Investments in the real estate market are defending themselves regardless of the difficulties in the economy, but construction of apartments has temporarily slowed down, warehouses have slowed down, but retail parks continue to gain investment wind in their sails
There is a lot of free capital on the market, but new investments are being introduced to the market very carefully. Investors are targeting projects that cater to the most basic needs – apartments and small, local shopping centers with a popular grocery operator and discount offerings. So we can observe a rash of new retail parks and convenience facilities on the market. Dozens of developments in this format are under construction in the country and more are being announced.
“Despite the many difficulties facing investors today, such as increases in the prices of construction materials, labor costs, utilities and bank financing of investments, the retail park sector is not slowing down. Investors who decide to commit capital to the development of retail parks can expect, depending on the project, a return of between 7% and 9%. It should be noted here that in looking for the most favorable options, they often enter the project already at the stage of the so-called ground, wanting to obtain a higher margin even at the expense of increased risk, informs Piotr Szymoński, Director at Walter Herz.
“The high cost of financing, which is now reaching the heights of capitalization rates for the best assets on the market, effectively discourages investment financing in a bank. Besides, access to it is very difficult. Banks act extremely selectively, preferring only proven players. However, for investors with means, participation in the construction of a retail park is good business and an anti-inflation shield for capital,” says Katarzyna Tencza, Associate Director Investment at Walter Herz.
Impressive rate of new supply growth
A threat to retail real estate, like facilities in other sectors, is the currently rising costs of building operations. However, in the case of retail parks, these costs are much lower than in large-format shopping centers, because they do not have extensive common areas. Investing in retail parks also certainly has the advantage of lower project development costs and the associated investment risks.
In 2022, the fastest growing sectors in the country’s commercial real estate market were warehousing and retail. According to Walter Herz, the Polish market grew by 350,000 sqm of modern retail space last year. Retail investments are now located primarily in satellite cities of agglomerations and smaller centers with less than 100,000 residents, and even in towns with fewer than 50,000 residents.
Developers who have been making investments in the retail sector for years are announcing the construction of more facilities for which they have secured land. In Q1 2023 alone, more than 100,000 sqm of retail space was put into use in Poland, including six new retail parks, and three were expanded. In addition, the redevelopment of two, Warsaw-based shopping centers has been completed, reports Piotr Szymoński.
More than 400 thousand sqm of retail space remains under construction across the country, including more than 30 new retail parks. The completion of about 300 thousand sqm of the space under construction is announced by the end of this year.
“The key here is good identification of needs in a specific location. What matters for the profitability of an investment in a retail park is, above all, the absorptive capacity of the local market and the appropriate structure of the facility’s tenants, securing the project with attractive lease agreements. Taking into account the increase in operating costs, tenants of retail parks are in a good position today, because in retail parks there is no need to maintain common areas, so operating fees have always been up to four times lower in them compared to large shopping centers. So are rental rates, which are about twice as low as in local large-area centers,” says Katarzyna Tencza.
High profitability of retail parks attracts investment funds
Owners of retail parks can’t complain about a lack of takers for leasing space. According to Walter Herz, the completed investments are most often already fully commercialized. Vacancy rates are non-existent in about 70 percent of completed developments, and remain at an average of 3-5 percent nationwide.
Retail parks are also among the most sought-after assets by investment funds. However, the availability of assets in this sector in the Polish market is still low. Only about a dozen percent of Poland’s retail stock is located in the retail park segment.
In 2022, the value of transaction volume involving retail real estate has not yet reached pre-pandemic levels (about €2 billion), reaching €1.5 billion, but it was more than 60 percent higher compared to the previous year. Retail parks accounted for more than 60 percent of the value of transactions registered in the retail sector in Poland, with facilities valued at up to 8.5 percent.
Walter Herz forecasts that despite the periodic economic slowdown, this sector will increase its potential and attract investor interest. This is because it satisfies the current most basic needs. Since 2020, there have been major changes in terms of consumer habits and the way we make purchases. There is a growing group of people who prefer to store online and in stores close to home instead of in large shopping centers, which now serve more of a social and service function. The popularity of retail parks is also fueled by an inflationary spiral. This is because they have discount offerings, which are increasingly in demand. Smaller, local shopping centers that provide quick, everyday shopping are gaining importance against the backdrop of the strengthening trend of 15-minute cities.
