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A notable upturn in the Polish commercial property market

2010 brought a rise in transaction volumes in the commercial real estate investment market in Poland.

It was also the strongest year on record for take-up activity in the Warsaw office market, with retail and warehouse sector also showing improvement, according to the spring edition of Cushman & Wakefield’s Marketbeat.

Investment market

Transaction volume in the Polish market totalled around EUR 2 bn, the highest figure since the previous peak in 2006-2007. The retail sector was the most popular segment with investors in 2010 and accounted for more than 50% of transaction volume. Office investment deals made up around 32% of the total volume, while warehouse deals totalled EUR 215 million (approx. 11%). Last year’s high level of activity is likely to continue in 2011, which should produce further moderate yield compression. Polish investors still claimed only a small share of last year’s total volume.

Wojciech Pisz, Associate and Head of Capital Markets Group, Cushman & Wakefield, said - The investment market staged a remarkable recovery in 2010. Following the stagnation in 2009, investors opted for new purchases. The most sought-after properties were offices in downtown Warsaw, but due to the very limited supply of such schemes investors focused on acquiring office buildings in non-central locations, mainly in the Mokotów district. The retail sector recorded the largest volume of deals, largely on account of the sale of two shopping centres in Warsaw (Arkadia and Wileńska). Several transactions were also made in smaller towns, which revealed price differences compared to prime schemes in the best locations. Investors were also quite active in the warehouse sector which typically showed relatively little liquidity. The volume of deals reached approx. EUR 215 million, mainly due to several portfolio transactions made by Panattoni. The transaction volume in Poland totalled approx. EUR 2 billion. Buyers and vendors appear to have come to a satisfactory compromise on price levels with yields of approximately 7%. The purchases are likely to continue if prices remain stable this year.

Office

The Polish office leasing market posted a strong recovery in 2010. Total take-up in Warsaw reached 549,000 sq.m, representing an increase of 96% on 2009’s total. Net absorption amounted to 180,000 sq.m, down by 33% from the record 2008, but up by 55% on 2009’s levels. A dearth of new completions as well as rising office demand led to a widening supply-demand gap, which initiated rental growth. Supply is expected to remain low, and this will push the vacancy rate down. The highest concentration of office space in regional cities is in Kraków, Wrocław, Tricity, Katowice, Poznań and Łódź. At the end of 2010 total stock stood there at 1,913,000 sq.m. In locations with a considerable space oversupply, for instance in Łódź and Katowice, rental rates are expected to stabilize while the demand may rise. In towns with limited space available and a stable demand such as Wrocław, a moderate increase in rental rates is likely. Of the largest regional cities Kraków continues to be a location with the largest office space stock and transaction volume resulting from the strong internal demand.

- 2010 was the strongest year on record for gross take-up activity in the Warsaw market, outperforming the peak of the market in 2007-2008. This high figure reflected the completion of a handful of transactions that were put on hold in 2009, while the real space absorption accounted for 33% of the gross demand and is expected to be much higher in 2011. New leasing deals accounted for the largest share of transaction volume, 58.5%, with renewals making up 35.5% of the total. There is clear evidence of an increase in pre-letting activity. Following a dramatic fall to 2% at the end of 2009, the pre-let share of the total take-up increased to 11.5% in 2010. Any further decline in space availability will contribute to rising rental rates at existing properties or schemes under construction. Pre-lets at planned schemes will be an alternative for tenants wanting to economize – says Paulina Misiak, Partner, Head of Tenant Representation Services, Office department, Cushman & Wakefield.

Retail

The global financial crisis, which began in mid-2008, is still taking its toll on the Polish retail market. The large number of development projects put on hold during the slowdown and a lack of construction starts caused a sharp drop in completions in 2010. Only 560,000 sq.m of GLA hit the market – just 62% of the new supply for the whole of 2009. Completed schemes were mainly in small and medium-sized cities – during the boom, investors considered these to be profitable markets.

- The schemes opened in 2010 employed three main retail formats: large regional shopping centres (IKEA Port Łódź), hypermarkets with small shopping galleries (Tesco Warszawa), as well as small shopping centres located in the city core (Agora Bytom) or on the core fringe (Galeria Mazovia Płock), that feature supermarkets, cinemas or larger clothing firms as their anchor tenants. The leasing market was increasingly active. Demand came mainly from fashion retailers. Leading the leasing deals was the opening of TK Maxx stores in several locations – says Katarzyna Michnikowska, Senior analyst, Valuation & Advisory, Cushman & Wakefield.

Industrial

Optimism prevailed in the warehouse sector during 2010. Total stock last year was 6.5 million sq.m, of which more than 300,000 sq.m was newly delivered. Demand rose by nearly 86% on 2009. Investors however needed to ensure that schemes are pre-let in order to secure financing for construction to begin. There was a handful of built-to-suit projects under construction. Vacancy rates decreased in most regions. Rents have remained stable.

- Take-up for the whole of 2010 remained healthy, at around 350,000 sq.m in each quarter, bringing the annual transaction volume to 1,419,000 sq.m, a rise of nearly 86% on 2009. New lease agreements were signed for 903,000 sq.m, while lease renewals totalled 516,000 sq.m. The highest take-up rate, 32%, was reported in Warsaw, where most deals were struck for assets in the suburbs. Upper Silesia turned in a take-up rate of 31%, and Central Poland came in at 13%. As in previous years, the demand for warehouse space came from logistics operators (38%) and retail chains (14%) – says Marek Skrzydlak, Negotiatior, Industrial department, Cushman & Wakefield.

Hospitality

Poland’s hospitality industry in 2010 showed signs of improvement, though this represented recovery from a low base; there is clearly some way to go before real growth can be confirmed. In Q3 2010 the hotel market recorded its best performance, with a rise in occupancy levels and, more important, an increase in average daily rates (ADR). Although clients still regard the per-room rate as the critical factor in selecting accommodation, a significant rise in demand enabled hotels to charge a bit more.

- 2011 is likely to see further improvement in the hospitality market. One factor that will prop up demand is Poland’s presidency of the EU Council, which will commence at the start of July. Also, preparations for the Euro 2012 football tournament will lift hotel income – says Dorota Malinowska, Hospitality consultant, Valuation & Advisory, Cushman & Wakefield.

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