Expo Real 2023 – Seeking investments with the potential to increase value

For many real estate market leaders among the over 40,000 participants of Expo Real 2023 who came to Munich from 70 countries to take part in the largest industry event in Europe, it was an opportunity to look for new investment opportunities in the face of more difficult macroeconomic and economic conditions in the world.

- When it comes to the core assets, the largest in volume and best located properties, one could observe a cold approach to transactions in Munich. Attractive interest-bearing bonds in Western Europe and the United States constitute strong competition for this type of transactions. At the same time, interest in value-add transactions is constantly growing. There is also a greater acceptance of risk by investors. They look at projects, look for solutions and opportunities to build investment value, because a market standard does not exist - says Bartłomiej Zagrodnik, Managing Partner, CEO at Walter Herz.

Piotr Szymoński, Director at Walter Herz, notes that this year at the International Real Estate and Investment Fair - Expo Real, there was a clear improvement in investor sentiment, so an increase in the volume of transactions is expected over the next four quarters.

Bartłomiej Zagrodnik emphasizes that although investor activity in Poland shows a downward trend, our market still remains attractive as a place to invest. – The limited number of closed transactions this year is mainly due to the divergence in price expectations of buyers and sellers, although the differences are smaller than last year. Investors tend to look for opportunities and submit offers below market prices, while property owners do not succumb to this pressure. We are observing a lot of activity from investors looking for opportunities to achieve above-average rates of return and long-term expansion of land portfolios. Investors also enter into joint ventures and look for the potential for larger-scale mergers and acquisitions. If interest rates stabilize next year and investment financing becomes cheaper, the chance of returning to higher transaction volumes will increase – says Bartłomiej Zagrodnik.

According to the latest Walter Herz investment report, most of the capital invested in the Polish commercial real estate market this year came from Central and Eastern European countries and the Baltic countries. Global players have suspended purchasing decisions and are monitoring the market.

Office market

In the first half of 2023, the value of transactions in the office sector in Poland amounted to approximately EUR 190 million and was the lowest value since the first half of 2004. During this period, 7 transactions were recorded. Investors' interest focused on Warsaw office buildings. Compared to the first half of 2022, when Google took over Warsaw HUB, setting a new record on the Polish office real estate market, investment activity in this segment decreased by as much as 86 per cent.

The largest office transaction recorded this year is the purchase of Wola Retro complex by a Hungarian investor - Adventum International - for almost EUR 70 million. Another important event on the market was the sale of Moje Miejsce II by Echo Investment to a Czech investor - Trigea Real Estate Fund. The value of this transaction amounted to EUR 45 million. Also noteworthy is the takeover of Wiśniowy Business Park complex (buildings C, D, E and F) by the Hungarian Indotek.

According to Walter Herz, capitalization rates for the best office assets in Warsaw with lease agreements for over 5 years, amount to approximately 5.5 per cent.

The office sector in Poland also sees the largest decline in the number of new investments, which is due to the high level of construction and finishing costs, project financing, as well as general uncertainty of investors.

A large increase in utility costs and imposed climate requirements increase the pressure to reduce consumption. Both tenants and investors prefer properties with environmental certificates that use modern technologies for monitoring and managing utility consumption, which are also rated higher by banks.

Retail market

The volume of transactions in the commercial real estate sector in Poland in the first six months of this year reached EUR 200 million, which is the lowest half-year result since 2010. The market recorded 12 transactions, covering a total of 17 assets. The largest transaction was the acquisition of Atrium Molo located in Szczecin by Grupa Metropol.

Capitalization rates for the best retail facilities ranged from 6.0 to 7.10 per cent, with an average of 6.5 per cent.

Retail parks have enjoyed particular interest on the market in recent years, and the new supply of this type of property remains at one of the highest levels in history. The year 2022 brought a rebound in the supply of new retail space to the market, the resources of which increased by as much as 400 thousand sq m.

– Similarly to other sectors, in the commercial sector buyers are looking for investment opportunities, and sellers are holding off on decisions because the offered prices are far from satisfactory from their point of view. However, the commercial real estate market is trying to stabilize asset valuations, so greater investment activity can be expected in the upcoming months. Investors are increasingly ready to engage in projects at an early stage of implementation in order to increase the profitability of the investment even at higher risk. Investments in commercial real estate, especially retail parks, are favored by the lower entry threshold for this type of projects, hence the growing involvement of private investors in the implementation of such projects is visible - says Bartłomiej Zagrodnik.

Warehouse market

The warehouse real estate market in Poland accounted for over half of the value of investment transactions in the first half of 2023. The transaction volume amounted to over EUR 430 million, which is one third less than in the previous year. Portfolio transactions were not finalized and investors focused on smaller projects. There were 14 transactions concluded on single assets, and the individual value of 12 of them did not exceed EUR 50 million.

Only the largest transaction, related to the takeover of Campus 39 in Wrocław by P3, exceeded the threshold of EUR 100 million. Another significant transaction was the purchase of City Logistics Wrocław II by the Czech investor – Trigea. The largest acquisitions also included the takeover of the KGL warehouse by LeadCrest Capital Partners and the transaction concerning the project in Uniejów, concluded between LCN Capital Partners and Panattoni.

We have seen a lot of private equity activity on the warehouse real estate market. Prices in this segment quickly adjusted to market expectations. Investors were also encouraged to close transactions by the increase in rental rates, which were rising the fastest in this sector. Investors are preparing land portfolios for projects that will be implemented within 18-24 months.

The decline in investment activity in Poland is influenced by high interest rates in Europe and the increase in the yield of treasury bonds. As Walter Herz points out, talks are underway regarding larger acquisitions, the completion of which would significantly improve the results of our investment transaction market in the second half of the year. For now, however, it is smaller transactions that are getting closed, not portfolio acquisitions or large individual transactions.