Tarrant Parsons

Evolution of the Polish real estate market

Originally Published in March 2019

With GDP growth coming in above 5% last year, Poland’s economy largely surpassed expectations back at the start of 2018 and defied the slowdown evident across many parts of the continent. Strong domestic demand was key in propelling a pick-up in momentum, despite mounting external headwinds. Both household consumption and business investment rose in solid fashion, as growth in the latter accelerated to over 8% year on year. Going forward, it seems domestic conditions will remain supportive, even if the economy does lose a bit of impetus over the year ahead.

The labour market has tightened significantly during recent years, evidenced by the rate of unemployment sinking to an all-time low. This has pushed wages higher, with households, on average, now enjoying a period of strong disposable income growth as a result. The easing in inflation, which fell below 1% through the backend of 2018, has further helped drive the improvement in consumers’ spending power. Although the recent acceleration in wage growth will likely filter through into higher price pressures at some point, inflation is forecast to remain below the NPB’s 2.5% target over the next twelve months. As such, this should allow interest rates to be kept on hold for at least a while longer. Indeed, Governor Adam Glapinski stated that he did not see any reasons to change policy until the end of 2019, or possibly even further into the future. This should all ensure credit conditions remain favourable for economic activity going forward.

The industrial segment has begun to attract significant growth in tenant demand, outpacing that for offices over each of the past two quarters

That said, the outlook is not without risks and the external environment may yet have a more significant influence on the domestic economy if trends globally were to take a turn for the worse. For one, the second half of 2018 proved to be a disappointing period for the Eurozone’s largest economy, with output in Germany contracting in the third quarter and flatlining in Q4. Given nearly 30% of all Polish exports go to Germany, a continuation of this slowdown would likely cause net trade to become a larger drag on growth. Alongside this, concerns appear to be resurfacing around the outlook for China, in part linked to the ongoing trade dispute with the US, and this clearly carries substantial importance globally.

Furthermore, Brexit has the potential to cause significant disruption, particularly if the UK fails to reach an agreement and leaves the EU without any deal or transition period. Although it is still thought more likely that either a deal will be agreed, or the deadline extended, a no-deal scenario remains a real possibility. As it happens, forecasts from Oxford economics suggest that Poland’s economy stands to take a slightly larger knock than most across Europe under a no-deal, albeit considerably less than both the UK and Ireland. Indeed, by the end of 2020, Polish GDP is estimated to be 0.8% below the level that would have prevailed had an ‘orderly’ Brexit path been taken.

Nevertheless, although these outside factors are potential threats, consensus forecasts point to economic growth in Poland remaining solid over the next couple of years. This economic outperformance compared to parts of Western Europe (as well as the relative value) should continue to support the commercial real estate market. According to data from Real Capital Analytics the Polish market saw investment volumes of €6.8bn in 2018, the largest annual sum since their records began in 2008. Meanwhile, feedback to the RICS Global Commercial Property Monitor shows sentiment, particularly on the occupier side of the market, has improved steadily over the past twelve months. Respondents report demand from tenants looking to occupy commercial space to have risen firmly at the headline level over the past few quarters. Notwithstanding this, when viewed at the sector level, it is noteworthy that retail trends are lagging, despite some still positive reading for occupier demand.

When it comes to rental expectations across the retail sector for the year ahead, these are very much a mixed bag. While rents for prime retail space are seen posting marginal growth, expectations for secondary retail rents have turned increasingly negative. In fact, RICS survey participants are pencilling in an annual decline of around 3%. What’s more, weakness in the secondary retail rental outlook is anticipated to intensify beyond the next twelve months, a trend becoming ever more evident across many parts of Europe. understandably, investor demand has been somewhat patchy for retail properties on the back of this, albeit the final quarter of the year did deliver a slight pick-up.

The shift towards online shopping at the expense of instore sales continues to challenge the business models of the more traditional retailers, explaining much of the caution in sentiment towards the sector. However, these structural changes are in many ways a benefit to the industrial sector and, in particular, the logistics market. As such, the industrial segment has begun to attract significant growth in tenant demand, outpacing that for offices over each of the past two quarters. The prime industrial sector also now leads the way in terms of rental growth projections for the coming year, with a near 5% rise anticipated. These robust and improving occupier dynamics are catching the eyes of more investors, with enquiries from both domestic and foreign buyers rising sharply for industrial assets. Consequently, expectations for capital value growth across the prime industrial market have become further elevated, pointing to significant gains in 2019.

All the same, there remains quite a contrast between prime and secondary markets, even in the industrial sector, with the latter exhibiting a relatively flat outlook both for rents and capital values. The overhang of supply created by development activity in recent years is what appears to be creating a more challenging environment for secondary space. Moreover, it also seems that construction starts in the office and industrial sectors have gathered renewed momentum recently. If this new stock is not absorbed sufficiently when it comes through, it could place upward pressure on vacancy rates, and secondary markets are likely to bear the brunt of this further down the line.