Proven partner is the key

Bartłomiej Zagrodnik, Managing Partner, CEO of Walter Herz

There is an abundance of various structures of barter transactions and joint ventures concluded on the market by investors and developers with landowners, which have not been popular in the last years of the market boom

The value of the transaction volume registered in 2021 and 2022 confirms that interest in the Polish real estate market among investors is not weakening and there is still a lot of room for growth. Despite the global economic slowdown, new capital is still flowing to Poland looking for interesting assets. New investment entities are making their debut on our market and funds that were active before are returning. Poland is still a cost-competitive market offering higher rates of return than Western Europe. This motivates developers to continue operating even in less favorable market conditions.

The growing costs of financing and construction of projects, abrupt increase in energy costs, as well as increasing labor costs, compensated by the indexation of rental rates and maintenance charges, make it difficult for companies planning to implement new projects to maintain optimal investment profitability. High inflation, followed by a series of interest rate increases, forced developers to look for alternative solutions to the costly and less accessible bank loans for new projects.

Therefore, we can observe a flood of barter transactions on the market that investors and developers conclude with land owners. Most joint venture investments are visible in residential construction and in the PRS sector, which last year saw a record value of transaction volume in Poland. This form of cooperation in the implementation of projects has been functioning very well in logistics for years.

New projects in logistics and PRS

Investors are preparing new projects primarily in these two sectors, because they report the largest deficits. High interest rates and bank requirements mean that renting has now become the only alternative to meeting housing needs for many people. The shortage of flats in Poland further deepened after the outbreak of the conflict in Ukraine, when the supply of flats for rent dropped drastically, opening up bigger prospects for the PRS sector. The negative aspect related to institutional rental is the legislative and tax risk.

Moreover, Polish warehouse market is still poorly saturated compared to Europe, when it comes to the amount of space per number of residents, which creates growth potential. The interest in leasing logistics space in Poland remains at a high level, as evidenced by the very low vacancy rate in warehouses. Entities providing services on the domestic market, but also European markets from warehouses located in Poland, are the most active and carry out the largest transactions.

Investors are looking for land for the implementation of projects of various scale. The investment must bring an appropriate profit that will be satisfactory for both the developer and the land owner. The form of cooperation depends on the type and size of the investment as well as the expectations of the land owner and potential tenants. Transactions that are concluded most often are those with two-stage billing for the project. Part of the payment is made after obtaining a building permit, and the remaining part is paid as a percentage share in the profit from the sale of the investment, as specified in the contract. Various types of bonuses for higher results or early completion are also taken into account.

A variety of cooperation forms

Various options of cooperation are possible. Land for housing is subject to valuation and then enters the JV as a contribution in kind and the transaction is settled, for example, by the profit generated by the company, thanks to which the owner of the land earns not only on the land for PUMM, but also participates in the developer's margin. The investment can also be implemented in such a way that the owner of the land receives a specific package of apartments after their construction. Land for PRS, office or logistics projects contributed to cooperation in barter after the investment and sale to the fund at a certain rate of return are settled, for example, by a fixed percentage share in the investment profit.

However, we cannot talk about the market standard and the dominant forms of JV cooperation in relation to individual market sectors. In each of them, various transaction structures and forms of settlement are implemented, which have not been popular in the last years of the market boom. Now the owners of investment land participate in the implementation of the development margin, becoming the beneficiary of the entire project.

For developers, it is an attractive opportunity and an answer to the limitations in financing the purchase of land and the high cost of capital with the simultaneous increase in the scale of investments. The investor brings in the experience in the implementation of specific development projects. In the case of office, warehouse and retail investments, what is important for the entire process and the safety of the project is the knowledge of the developer who perfectly knows the business parameters that can be achieved in terms of lease for a given location.

Seeking potential

Only fully commercialized projects that meet certain parameters guarantee the interest of investment funds in purchasing real estate, bringing success to the entire project. The quality of the real estate, as well as the appropriate selection of tenants and their stable situation are crucial. It should be noted that commercialization is slower today, especially since rental rates in the warehouse sector and PRS have gone up by 20-30 per cent over the last year.

The stabilization of construction costs is making things easier for developers. A clear slowdown in the dynamics in the construction sector meant that construction costs dropped and returned to the level from over a year ago.

Before concluding the JV agreement, an architect or planner verifies the potential of the provisions of the local zoning plan for the real estate, analyzing the potential of the land and its use. They analyze and quantify all kinds of investment risks, as well as potential additional costs that may arise during the implementation of the project. Many plots have a lower value than the owner expects, because, for example, the local development plan has been prepared in such a way that limits the potential of the land. We often encounter, for example, land properties that carry high costs related to obstacles or restrictions due to the location of heating or power networks or underground watercourses.