Monika Bronicka, Director and Head of Valuation and Advisory at Avison Young talked to Property Forum about the current challenges to the valuation of properties under rapidly-changing market conditions in Poland.
I simply cannot begin with another question: What impact does the Russian aggression in Ukraine have on the market in Poland in terms of asset valuation?
Property valuation is the branch of the real estate sector that is needed during the whole economic cycle. Each turbulence in the market – e.g. recession, crisis, pandemic, war situation – might require asset valuation even more because investors, developers and banks seek for risk adjusted property value estimation.
When talking about valuations prepared for transaction purposes, it is undeniable that at the beginning of each turbulence there is a visible slowdown and some market players’ take a “wait-and-see” strategy. It also happened when Russia invaded Ukraine – we registered a smaller number of requests for proposals coming to us. Banks and investors asked us about the war's impact on the property value. A higher risk of investment and investors’ doubts have resulted in putting part of the transactions on hold, but there was no evidence of the increase in yields - which are one of the most important factors applied in valuation - in the investment market. At the moment actually, it is increasing costs of construction that have a significant impact on the property valuation – residual value or profitability of the investment.
Monika Bronicka
Director, Head of Valuation and Advisory
Avison Young in Poland
In view of the prolonged conflict and the expected economic slowdown, can we expect an outflow of Western investors from the Polish real estate market in the long term?
We are carefully observing the market and do not expect the outflow of investors. We noticed awaiting and a little bit prolonged time of starting the transactions, which is the natural trend in the new geopolitical situation, but the Ukrainian effect seems to be floating away a bit. Bearing in mind the war is taking place next to the Polish borders, investors became more cautious, however, they are still interested in the Polish real estate market and there are still a lot of new deals happening.
A number of transactions on the investment market in Q1 2022 was lower than expected but volume was the third-best year opening since 2016. We have also registered the biggest ever single transaction in the Polish office market – The Warsaw Hub acquired by Google. This proves the continuous interest of the largest global companies in our property market.
Due to the geopolitical situation, there is increased insecurity among investors operating in the European commercial real estate markets. It is, however, the potential economic slowdown and the inflation and the raising interest rates that actually may have a much greater impact on the Polish real estate market than the geopolitical situation itself. The properties’ value may be more exposed to fluctuations, changes in rents and rates. In this situation, we recommend more frequent control of the property valuation.
Which assets are the most sought after, from your perspective?
Warehouses remain the most often estimated assets on the market, both existing ones and projects in development. It means that industrial properties are still a very interesting asset class for investors. Nevertheless, the increasing construction costs do have an effect on the viability of the projects for the developers and the investors providing capital for those developments; and at the same time, the pressure on the financing costs might be challenging from the exit value point of view.
Also, retail parks and convenience schemes are in the range of investors’ interest. We appraise numerous retail parks and stand-alone stores for both loan collateral and purchase purposes. We have great market insight here: we deal with a lot of transactions in this sector as the company is assessing them technically, valuing, reviewing performance, as well as selling, so the database we have for retail parks is probably the best in the market at the moment.
Except for traditional commercial properties, alternative investments are also within the scope of investors’ eyes. Demand for apartments for rent has been increasing in the last year or so. The main drivers for renting flats, private and institutional, are growing by leaps and bounds interest rates in Poland as well as the influx of war refugees from Ukraine. Albeit the income denominated in Polish Zloty needs to be hedged to make it risk-free and these costs negatively impact the profitability of those projects. On the other hand, the rent rates have increased significantly in the last months, making the yields much more appealing. Above only thrives the investors’ appetite for developing and purchasing PRS projects in Poland. And the proper value assessment is crucial in so a rapidly changing environment. We had the pleasure to cooperate with investors on the PRS market in Warsaw as well as in the regional cities. As a company, we are also very engaged in the monitoring of the PRS development projects and therefore the cost estimates we have a very much up-to-date – key for the proper value assessment.
And which types of assets will step off a valuation stage for a while?
Retail properties had a significant share in the investment market volume in Q1 2022 (ca. 44%), but we should remember that it was due to one big transaction mostly – the sale of 50% of EPP portfolios to two joint ventures: Horse JV and Community Properties JV. In 2021 and Q1 2022, several traditional shopping centres were sold. But the transacted ones were acquired mostly for further redevelopment and have been treated by the buyers as the income-generating land. Also, demand for traditional shopping centres has shrunk - the market significantly changed in the favour of retail parks and convenience projects, which fulfil customers’ needs and are more resilient to market turmoil. The second sector which has slightly stopped from valuers’ perspective is the hotel sector. Increasing costs of construction, inflation, and limited financing might be a barrier for investors willing to enter new development projects.
Double-digit, surging inflation also looks like another challenge for valuation teams to face in the forthcoming months?
Indeed, Poland has reached double-digit inflation. In May 2022 the result was the highest since May 1998. Inflation influences the property market value directly. It affects the cost of construction materials and the cost of work. In this reality, developers, when starting new projects, have to face a higher risk of investment. It can cause an increase in sales prices in the residential sector, and a rent increase in the commercial sector, in order to achieve expected return and investment profitability.
Valuers are obliged to reflect all risks in the valuation process. We observe the market transactions and investors’ sentiment. Applied market assumptions, mentioned before, are significant in the valuation. Valuers had a challenging time during the pandemic, when the war in Ukraine started, and also now when inflation is ballooning. I believe the market will probably require more frequent valuation updates because of the economic changes. That is also one of the reasons why our valuation and research teams grew twice since starting our operations in the Polish market. Our experience allows us to support the most demanding clients in this tough period.
„Green certificates” on the Polish market – still an added value for investors, or mandatory condition already?
Sustainability and ESG are much more important currently than a few years ago. The property market matured and each commercial property is considered a better investment product when it has a green certificate and ESG solutions implemented. The majority of newly constructed buildings built within the last few years were certified and characterized by lower operating costs, due to energy, and water consumption. They are more attractive to investors. Some buildings are modernized to meet standards of certification and to be more user-friendly. This is important for the occupiers due to their internal policies, but now in an environment of such high inflation, it also has monetary impact i.e. lower costs of service charges being more beneficial to the tenants.
ESG became compulsory according to the European directive in March 2021, and stock exchange companies in the financial sector have to report ESG activity in nonfinancial reports. Selected funds are already prohibited by statute from investing in entities that do not meet the selected standards. It is only a matter of time before the obligation to report ESG data is extended to other sectors of the economy - including the real estate market.
It is worth noting, that even despite the lack of formal regulations, investment products delivered by companies which openly inform about their good practices, are better perceived by financial institutions and investors. In terms of valuation, valuers are obliged to collect and record appropriate and sufficient sustainability and ESG data for the valuation, also ESG matters should form an integral part of the valuation approach and reasonably support the reported figures. These recommendations are reflected in RICS Global Standards, effective from January 2022. We observe that valuation standards and practices follow general trends of ESG. This trend is new for valuers and all of us should take it into consideration when assessing or commenting on ESG factors. In some cases, valuers may recommend further enquiries or obtaining additional expertise in respect of questionable matters.
What is your opinion on the current stance of banks in terms of financing new property investments in Poland?
Polish National Bank has increased interest rates in 2022, five times! They are the highest since 2012. Banks’ positive financing decision depends on the project profitability and security of income. Good and profitable projects will still be financed, in my opinion. Whilst WIBOR has changed and loans are more expensive in Polish Zloty, most of the loans are granted in Euro and therefore the impact has not been so significant just yet. Albeit also EURIBOR is also expected to rise as European Central Bank is going to increase interest rates in the eurozone shortly. For the time being, these are not expected to be significant. We aim to monitor the situation and the impact on the real estate market.
We live in challenging times. Nobody predicted the COVID-19 pandemic or Russian aggression in Ukraine or such significant and rapid inflation or energy costs increase. We face unexpected turbulences which shook stabilized environment for investors, developers, and banks. Economic fluctuations inherent in the economy are nothing new. We are close to the market and take into account the sentiment of the investors. The appropriate value estimate is crucial for the market players, especially for the banks. Whilst the times are turbulent, hopefully, the war caused by Russia will be resolved, markets will begin to stabilize and existing risks and market uncertainty will diminish in the near term. I wish this for all of us.
