49 (144) 2021


Commercial real estate in Poland: Will it ever be the right time for REITs?

By Marzena Richter, international auditor experienced in property funds, practising as Staniszewski & Richter
Header marzena richter city week

Having worked in Poland mainly as an auditor and adviser to foreign funds and companies for more than 25 years, I have observed fund managers, institutional investors and corporates reaping the rewards of the development of CEE capital markets.

Underpinning these capital markets has been the development of the commercial real-estate sector whose confidence in Poland is simply verified through observation of ever-increasing towers and cranes in Warsaw and in regional cities.

As a professional qualified originally with the ICAEW in London in an international medium-sized firm serving private wealth, trusts, high net-worth individuals and family offices I was already familiar with real estate management, fund management, financial services regulations and international tax before I came to Poland.  Having just finished two placements with international offices of my training firm; one in Geneva for a family trust and the other in Guernsey, very early on in my professional career I plunged into bankrupt post-communist CEE.  The contrast could not have been starker.

Initial investment in real estate in Poland was extremely slow in the 90s, with new commercial buildings causing a sensation on delivery! Highly restrictive, lengthy and bureaucratic real estate permits were in place in the transitional phase of acquis Communautaire prior to EU entry. During this period both foreign and local investors acquired land banks and investment /development in commercial property was not very visible. Opportunistic funds were becoming active and all transactions made headlines. Fledgling consumer retail networks started to sprout up with the ensuing logistical investment hampered by poor infrastructure development. In the 1990s neighbouring smaller countries in CEE were attracting investment since their economies were more advanced whilst the Polish economy was bankrupt, restructuring and reforming.

Nevertheless post-9/11 and with the build up to the enlargement of the EU on 1 May 2004 things suddenly changed. Poland’s entry into the EU suddenly seemed to give the seal of approval that this was safe territory for institutional investors, corporates and private wealth. An insatiable appetite for consumer spending was initially fuelled by EU development funds and well-educated, hardworking middle classes, has now further increased through massive social spending by the current government.

Poland’s well-educated and increasingly high-tech workforce continue to attract the transfer of major contracts in both BPO and SSC from other regions such as South Africa and Asia or even the EU! Evolving commercial sectors aligned to government policy such as infrastructure development, clean energy, security, environmental, high tech, new technologies, digital have all only increased the thirst for office space. By simply looking at the Warsaw skyline it is possible to see leading investment banks, insurers, global professional advisers who all have confidence in Poland! Google’s presence is simply a cherry on the cake.

This confidence is sustained by Poland’s track record in economic growth not only as an EU leader but also competing with other world growth-leaders. The pandemic like everywhere else has interrupted Poland’s economic performance but with good predictions for coming out of the health crisis and boosted by the EU’s post pandemic recovery fund, the positive growth rate trend should continue.
The pandemic has come just over a decade since the global financial crisis which Poland negotiated well. Capital had migrated to Poland in search of superior returns before the financial crisis which if it had been judiciously invested was well protected. During an audit meeting with one of my clients noting the sudden drop in interest costs year on year – I commented to the fund manager “you are laughing all the way to the bank!” That is to say the margin between the return for investors and interest costs had actually increased thanks to quantitative easing.

The pandemic as we have already seen is fuelling inflation and interest rates are miniscule. Therefore the question that begs to be asked is why have Poles been served up with Amber Gold or the ironically named Get Back bonds? At the same time as commercial property development and take up has been accelerating, why have REITS been ignored in Poland? So many attempts not over years but now decades have been made to create a regulatory and legislative infrastructure seem to have stalled or been thwarted.

In my opinion given the fact that dividends for tax-resident Poles are privileged under taxation rules, surely a cash-generative real-estate investment paying 90% of earnings in dividends to investors is an interesting proposition? This is the key condition and definition of a real estate investment trust! Investment income has of course become subject to the Belka tax and the super-rich have been captured by the solidarity tax. Nevertheless, the favourable position of dividends in the Polish tax jurisdiction remains – and one would consider this to be an investment incentive compared to other jurisdictions.

Apart from keeping cash under the mattress where else do Poles keep their money? Bank deposits? Land parcels and rented apartments? Government bonds? Warsaw Stock Exchange ? Wealth funds? Tax havens? Foreign jurisdictions? And of course, a proportion of salary is deferred into the state pension scheme and private/individual pension funds.

Another issue the Ministry of Finance have to overcome is the exemption of REITS as regards corporate income tax. Under the original concept, REITS are privileged and the principles of their operation should be maintained. In order to provide an incentive for investment, the double taxation of income on the individual investor should be removed. Furthermore, Polish REITs will be competing with foreign REITs so level-playing-field rules should be adhered to not to prejudice Polish funds.

At an on line meeting on 28 April 2021 organised by the BPCC attended by property, finance, tax and professional advisers certain observations were made; commercial property markets are illiquid, the Polish residential market is overheating, and NBP is concerned about investment bubbles. Why does some of the capital overheating the residential market not shift into the commercial market?

The most shocking information is that Poland is becoming increasingly isolated as a country not investing in its own commercial real estate market, where approximately 95% of all transactions are carried out by foreign investors. Neighbouring countries such Czechia and Hungary have invested significant proportions of their own capital in their own commercial real-estate markets. The experience of CEE countries is also a positive argument.

Investment always carries risk but this depends on the legislative framework and regulatory framework governing the REITs market. Furthermore, it is up to the fund managers to manage the crises (such as the pandemic), follow the investment cycles such as termination of mandates, rental and refinancing cycles, implement efficient tax structures, financing structures, hedge currency and interest rates all within a regulatory framework. Of course. track record, management fee structure, supervision as well as management incentives such as share ownership are issues for regulation and consideration by investors. Transparency, the liquidity of shares in REITS, listed and non-listed REITs are also matters for regulation.

Up until the pandemic, recurring rental income streams were some of the most secure returns available to investors. Attractive locations and amenable property managers ensured high-quality financially dependable tenants. Of course, as we come out of the pandemic we may have to face a correction. Nevertheless, another question which remains unanswered is what would the attitude of the Polish government be if more Polish capital were invested in shopping centres? The pandemic has damaged shopping centres with no particular government remedy for this sector.

Post-pandemic, the landscape of tenancy requirements may change, for example due to lifestyle changes like more work from home and more online shopping. Does this mean less office space, less folk in the malls and more warehouse and logistics space? Insolvency, financial hardship, restructuring will inevitably affect businesses, but as is the case with markets provide opportunities for others.

Summarising the situation in Poland with REITs what I find most ironic is that every time a Polish consumer goes into a shopping centre, they contribute to a foreigner’s pension fund! All the highly skilled Polish employees working in glass towers contribute value to foreign portfolios! Poland has already proved the strong development of capital markets so why are Polish REITs so prejudiced?

I put this point to the Minister of Finance, Tadeusz Koscinski at an online event organised by the International Chambers of Commerce in Poland on 26 May 2021. Given Poland’s incredible track record on GDP growth (bar the pandemic) and taking into account inflation, Poles’ investment habits and REITs uptake in neighbouring CEE countries, I addressed the lack of Polish domestic investment in its own commercial property market. The response given was that legislation on REITs previously set aside had been resurrected was in progress, and the investment model considered would be in the form of a bond with a minimum value of 500,000 złotys.

At a BPCC panel discussion on 24 June 2021 at the Hotel Bristol sponsored by three members including property and human resources consultancies Savills and Michael Page respectively highlighted the continuously dynamic changes to the economic landscape caused by the pandemic. Notably, warehousing and logistics were “on fire” with ever increasing demand for IT and e-commerce personnel. Digitilisation, automation and IT integration projects previously in the pipeline have now been fast forwarded. Any possible shrinkage of office space due to changing work habits is expected to be offset by the continuous stream of new investment into Poland. Lack of consumer investment vehicles in Poland has resulted in domestic property values rapidly increasing as the demand for buy to let never ceases.

Before the pandemic the OECD forecast that Poland will be the fourth-fastest developing country in the world in 2019. After three waves of the pandemic, growth forecasts are back on track at 4-5%. Poland is indeed a solid country for investment in general, it is worth recalling that in October 2018 Poland became the first former Soviet-bloc country to be upgraded by FTSE from an emerging to developed economy status and is now alongside 15 European countries (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain Sweden, Switzerland and the UK) in the ‘Premier League’ of European economies. Such an elevation only takes place on average once in a decade!

Marzena Richter ACA
Staniszewski & Richter and BPCC Board Member

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