Initiated by the BPCC in 2006, the formula is simple – invite builders, estate agents and everyone connected with the sector, and initiate a discussion about the pipeline of projects currently under construction. The idea is to share insights into market conditions, looking at new investment, access to labour, building-material prices and the demand side. With a roomful of architects, civil engineers, chartered surveyors and other professionals working with the sector, a detail picture emerged as to key trends for the next few quarters.
Four panellists set the scene for the open discussion; Barbara Radziwon, managing director of Flowcrete CEE, Marcin Baczewski, from AHR Architects, Daniel Bienias, managing director, CBRE Poland and Bartosz Clemenz, real estate lawyer from Hogan Lovells. The event is held, as always, under the Chatham House rule, so individual quotes are not attributed to the speaker; this facilitates an open discussion.
The current market situation was described as ‘a perfect period’, with a very active commercial sector. Buildings are being built ‘because the tenants will pay the rent’ – there is demand for logistics, offices and retail, money coming into the Polish market from pension funds and private equity – and what’s new – an increasing amount of investment from the Far East, and not necessarily China. Polish real estate hits the sweet spot balancing the security and regulations of an EU economy while offering higher yields than in the mature markets of Western Europe.
However, there are big variations based on location and standard. While Class A offices are eagerly sought after by tenants, Class B office space ‘has troubles’. Logistics centres are springing up wherever new infrastructure projects are being completed, with western Poland and Lublin being particularly interesting now.
There was a big discussion about retail, with the question of whether it was saturated. The Sunday trade ban has not helped; there is a slowdown in retail. There is still upside in operating the dominant shopping centre in regional cities, lesser centres are facing tougher times. The future development of ecommerce, and how that would affect the Polish retail sector, was mentioned. In the UK and US, where ecommerce forms a far higher percentage of overall sales, shopping malls are in trouble. But whereas online sales in the UK already account for 17% of all retail, in Poland it is still only 4%. E-commerce creates the need for last-mile logistics, and here the market for smaller distribution centres located closer to the consumer is booming.
Labour shortages are leading to a slowdown in delivery, at the same time as a big jump in investment volume is driving up demand. And material prices are also rising at alarming levels. The resulting costs cannot be easily passed on to clients, who are also working to planned budgets. Tenants are, however, still interested. Predictions that over-supply would lead to vacancy rates of 18%-20% in Warsaw have proved to be wildly wrong – they are currently 10%, and only 6.5% in the Central Business District.
There were some interesting observations about the hospitality and residential sectors. There is a new influx of investors interested in building hotels of up to 200 rooms, with Warsaw alone likely to have up 40 new hotels being opened in the next three years. In residential, there is still much business in properties bought for cash by individual investors, seeking a higher return on investment than bank deposits, while at the same time institutional investors are beginning to create a new market in buy-to-let developments, something that has been absent in Poland.
The bottleneck and length of procurement pipeline was discussed. An answer to the labour shortages and slow build times is prefabrication. It was said that much of Poland’s capacity in this area is being produced for export, with Scandinavia being a top destination for Polish pre-fab manufacturers. Another reason for rapidly-rising prices of building materials is China’s decision to clamp down on domestic pollution. Producers are having to install environmental protection equipment, closing down their factories as the mandatory new kit is installed. Finally, land prices are surging in Poland’s most popular locations.
The next business budgeting cycle will have to factor in higher labour, materials and land costs, which means that an inflationary leap is to be expected. How will this play out? Join us for the BPCC’s next Construction and Real Estate Breakfast in February 2019. Watch this space!