2019 was a record-breaking year in terms of the value of investments on the Polish commercial real estate market. Investors were not scared away by the rising prices of real estate, caused among others by decreasing land availability and increasing construction costs, and EY experts expect Poland to remain in the focus of investors’ attention in the near term.
he value of transactions on the Polish commercial real estate market in 2019 amounted to EUR 7.8 billion, which means a significant increase in a couple of recent years considering the fact that, in the year before, the amount of EUR 7 billion had been exceeded for the first time, while in 2017 the respective amount was about EUR 5 billion.
The office market was the greatest investment market in 2019. The value of transactions in this segment exceeded the total value of contracts concluded in the retail and warehouse sector and accounted for 52% of the value of all investments on the Polish real estate market last year. The largest transaction finalized on the Polish offices market in 2019 was the sale of the Warsaw Spire building for EUR 386 million. One of the reasons for the decrease in the share of commercial real estate in the total value of the reported investment transactions is the dynamic development of the e-commerce sector, which shifts investors’ attention away from traditional retail centers. The lower share of the warehouse and industrial real estate sector is primarily due to the smaller number of such real properties on offer as well as lower prices compared with office and retail facilities.
Due to favorable economic conditions, investors are extremely active on the Polish real estate market. We think that this market will continue to be attractive to them due to its size and scale, strong foundations and capitalisation rates, which are still higher than in the countries of Western Europe. The largest amounts of investment capital flow to Poland from Europe and USA, but investors from Asia and the Republic of South Africa are also interested in our real estate market. In the first three quarters of 2019, about 20% of transactions were made by investors from Singapore, South Korea, Japan, Philippines and Malaysia – says Anna Kicińska, Partner, Leader of the EY Real Estate Group.
Offices on top
The capital city invariably stands out on the Polish map of office buildings, with over half (51%) of the total office space being located there. Kraków and Wrocław have much lesser office space, but still the largest among regional cities, with, respectively, a 13% and 11% share in this market. In total, at the end of 2019, over 11 million m2 of office space were located in the largest Polish cities. However, EY experts indicate that smaller cities, such as Rzeszów, Częstochowa or Toruń, where shared service centers, which are the main creators of demand in regional cities, are already operating, will be gaining importance. On the office market, buyers and occupiers are mainly looking for modern facilities with innovative technological solutions, which may become a potential bargaining chip for employers trying to entice employees with friendly and modern offices.
Shops are changing along with changing buying habits
The retail segment is affected by changes in the buying habits of the Polish people, who are increasingly using online rather than traditional shops, whereas shopping centers and retail parks, due to their cinemas, restaurants and rest areas, are increasingly used for social interaction.
- Most of the new retail space is developed in large cities. Currently 217 thousand square meters of retail space are being developed and will be made available for use next year. Those who are looking for retail space continue to focus their attention on prime locations and can pay for them several times more. Poland is also on the radar of retail chains and companies which have not been present in our country so far. Last year at least a couple of new brands appeared on the Polish market, and the next ones may face the challenge of limited availability of retail space in the most attractive locations – says Łukasz Jarzynka, Associate Partner, Assurance Leader of the EY Real Estate Group.
Warehouses respond to the needs of the retail sector
Changes in the consumers behaviors of the Polish people, development of the e-commerce sector and improving transport infrastructure will continue to drive the warehouse real estate market, which has already absorbed a record-breaking volume of new warehouse space in the current year. Logistics operators and representatives of the e-commerce sector are among the most active users of the warehouse space. Although currently the largest portion of the market is held by Warsaw and surroundings, where, in aggregate, 23.3% of such properties are centered, followed by Upper Silesia (18.3%) and Central Poland (16.5%), new locations such as Bydgoszcz, Toruń, Lublin, Rzeszów or Zielona Góra also have chances for development due the accessibility of land and warehouse workers.
Apartments more than just to live in not only for dwelling
Despite the exceptionally high prices (driven by high demand, decreasing supply of land for development as well as rising construction costs), sale of apartments in Poland remains at a high level. In the main six markets (Warsaw, Kraków, Tri-City, Wrocław, Poznań, Łódź), the level of sales in 2019 was only 10% lower than the 2017’s all-time high. The decline in sales (in Kraków and Tri-City) is mainly due to the smaller number of apartments on offer rather than lesser demand. Warsaw can invariably boast of having the most developed housing market, with over 20,000 apartments delivered every year. Due to a change in buyers’ preferences (from ownership to rent), a noticeable increase can be seen in the demand from institutional investors in the sector of apartments for rent. Private student houses are also in the focus of investors’ attention due to the continually high demand and scant housing resources offered by universities. On the other hand, demographic factors (aging population) create space for the emergence of a new market segment related to the development of the so-called “silver economy”. This creates the potential for the development of a housing construction industry customized to the needs of seniors or combining apartments with health care facilities.
Hotels have a new competitor
Although the Polish tourism industry is doing well and over 2.6 thousand hotels are available on the market (the most of them in Cracow, while Warsaw holds the field in terms of the number of available hotel rooms), still the hotels market must face the challenge arising from the development of the short-term rental of apartments. Such properties are usually available at lower prices than hotel rooms, and at the same time they are equally well located and equipped, which makes them an interesting alternative.
Changes in legal and tax regulations
The year 2019 and the beginning of 2020 brought several important changes in the Polish legal and taxation systems. Although none of them have revolutionized the real estate market, they are not neutral for that sector.
- The amendment to the law on restrictions on trade in agricultural property had significance to the commercial real estate market in 2019. The amendments made allow purchase of agricultural property with an area not exceeding 1 hectare without consent of the Director of the National Support Centre for Agriculture by both natural persons and companies (prior to the amendment companies were virtually excluded from buying such property). Simplification of the provisions of the building law, the aim of which is to shorten formal procedures and ensure greater stability for the building permits obtained, can also be viewed as a positive message to the participants of the real estate market. On the other hand, the introduction of the amendments to the so-called Developers Act proposed by the President of the Office for Competition and Consumers Protection (e.g. payments to the Developers’ Guarantee Fund) may contribute to further rise in the prices of apartments. Investors are still waiting for decisions on REITs, which, as the Polish real estate investment market develops, could become an additional investment opportunity – says Piotr Woźniak, Manager, EY Real Estate Group.
Preparation of financial statements in the electronic format of an XML file according to systematically updated logical frameworks may present another challenge for companies in the current year. This requirement currently applies to all financial statements prepared in accordance with the Polish Accounting Act and we can expect that, in the future, it will be extended to also include other types of financial statements. In addition, starting from 2020, capital groups which are issuers of securities admitted to trading on regulated EU markets and prepare consolidated annual reports in accordance with IFRS will be required to prepare them in the new XBRL format, which has been selected as a result of the implementation of the European Single Electronic Format (ESEF). These actions have been taken to increase the transparency of information on issuers as well as to improve data comparability and facilitate investors’ analyses.
The developments in tax regulations that took place in 2019, some of which will be continued in the current year, were also not without significance for the real estate market. They are mainly the result of the regulations that have been implemented all across Europe to decrease tax offences or tax avoidance.
-A reform of withholding tax regulations has been carried out for over a year, with the intention that, starting from July 2020, the ability to apply reduced tax rates and exemptions from the withholding tax will depend on the fulfilment of a number of additional requirements. Beginning from November 2019, entrepreneurs must apply the split payment mechanism, which includes, among others, payments for construction services. Changes were also made to the rules of settlement of purchases of goods and services, which now must be made to bank accounts from the so-called white list of VAT taxpayers to be recognized as tax deductible costs. Furthermore, in 2019, the MDR regulations on reportable tax arrangements came into force, and we currently expect further legislation tightening up tax regulations. These as well as numerous other developments have significantly changed the business environment by imposing numerous additional requirements on taxpayers – says Tomasz Ożdziński, Associate Partner, Tax Leader of the EY Real Estate Group.