The decline in investment volumes recorded this year in all sectors of the commercial real estate market in Poland is most evident in the office segment. Despite the relative recovery seen at the end of the summer, the total transaction volume recorded in Q1-Q3 2023 was only around €1.7 billion, of which only around €267 million was attributable to office assets.
However, in this time of slowdown, there is also room for success. Avison Young’s investment advisory team has about one-third of the deals completed in the sector – both in terms of volume and number of transactions.
“The figures clearly confirm the slowdown in the commercial property market. However, transactions are continuing to take place. Compared to other countries in Europe, Poland seems to be one of the more active markets. And just like during the COVID-19 pandemic, investors are adapting to the changing conditions by reviewing their assets and investment strategies,” comments Marcin Purgal, Senior Director, Investment at Avison Young.
Unrivalled Warsaw.
In 2022, investors’ focus was mainly on regional cities, where 15 out of 21 office deals were concluded. This year, investors interested in office assets focused their attention exclusively on the Warsaw market.
The type of assets that investors focus on has also changed since last year. In 2022, transactions involving ‘core’ or ‘core+’ properties prevailed, which can be read as a choice of a low-risk strategy. This year, in addition to ‘core+’ properties, there is also an apparent interest in ‘value-add’ and opportunistic assets for redevelopment or change of function – which, in turn, is indicative of a trend to look for investment opportunities.
Cheaper assets at a premium.
Since the beginning of the year, investors have shown particular interest in cheaper areas outside the centre of Warsaw, including the Mokotów and Służewiec areas. The Avison Young team has recently finalised as many as two transactions in this area (Obrzeżna Center and HOL 7.7), and further projects are also under negotiation. However, the assets located in the centre of Warsaw were the subject of the largest transactions.
The largest transaction by the end of Q3, valued at almost €70 million, was the purchase of the Wola Retro building by the Hungarian fund Adventum, where the investment advisory department of Avison Young represented the seller Develia. The second largest transaction involved Warta Tower, which was acquired by Cornerstone, confirming the increasing activity of Polish capital, particularly in value-add and opportunistic real estate.
Avison Young notes that despite a significantly lower total transaction volume, investment activity in 2023 remains high in terms of the number of transactions. Liquidity is at a comparable level to Q1-Q3 2016 and 2017 performance, but average transaction volume is significantly lower.
The structure of office transactions is dominated by smaller projects. There is a lack of acquisitions of larger investments, whose prices have not yet corrected as expected. The main reasons for the stagnation in the office sector, in addition to the continuing gap between the price expectations of sellers and buyers in the first half of 2023, are the high cost of financing acquisitions and the perception that office properties are less stable investments due to the spread of the hybrid working model.
Regional investors and indigenous capital.
Global institutional funds remain dormant. The lack of competition from them is being exploited by local investors and private business. Most of the capital invested in the Polish commercial real estate market this year came from Central and Eastern Europe (CEE) and the Baltic countries. In the first half of 2023, investors from the CEE region accounted for 45 per cent of the total transaction volume in Poland. This is 20 per cent more than in 2020-2022.
Another source of capital that is taking advantage of the limited competition and entering the game is domestic capital, which is looking for opportunities and price reductions in the commercial real estate sector. It can be divided into two groups. One is companies with Polish capital, which are taking advantage of the downturn, are able to properly assess the risks and secure financing and finalise a good deal. The other group is ‘family offices’, wealthy individuals representing wealthy families interested in additional investment options. Investors in this segment are targeting all major asset classes valued at up to €50 million, ranging from core properties to investments carrying higher risk but capable of generating high returns.
Entering the new year with optimism.
The outlook for the office sector is moderately optimistic. In 2024, new assets may enter the market due to a large number of refinancings and the redemption of quite a number of commercial bonds issued by developers and investors.
The availability of office assets may also increase as a result of portfolios being reviewed by investment funds that have adopted a new operating strategy and plan to dispose of properties that do not fit into it, or those that review portfolios for ESG compliance. Global and European players looking to optimise their portfolios may move towards reducing allocations to office assets and shifting investments to currently more attractive sectors, such as warehousing or PRS.
Decisive for the activation of activities in the investment transaction market in 2024 will be interest rates and the availability of financing. Yields for key projects have risen on average between 0.5 and 1 percentage point over the year in Poland with it being difficult to determine the rate for prime assets as no prime deals have been recorded in the office sector. Avison Young expects that investment activity in the office sector may remain subdued due to the market’s continued rather sceptical attitude towards this class of property, while it should stabilise in other sectors.
A recovery in transaction volumes may also be brought about by a change in the policy of banks, which are still very selective in their approach to project financing, so that cash investors still have a strong advantage and a greater opportunity to conclude attractive deals.
Author: Marcin Purgal, Senior Director, Investment at Avison Young
