1. The commercial real-estate market is a bellwether for any economy; demand for offices, factories, warehouses and shops indicates not only the pace of growth, but its direction. What are the key trends you are observing in Poland at present? Looking at new investment, how much of it is coming from abroad, how much is domestic capital, which segments are most attractive?
I find it always helpful to look at any sector from two perspectives: a more immediate transactional one, and the second one that takes the long view to understand structural drivers of change.
By now it has become obvious that now we are in an accelerated recovery mode. The major bet is that the intense focus on vaccinations will bring the pandemic to its endemic phase, and we are on track to experience a major growth rebound. Of course, a somewhat more realistic view is that the trend will be a fractured one and riddled by surprises as there are downside risks such as inflation, supply chains and geopolitics, but it is my belief that overall, the real estate industry is today hungry for records more than ever.
Short view. A number of key themes are going to drive demand post-Covid: continued interest in growth of office space spearheaded by the Covid-winner-sectors and international investors; e-commerce is here to stay, and we are a European heavy hitter in that space; retail is going to recover – but I am expecting more sophistication in terms of formats, investment platforms and tenant strategies. Residential is going to be somewhat affected by the rising interest rates, but institutional landlords and space for supply growth will be there to support it and we are bound to see some interesting portfolio deals.
Long view. What I think, however, is really interesting are the fractures caused by the pandemic that have opened our eyes to new needs. Real estate in Poland and CEE is a heavily under-consulted space. Having been on the industry side, today, with my new real estate experience, I am now amazed how CEOs, focused on their core business, do not yet realise the potential of real estate optimisation – from a balance sheet, cost and workplace perspective. We are yet to see also strong engagement from municipalities and public sector leaders, who will soon realise that well-balanced and transparent real-estate strategies are needed to address changing needs and shrinking resources. Most of all, ESG will become an intense focus; I am determined to accelerate this discussion as we haven’t seen much of the quantifiable impact of this shift.
2. The government still has to enact some form of legislation enabling real-estate investment trusts (REITs) to be established in Poland. This leaves Polish investors at a disadvantage compared to investors from countries where REITs operate; lack of Polish REITs also makes the Polish market less liquid than other real-estate markets in Europe. How do you see the prospects for REITs in Poland?
It is an imperative that the Polish capital markets at large have the most competitive legislation and are on par with the most investor-friendly countries. Given our growth potential as the economy re-opens, our yields compared to western Europe and continued strong FDI inflow, there is a lot to be gained if we position ourselves right against a wall of money that needs enabling.
Allowing REITs to operate in the Polish market is an obvious step. They could become an attractive and safe alternative for individual investors, who nowadays have to look for ways to allocate their growing pool of savings. On the other hand, for Polish institutional investors it would be an opportunity to increase their exposure to the real estate market – especially commercial ones. The entities that would benefit from it would be those that accumulate private money and convert it into institutional capital, such as pension funds or insurance companies.
3. Shared-services centres (SSCs) and business-process outsourcing (BPOs) continue to flourish in Poland, our members in recruitment are reporting record levels of demand. And yet the SSC/BPO sector has adapted well to working from home – the hybrid work that everyone sees as the future is morphing from three days in the office two at home to two days in the office, three at home. How do you see the long-term demand for office space in the wake of the pandemic?
Given a fourth-quarter rebound in Poland and Europe, we are relatively bullish on the office demand, but we have to remember that it is a process of returning to a supply-demand equilibrium and restarting construction activity that needs to occur to bring us back to pre-Covid levels over time.
The future of work is a big theme for us and the pandemic has completely shifted the employers’ perspective. Over last two years we have undergone an interesting process: during different waves of Covid we have proved to ourselves that remote work is as efficient or even more efficient than working from the office, and as the pandemic receded and people were coming back, they realised specifically what they missed.
This experiment has made it clear that employees’ time at the office will need to be structured differently around specific tasks, meetings, team-building and creative spaces to make the commute worthwhile. Demographics and cultural perspective are accelerating this trend: by 2030, Generation Z will constitute one-third of the world’s workforce and they will treat this new working model as the new normal.
4. The pandemic has also accelerated the shift from traditional retailing to e-commerce. Looking at the Polish market, how is this trend being reflected in demand for retail space? And indeed, for logistics space –- will 'urban logistics' (or 'last-mile logistics') change the way our cities look and function?
Logistics space remains as the key engine of the real estate market volumes. 2021 smashed all records, both in terms of tenants’ activity and investments, which closed the year at €2.8 billion in transactional volume. Poland ended up being number two in Europe in terms of development activity, just after Germany. Given the vacancy rate at a record low at below 5%, there is no end to this trend in sight.
The growth in the new demand in logistics at 58% YoY is of course driven by strong underlying trends. The accelerated shift to e-commerce is responsible for large part of that demand. We also observe strengthening of shifts in structural urban thinking and the concept of ‘15 minute’ cities. Poland’s growth of infrastructure over recent years has prepared us well for this leapfrogging. An important phenomenon that has irreversibly changed retail and logistics is the rise of environmental awareness among customers.
5. Travel and hospitality has probably been hit harder by the pandemic than any other business sector. We can see some hotel operators moving into space that was once the domain of offices and residential property, but how are the prospects for new hotel investments looking across Poland – and how does that compare to the global picture?
Nobody could have predicted that around 60% of hotel development projects that were under construction or final planning in early 2020 would be stopped by the pandemic. Additionally, projects that took off had to face delays, curtailing supply growth. As the economy recovers, the inflation situation, rising interest rates and the availability of funding make up for a relatively challenging backdrop. We anticipate that rebranding and consideration of alternative uses are likely to accelerate this year.
Although hotel construction is held back, hotel bookings gain momentum. Countries with strong domestic demand (UK, Germany or Poland) have been the most resilient so far. Business travel is kicking back into gear and small conferences are returning to hotels. In Warsaw there were 2.5 times more hotels bookings between May and December 2021 than in the previous year.
At JLL, we had strong year across our EMEA hotel transactions activity. We should see more hotels transacting in Poland this year. These will be mainly driven by cash-flow positions and by strategic decisions.
6. Companies are in the throes of green transformation – few corporates would even envisage moving their operations to offices or industrial buildings that are not BREAM or LEED certificated. As they move into new, environmentally friendly, premises, what happens to the legacy buildings – will they be left stranded? Will they be re-purposed (for example offices to flats)?
We are at an interesting turning point of the ESG discussion, which has been on the top of the agenda of investors, tenants and consulting firms. Only today, do we start to see quantifiable results of these discussions. 45% of green retrofits have reported reduced operating costs by over 10% within five years. In Europe we are seeing sizeable transactional premia on the green buildings and green financing is a big theme. There are cities in Europe, where you won’t be able to build a new building in prominent locations and retrofitting in the spirit of ESG will be a must. It will take time for this to be the case in Poland, but it is a foreseeable future.
7. Are you observing any geo-political trends affecting the Polish real-estate market? Near-shoring production and supply chains from the Far East closer to Europe's consumer markets, or UK businesses setting up on the Continent because of Brexit?
We are entering 2022 with a great deal of uncertainty in the markets and strained supply chains that will take years to fully recover. It is also still unclear whether a pandemic will ultimately determine if we live politically in a world of G20 and a real moderated global agenda or of increasing divisions within the EU in the face of geopolitical uncertainty.
Mateusz A. Bonca, PhD
A leader with years of experience in international management and strategic consulting for leading corporates in Europe, Africa and the Middle East. Chairman of the Board of JLL in Poland since 2020, leading company’s local advisory business and overseeing EMEA Centre of Excellence. Prior to joining JLL, he was the President of the Management Board of LOTOS Group S.A. Earlier he worked as the Director at Deutsche Bank AG in Frankfurt am Main, led consulting teams as a Manager at Peppers and Rogers Group in the Middle East, and worked at McKinsey & Company, delivering projects across various industries.