 2021, according to Chicago-based commercial real estate services firm JLL.
Despite its vicinity to the war, Poland remains a magnet for businesses. “We continue to see strong demand from tenants in the country due to a range of reasons,” says Waldemar Grabka, senior director and head of Poland at EQT Exeter, which has been active in Poland for nearly a decade. “We remain optimistic about the Polish market as we continue to respond to this robust tenant demand.”
Demand drivers include nearshoring by Western European manufacturers, international companies seeking to access the European market amid the continued rise of e-commerce and businesses moving operations from Ukraine to Poland.
Such demand was a major reason why Peakside and Swiss private markets firm Partners Group entered the Polish logistics market in February, with the acquisition of a portfolio of warehouse properties that the parties plan to refurbish and redevelop into 1.6 million square feet of space.
Stefan Aumann, founding partner at manager Peakside Capital, explains the deal had been in the works for a year and a half and was announced just a week before Russia’s invasion of Ukraine. However, “I would say that the thesis is still valid,” he asserts. “We still have significant growth in demand for logistics space in Poland; we still do have a lot of catch-up potential in terms of stock compared to other places in Europe. We have a lot of obsolete stock that needs to be replaced at some point.”
But while Peakside is continuing to pursue logistics transactions in Poland, “the outcome is less transparent than it was before the conflict in the Ukraine,” he observes.
This has led to a general change in approach to underwriting transactions. “You become more demanding. You know if you have an option on a plot of land, you will ask for more time, you will ask for less deposit. You eventually will ask for a lower price.”
Savills Investment Management, meanwhile, is planning to shift gears and expand into other property sectors. “We may be shying away from new investments in logistics and offices because we’ve done it, and we caught the cycle well,” says Kiran Patel, the firm’s deputy chief executive and global chief investment officer. “But we do like purpose-built student accommodation.”
Pricing is more attractive in the latter property type, with yields at around 5 percent to 5.5 percent compared with 4 percent for core logistics and 4.25 percent to 4.5 percent for office. “A lot of the stock is outdated,” he adds.
“Most of those dormitories are owned by the state or the universities and they are subpar quality today, so you need some modern purpose-built accommodation.”
Demand will be driven by Poland’s more than 1.2 million-strong student population and the country’s ability to attract major employers such as Samsung Electronics, Delphi Automotive, GE, Intel and Google, which in turn should capture young talent.
“It has cyclicality, but it’s not like a do or die sort of thing,” Patel says of Poland. “So you play the cycle. And that’s why in sectors like offices and logistics where we have been dominant, we’re taking the foot off the pedal because there’s been a lot of capital that’s gone there and driven prices up. We would be rather sellers today in those markets.”
Bigger threats than war?
The caveat for continuing to invest in Poland, however, is if the conflict were to further escalate and drag Poland into the war, Aumann points out. “Obviously, that would be very bad from a lot of angles.”
For one thing, it is much more challenging to exit an investment in Poland and other CEE countries than in Western Europe during times of crisis. “When things get tough like in a situation like Covid, but also now Ukraine, liquidity dries up for us in these markets,” he says. “In the UK, but also Germany, if you want to sell an asset, you can sell an asset. You might not be happy with the price, but you will have liquidity.”
Patel, however, believes it is unlikely that the war will spread to Poland. Unlike Russia’s neighbouring countries Finland and Sweden, for example, Poland is a member of the NATO. “If Russia goes and invades a NATO country, that would be World War III and I think all bets are off in that respect,” he says. “I think the war escalating is still a risk, but I’d like to think of it as a very low risk.”
“I think the war escalating is still a risk, but I’d like to think of it as a very low risk.”
Kiran Patel, Savills Investment Management
For Patel, the biggest threat is rising inflation, which affects real estate everywhere but is a particular concern for Poland. Inflation in Poland was at 9.2 percent year-over-year in January, compared with 5.1 percent for the euro area and 7.5 percent for the US, according to Narodowy Bank Polski, the Polish central bank. By March, inflation in Poland had risen to 11 percent year-over-year, according to ING Bank.
“Poland has been a fast-growing economy, faster than some of those Western European markets, but it has more volatility,” he explains. “And now we’re on the downward slope, you could argue, because inflation pressures are building.”
Patel adds that the Polish real estate market has always carried a higher premium because it has a different currency, the złoty, and consequently a different interest rate environment than other countries in the EU. The NBP has raised interest rates from 1 percent at the beginning of the year to 4.5 percent at press time. “So that is a worry,” he says. “Economic growth will be impacted.”
No distress yet
The rapid rise in interest rates is one reason why it is difficult to have a pricing outlook on Poland, Aumann explains: “I think it’s still too early to say what is going to happen to pricing because also you have many movements. You have the war, but then you also have inflation.”
He adds that there are “so many other pieces of the puzzle,” including Russian and Ukrainian companies moving their headquarters offices or distribution centres to Poland.
Property discounts therefore have yet to materialise. “In the industrial or commercial space, more broadly so far, I think people would not say that there is a distressed scenario,” he says. “How that is going to develop over the next six months – I think that’s to be seen.”
“So far, I think people would not say that there is a distressed scenario.”
Stefan Aumann, Peakside Capital
Offsetting any potential distress are rising rental rates. Karczewicz observes that development starts have been postponed as result of rising inflation as well as escalating costs of energy and materials. “Thus, a reduction of new office supply is to be expected for 2023 to 2025, resulting in higher rental rates in the coming years,” he says.
New tenant demand from businesses looking to relocate from Ukraine will also put upward pressure on rents, Purgal adds: “In the mid-term, we can predict that developers and property owners may start renegotiations of rents and try to increase them. If there won’t be a massive rent increase, property owners may limit tenants’ incentives and leave the headline rents unchanged.”
For Patel, the major unknown for Poland is the impact of nearly 3 million migrants from Ukraine on the Polish economy. “That’s a huge influx of populace, which needs support, feeding and funding,” he remarks.
“Where does the money come from? If other countries aren’t supporting that and this is all reliant on Poland, then that will have greater economic consequences, which may mean a much more difficult economic outlook. And obviously, economics then translates into property pricing.”
Still, he does not anticipate many distressed sellers to emerge in the country. “I don’t think anyone who goes into Poland goes into it without understanding the market dynamics, the economics, etcetera,” he says.
“I personally don’t sit here and say Poland has become more risky. Yes, there may be some contagion risk, but I think it’s quite small. So in that respect, are we going to see capital come out of Poland? No, I wouldn’t have thought so. Not in a big way.”