Piotr Trzciński, Head of Investment – Poland at Savills Investment Management talked to Property Forum about the changes forced by pandemic on the investment market, financing conditions and the long-term strategies of major international players.
Crisis-resistant properties – a myth or just another term for warehouse investments?
That depends on the type of crisis, the property, the tenant, the location and importance to the supply chain. Of course, not all assets can defy crises but some market sectors, such as e-commerce, packaging, courier services or food logistics have not only withstood the downturn but excelled due to structural trends. These sectors are currently driving the success story of certain schemes and submarkets. On the contrary, e.g. the manufacturing or DIY industries have coped with disruptions to supply chains, falls in volumes of orders and restrictions on domestic sales. Take the automotive industry investing in the transformation towards e-mobility for example: some locations in Poland will emerge e.g. around new factories of lithium batteries or EV components, but others will suffer from ongoing consolidation. High hopes are put in automation to immunize the warehouse sector against force majeure events. This holds true in the case of a pandemic as robots do not have to be socially distant whereas it might not be true for a blackout.
The retail and office sectors were severely affected by pandemic restrictions. What is your opinion on their performance 15 months after the start of the outbreak?
Though retail performance has rebounded after the last lockdown, Polish retail remains a ‘hard-sell’ and the looming threat of another lockdown is a headwind to performance forecasting. We are at a point where the supply has increased dynamically over the past decade and some larger concepts struggle to meet return expectations these days. However, we are positive about established core assets and those with a high proportion of daily-goods footprint in the best locations. Overall, retail consolidation and repricing in Poland will take time. After that, the sector may regain its charm again due to fundamentals. On the way, some investors may want to reduce equity exposure to retail facing reduced property valuations. This might create interesting opportunities for investors with higher risk tolerance and seeking a retail footprint in times of new supply and land constraints.
If vaccination programs are rolled out quickly and any restrictions reintroduced due to the Delta variant will be applied locally rather than country-wide, the current economic rebound should help retailers dealing in non-essential goods and discretionary products make up some ground compared to 2020. Yet, the majority of these retailers might face intensified pressure this year due to the massive loss of sales in 2020 and the slow start to the year.
On offices, our view that the physical office will remain a centre of company operations has not changed despite the fact that European countries move at different speeds as far as return to offices is concerned. Prime offices in Poland have fared pretty well throughout the pandemic, benefitting from market uncertainty and tenants playing it safe and preferring extensions over relocations. Pandemic-triggered space optimization trends will be spread in time as most occupiers can effect these changes no sooner than lease roll-over.
Piotr Trzciński
Head of Investment – Poland
Savills Investment Management
The office market will certainly undergo many deep changes in terms of working organization. Do you think that demand for office space in Poland may shrink in the long run?
We do not believe the need for agile working or greater flexibility is going to change, nor will this buck the trend of favouring CBD office locations. However, weaker employment growth could weigh on rental growth prospects in the short term. We think the decline in office demand is temporary and foregone take-up volumes might be recouped as tenants return to offices with greater confidence and the transformation of their office space use is completed.
Corporate workspace becoming more agile and the flight to quality building fit-outs across European office markets are trends to be seen in Poland as well. Polish office stock is modern compared to most of Western Europe what may facilitate adaptation to these trends. Technologically advanced offices with remarkable health and wellbeing credentials, offering flexible occupier solutions and community-enhancing amenities will be in fashion. All of this means higher “resilience” capex and may take some trial and error to find the right balance.
The long-term success story of the Warsaw office market is still intact. The same holds true for key regional cities. The appeal of Poland for foreign and domestic companies is still strong with the economic growth and dynamics in the service sector coming out of the crisis. We should remember that Poland is the go-to country for FDI and Warsaw is the gateway to CEE for foreign companies in the white-collar and manufacturing sector. Despite the current demand-side weakness, Warsaw still shows relatively strong growth rates of office employment (so office demand) for the mid-term until 2025. Warsaw offers a highly skilled labour pool and a relative price advantage in terms of occupier costs compared to cities like London, Amsterdam or Berlin.
E-commerce: traditional retail-killer or a forced collaborator?
I’d say e-commerce and brick-and-mortar will exist symbiotically while e-commerce will be the one to flourish. The pandemic has pushed online retail sales to unprecedented levels and will remain a key growth driver in the logistics sector in the years ahead. According to PMA, COVID-19 boosted the Eurozone’s online penetration rate to 15% in 2020 with Poland uplifted to
c. 10%.
With more consumers opting for services such as click-and-collect, retail parks could continue to benefit from this trend, as this format has an easier time accommodating click-and-collect services.
Overall, we expect to see divergent growth in the retail sector in 2021, with clothing and footwear retailers potentially seeing the strongest growth whereas those that have benefited from the pandemic such as electronics and grocery retailers might experience slower growth this year. Nevertheless, the grocery retail sector has done really well during the crisis and is now considered essential infrastructure.
Is Savills IM considering joining the party on the rapidly developing, but still immature PRS market in Poland?
The wider living sectors across Europe are a key focus for us. So far, we have not ventured into the Polish built-to-rent market, but we are not new to the sector. We have country-specific experience having developed and managed living investments in Spain, France, Italy, Poland and the Netherlands in the past. On the back of it, we have looked at a couple of opportunities in Poland already.
In addition to multi-family, there is a particularly appealing story behind PBSA in the largest Polish cities because of the interplay of the growing number of students, shortage of quality supply, low quality of public dorms, and low rents compared to parts of Western Europe. We are actively considering some PBSA schemes that could form part of a European Living or specific PBSA strategy.
Investors from which parts of the world will be active on the Polish market in the coming quarters?
Most global investors have Poland on their radar these days either as a stand-alone country of allocation or an element of a wider strategy. That said, we expect European and US capital to remain active across office and logistics sectors both in the core and value add space. CEE and Middle Eastern capital will also be there for regional offices and, selectively, Warsaw. After a brief hiatus caused by travel restrictions and less favourable currency hedging terms, Korean capital will become active again especially in the logistics and office sectors. Noteworthy corporate takeovers by European and CEE investors in the living sector may make other European capitals follow suit subject to the availability of right-sized platforms.
Do you expect any changes in financing conditions in the nearest future?
In principle not. Lenders continue to be most comfortable around 50% LTV and below on an interest-only basis. 60% LTV remains difficult to attain even on core assets, with higher prices putting pressure on lenders’ debt yield hurdles. There is little indication that this leverage appetite will change in the near term. 5-year all-in rate for financings in Poland is rather stable at c 2.1% compared to c. 2.50% UK and c 1.1% in Germany. For EUR-denominated loans, we would still assume a zero floor given the lack of consistency across lenders in passing on the benefit of negative rates.
In terms of sectors, financing retail remains tough with the exception of food anchored developments or those offering other essential goods. There has been little change in prime office debt terms year to date, though we have observed tighter pricing and increased lender appetite for assets with the strongest income and certainty of occupancy. In the logistics sector, lenders are generally following investors in increasing exposure. This puts the price of debt under compression and has led to a convergence in office and logistics loan margins similar to what has happened to office and logistics yields. Many countries including the UK, France, Germany and to some extent, Poland have seen a narrowing of the sector spread.
What are Savills IM’s investment plans in Poland for the next 18 months?
We have defined industrial & logistics and living as growth sectors and the cornerstones of our medium to long-term investment activity. In addition, we can consider tactical acquisitions in other sectors like office and convenience retail if risk-adjusted returns make sense. I see us doing bigger tickets and joint ventures on a scalable product, also with Poland as an element of a wider pan-European play – the recent strategic investment alliance with our partners at Samsung Life brings seed capital for new funds which, among others, will target Europe and will cover debt and equity strategies. All of this will be with ESG overlay as we believe that consideration of ESG issues throughout our investment process is a big part of our primary responsibility towards stakeholders and communities.
We can leverage off our solid track record and market relationships in particular in the warehouse and office sectors. Asset management-wise, we will stay focused on improving cash flows, keeping very good tenant relationships and enhancing the ESG credentials of our existing AuM.
