Polish Real Estate: Investors Hunt for Opportunities and Value-Add Assets

Bartłomiej Zagrodnik
Bartłomiej Zagrodnik, Managing Partner, CEO Walter Herz

Investors are looking for market opportunities and value-add assets. Companies are optimizing their portfolios by putting up for sale properties that do not fit their new investment strategies.

This year, interest in the Polish investment market is clearly lower than in the previous years. Poland and the Central and Eastern European region are no exceptions in this respect. This is a global trend. Its scale in Poland is clearly illustrated by the drastic decline in the value of transaction volumes on the commercial real estate market recorded this year. The market is now dominated by smaller transactions, which have replaced large, individual purchases and portfolio acquisitions. The high cost of money eliminated most of the large players who based their investments on debt financing from the market.

Opportunistic investors and entities looking for value-add assets took the initiative. The largest players from the core segment are still waiting for the final stabilization of capitalization rates and valuations, and are just watching the market. There is a noticeable decline in the activity of entities from Western Europe, Asia and the US, who focused on their own markets.

Seeking more profit

According to Walter Herz analysts, local capital is gaining importance on the real estate market in Central and Eastern Europe. Smaller entities from Western Europe are also looking for an attractive opportunity to enter the Polish market. Private and family equities coming from smaller investors who would like to take advantage of the currently limited competition are also willing to invest in Poland. They focus on the main assets from the office, logistics and retail sectors with a maximum value of EUR 50 million.

Piotr Szymoński
Piotr Szymoński, Director at Walter Herz

– Obtaining capital for real estate investments is currently not only very expensive, but also quite challenging. Banks are extremely skeptical about financing real estate purchases, which gives an advantage and greater opportunities to investors who have funds. Opportunistic investors, bargain seekers and entities interested in value-add real estate are active on the market. Investors are also looking for opportunities to create joint ventures with capital coming from several entities – says Piotr Szymoński, Director at Walter Herz.

The market remains relatively stable. It is still facing the negative effects of the pandemic and Russian aggression against Ukraine, which have caused high inflation, increased costs of materials, workmanship and investment financing. Asset valuations are still being adjusted to the changing economic conditions.

Changing investment strategies of companies

– Companies are optimizing their real estate portfolios and updating their strategies for the upcoming years. They adapt investment plans to changes taking place in the environment of global economic downturn. Among other things, properties that do not fit into the companies’ new investment paths are put up for sale. Investors are primarily interested in projects that have the potential to increase their value, for example through reconstruction and function change or modernization and expansion – says Bartłomiej Zagrodnik. – In the third quarter of this year, we could observe much higher investor activity than in the first half of the year. Many lower value deals are currently being negotiated. Recently we represented, among others, a stock-listed developer selling a portfolio of 4 properties that did not fit the company’s new investment plans, as well as an investor with projects that were too small in relation to the chosen strategy – says Zagrodnik.

Bartłomiej Zagrodnik points out that more attractive assets may appear on the market next year, when bonds issued by developers and some investment loans mature.

It is obvious that this year investors have shifted their interest from offices to the currently more developing sectors, such as housing and warehouses. It is evidenced by the structure of the transaction volume registered in Poland in the first half of this year, when purchases in the logistics sector dominated. The most interesting assets in this segment are currently real estate with value not exceeding EUR 100 million. Mainly city warehouses and attractively located, large-scale logistics facilities.

The motivation to invest in the residential sector in Poland are the recently introduced legislative changes. The amendment to the special housing act may expand the offer of land with housing potential to include degraded areas developed with older retail and office buildings. This creates opportunities to purchase land with commercial buildings and transform the investment into residential use after modernization or demolition of the existing properties.

In the retail sector, investors are mainly interested in smaller projects, retail parks and shopping centers.

Walter Herz analysts indicate that activity on the investment transaction market is likely to increase in the second half of next year at the earliest, provided that inflation declines, which would enable a reduction in interest rates in the euro zone. Our investment market depends on foreign capital, which so far largely came from Western Europe.