What type of real estate is worth investing in

Investments in the real estate market are coming through regardless of the difficulties in the economy, but housing construction has temporarily slowed down, warehouses have slowed down, while retail parks are still gaining momentum

There is a lot of free capital in the market, but new investments are introduced to the market very carefully. Investors aim at projects that meet the most basic needs - apartments and small, local shopping centers with a popular grocery operator and a discount offer. Therefore, we can observe a flood of new retail parks and convenience centers on the market. Dozens of investments in this format are under construction in the country and more are scheduled to be built.

– Despite many difficulties faced by investors today, such as the increase in the prices of building materials, labor costs, utilities or bank financing of investments, the retail park sector is not slowing down. Investors who decide to put capital in the development of retail parks, depending on a project, can count on a return of between 7 per cent and 9 per cent. It should be noted that when looking for the best options, they often get involved in the project already at the stage of the so-called ground level, wanting to obtain a higher margin even at the expense of increased risk - informs Piotr Szymoński, Director at Walter Herz.

– High costs of financing, the value of which now reaches the capitalization rates for the best assets on the market, effectively discourage from financing investments in the bank. Moreover, access to it is very difficult. Banks operate extremely selectively, rewarding only proven entities. However, for investors who have funds, participation in the construction of a retail park is good business and an anti-inflation shield for their capital - says Katarzyna Tencza, Associate Director Investment at Walter Herz.

Impressive growth rate of new supply

A threat to commercial real estate, as well as facilities from other sectors, are the currently rising costs of building maintenance. However, in the case of retail parks, these costs are much lower than the big shopping centers, because they do not have extensive common areas. The advantage of investing in retail parks is certainly lower costs of project implementation and the associated investment risk.

In 2022, the warehouse and retail sectors were developing the fastest on the commercial real estate market in the country. According to Walter Herz, Polish market grew by 350 thousand sq m. of modern retail space last year. Retail investments are now located primarily in satellite cities of agglomerations and smaller centers with less than 100 thousand residents, and even in towns with less than 50 thousand residents.

– Developers who have been carrying out investments in the commercial sector for years, are announcing the construction of more facilities, for which they have secured land. Only in the first quarter of 2023, over 100 thousand sq m. of retail space was commissioned in Poland, including six new retail parks, and three expansions. In addition, the reconstruction of two shopping centers in Warsaw has been completed – says Piotr Szymoński.

More than 400 thousand sq m. of retail space is under construction across the country, including over 30 new retail parks. About 300 thousand sq m. of space under construction is expected to be delivered by the end of this year.

– A good recognition of the needs in a specific location is the key. The profitability of investments in a retail park depends primarily on the absorption of the local market and the appropriate structure of tenants of the facility, 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 there is no need to maintain common areas in retail parks, which is why service charges have always been up to four times lower than in large shopping centers. Just like rent rates, which are about two times lower than in local large-area centers - says Katarzyna Tencza.

High profitability of retail parks attracts investment funds

The owners of retail parks cannot complain about the lack of people willing to rent space. According to Walter Herz, the completed investments are usually fully commercialized. There are no vacancies in about 70 per cent of completed facilities, and in the whole country they are on average at the level of 3-5 per cent.

Retail parks are also among the most sought-after assets by investment funds. However, the availability of assets in this sector on the Polish market is still low. Only a dozen or so per cent of retail stock in Poland is located in the retail park segment.

In 2022, the value of the transaction volume involving retail real estate has not yet reached the pre-pandemic level (around EUR 2 billion), with EUR 1.5 billion, but it was over 60% higher compared to the previous year. Retail parks accounted for over 60 per cent of the transaction value registered in the commercial sector in Poland, while facilities were valued up to 8.5 per cent.

Walter Herz predicts that despite a periodic economic slowdown, this sector will increase its potential and attract investors' interest. Currently, it satisfies the most basic needs. Since 2020, there have been big changes when it comes to consumer habits and the way people shop. There is a growing group of people who prefer to buy online and in stores close to home instead of in large shopping centers, which now fulfill more of a social and service function. The popularity of retail parks is also driven by the inflation. They have a discount offer, for which there is an increasing demand. Smaller, local shopping centers that enable quick, everyday shopping are gaining importance in the context of the growing trend of 15-minute cities.