US home sales hit by affordability and supply constraints

US home sales hit by affordability and supply constraints

ING Economics ING Economics 19.05.2023 15:08
US home sales remain subdued thanks to elevated borrowing costs, high prices and a lack of supply. New home sales should continue to outperform existing ones in this environment, but price risks remain skewed to the downside. Commercial real estate woes are the bigger concern as office vacancies and higher refinancing risks point to rising loan losses Commercial real estate woes are a concern as office vacancies and higher refinancing risks point to rising loan losses Existing home sales remain under pressure from affordability issues and a lack of options Existing home sales fell 3.4% in April to an annualised 4.28mn versus expectations of a 4.3m outcome. Sales had been as high as 6.3mn as recently as January 2022. Higher borrowing costs and a general lack of affordability after prices rose nearly 50% through the pandemic have constrained demand, but we also have to recognise there is a lack of supply out there, which is also contributing to lower transaction numbers. The more than doubling of mortgage rates over the past 18 months means many homeowners who would like to move are effectively locked in by the cheap financing they secured on their current property. New home sales have consequently been performing more strongly despite the drop in mortgage applications for home purchases – the buyers that are out there simply don’t have much to choose from. New home sales are outperforming existing home sales as mortgage applications point to weakening demand Source: Macrobond, ING   Affordability will remain a key constraint that points to downside risks for transactions. The latest weekly Mortgage Bankers Association data showed that the typical mortgage for a new home taken out last week was a 30Y fixed rate product with a size of $440,400 at a rate of 6.57%, giving a monthly mortgage payment of $2804, a record high. Twelve months ago this was $1750 per month. Consequently, if you are considering buying a home today, you are looking at an annual mortgage cost of around $33,650 on average which, given a median pre-tax US household income of a little under $75,000, points to ongoing weak demand unless prices fall substantially or borrowing costs plunge. Higher borrowing costs and elevated prices have led monthly mortgage payments to surge Source: Macrobond, ING If unemployment turns then rising supply could mean accelerating price falls Should the US economy experience a hard landing and the start of a rise in unemployment, this would threaten a rise in default rates and an increase in the supply of homes for sale. In this scenario, falling demand and rising supply mean falling property prices would be the likely outcome. House price-to-income ratios remain extremely elevated, and for them to return to long-run averages, we would likely need to see prices fall by around 20-25% in the absence of any rise in incomes. Construction of new homes would inevitably fall as well. Commerical real estate is where the bigger problems lie Unfortunately, it isn’t only the residential sector that looks vulnerable. Last week the Federal Reserve warned of the risks facing the commercial real estate sector since the sharp jump in interest rates over the past 14 months “increases the risk” that commercial real estate loans will be difficult to refinance. A recent report from another bank suggested that up to $1.5bn of these loans need to be refinanced by 2025. With office occupancy nationally running at 45% according to data from Kastle and many offices in need of updating and investment, there is the very real risk that defaults rise – A PIMCO fund has defaulted on $1.7bn of office-related loans this year and Brookfield has defaulted on more than $750mn of debt tied to Los Angeles office blocks. What makes this so problematic for the property market and construction sectors is that small banks account for such a high proportion of commercial bank lending to both residential and commercial property. As the chart below shows, banks with less than $250bn of assets account for two-thirds of the stock of all commercial lending to commercial property and more than a third of residential property lending by all banks. Small and regional banks account for the majority of commercial real estate lending Source: Macrobond, ING Small banks will come under increasing pressure, threatening weaker credit growth throughout the economy With these small and regional banks already being squeezed by deposit flight and facing the prospect of more intense regulatory oversight in the wake of recent high profile failures, loan losses on commercial real estate will only heighten the pressure on these banks. The Fed’s viewpoint is that “the magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of C.R.E. debt.” With the Fed’s Senior Loan Officer survey indicating credit conditions are rapidly tightening across the board and particularly for commercial real estate lending, this implies a sharp downturn in lending for the sector, meaning refinancing could be immensely challenging and create a downward spiral for prices that will suck construction spending sharply lower. Tighter lending conditions point to a steep downturn in lending on commercial real estate, making refinancing challenging Source: Macrobond, ING   This will have knock-on effects for other lending markets, with banks increasingly reluctant to lend across the board. This is hugely significant as what turns struggling businesses into failing businesses is when credit availability evaporates. Given small and regional banks account for more than 40% of all lending in the US, with a particular focus on small businesses outside of major cities, this is a troubling situation. Large banks are unlikely to be able to fill the gap and the risk is that unemployment climbs. In such an environment, the market pricing of significant and rapid interest rate cuts from the Federal Reserve from later in the year appears justified. Read this article on THINK Tags US Lending Home sales Construction Commercial real estate Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Office market is drifting in calm waters

Office market is drifting in calm waters

Finance Press Release Finance Press Release 12.05.2023 11:39
Demand in Warsaw is declining, but remains at a good level in the regions. The low activity of developers and the lack of new offices are starting to bother tenants looking for space in the capital There is less and less available office space in the center of Warsaw. The vacancy rate at the end of Q1 2023 dropped to around 10 per cent in the central business area of the city, which generated a slight increase in rental rates in prime locations. In the first three months of the year, demand remained relatively stable in Warsaw. Nearly 160 thousand sq m. of offices have been leased by tenants, less than in the previous quarter and 40 per cent less than in the corresponding period last year. The largest amount of space was contracted in the central business zone, which has been the most popular for a long time. Companies focus on the best spaces. The lease volume in the first months of the year was dominated by new contracts, including pre-let contracts. As a result of the shrinking of the available space in the central area of the agglomeration, as predicted by Walter Herz, we will probably see an increase in the share of renegotiations in lease transactions in the upcoming months. New investments in Warsaw only scheduled - Warsaw is characterized by a deepening decline in developers’ activity, which we can observe for the fourth year in a row. This is due to economic and geopolitical conditions, as well as high costs of construction and loan servicing. However, in recent weeks, two new projects have been launched on the Warsaw market. There are now 274 thousand sq m. of space under construction, three times less than during the boom before 2020. The Bridge, Lixa, Vibe or Skyliner II remain under construction. By the end of the year, there is a chance to complete the construction of only over 70 thousand sq m. of offices - says Mateusz Strzelecki_Partner and Head of Tenant Representation at Walter Herz. – A similar amount of office space – 68 thousand sq m. in, among others, Kreo and Mogilska 35 projects, remains at the finish line of implementation in Cracow, the largest regional market in the country – says Mateusz Strzelecki. At the same time, developers in Warsaw are turning to the modernization of older buildings and replacing them with contemporary buildings such as Upper One, which will stand in the place of the demolished Atrium. - The growing number of permits obtained and applications submitted last year indicates that investors want to secure the possibility of starting new construction projects, primarily in the center of Warsaw - says Mateusz Strzelecki. - This year, companies are more cautious about their leasing decisions. Fewer large spaces are contracted. Tenants are starting to optimize the cost of maintaining offices, which are becoming more expensive. The market is experiencing a sharp increase in operating costs, which in the case of some properties can be up to 60 per cent higher – says Mateusz Strzelecki. Regions sustained level of demand A total of 175 thousand sq m. was leased in the eight largest regional markets in Poland in the first quarter of this year. It is a similar amount as in the previous quarter and a several per cent better result compared to the same period a year earlier. In contrast to Warsaw, the share of contract renegotiations has increased in the regions, and the number of pre-let contracts in transactions has decreased, despite the fact that there are many offices available in buildings completed in recent years. In recent months, the vacancy rate in the largest regional markets has slightly increased and averages around 16 per cent. The largest number of vacant offices is in Lodz - over 20 per cent. The increasing amount of available space means that the pressure for rent increases is not as noticeable in the regions as it is in Warsaw. – Nevertheless, a slight increase in rental rates was recorded this year in Cracow, where in the first quarter of the year, about 10 per cent more space was leased than in the same period in 2022. This market was dominated by new lease agreements – says Mateusz Strzelecki. In the first quarter of 2023, less than 70 thousand sq m. of news space was completed in regional centers. The most, over 4 thousand sq m. of new offices emerged in Cracow market. Centrum PoÅ‚udnie 3 was completed in Wroclaw, Officer - in the Tri-City, and in Cracow - Ocean Office Park B and Fabryczna Office Park B5. Meanwhile, no new buildings were commissioned in Warsaw at that time. There is less space under construction in the regions. Projects with a total of approximately 530 thousand sq m. are under implementation. The largest number of office meters is still under construction in Wroclaw - approx. 150 thousand sq m. and Katowice - approx. 130 thousand sq m. About Walter Herz Walter Herz company is a leading Polish entity operating in the commercial real estate sector across the country. For ten years, the company has provided comprehensive and strategic investment consulting services for tenants, investors, and real estate owners across the country. Walter Herz experts assist investors, property owners, and tenants. They provide full service to companies from the private and public sectors. Walter Herz advisors support clients in finding and leasing space and provide consulting in implementing investment projects in the warehouse, office, retail, and hotel sectors. The company is based in Warsaw and runs regional branches in Cracow and Tri-City. Walter Herz has created the Tenant Academy, the first project in Poland, which supports and educates commercial tenants from all over Poland by organizing specialized training meetings. The agency introduced the Code of Good Practice to ensure the highest ethical level of services.
US Inflation Eases, but Fed's Influence Remains Crucial

A fair-weather bounce in US housing

ING Economics ING Economics 27.04.2023 11:54
US housing transactions and prices have surprised in the early part of the year as warmer weather lifted demand. Amid a dearth of supply, prices are being supported, but higher borrowing costs and tighter lending conditions suggest the outlook remains tough Source: Shutterstock Warmer weather boosts demand US home prices rose surprisingly in February, up 0.06% month-on-month versus the -0.4% expected according to S&P Case Shiller data released today. Western cities remain under pressure with Seattle, Portland, San Francisco and Las Vegas all down the bottom of the city comparison with MoM falls between -0.3% and -1.5%. Los Angeles, however, bucked the trend by rising 0.6%. In year-on-year terms, Seattle (-9.3%) and San Francisco (-10%) are at the bottom of the table with Miami (+10.8%) and Tampa (+7.7%) sitting at the top. The warm weather in January appears to have lifted housing activity, most probably bringing forward buyer interest from the Spring rather than creating a whole new set of buyers. Amidst a dearth of supply, this generated the first positive MoM house price index change since June 2022. New home sales benefit from a lack of existing homes on the market Meanwhile, new home sales jumped 9.6%MoM in March to 683,000 – well above the consensus prediction of 632,000. This is especially surprising given the steep decline in mortgage applications for home purchases. The historical relationship between the two series suggests that new home sales should be closer to 300,000 than 700,000. There isn’t a huge amount of evidence suggesting a sudden surge in all cash purchases, so we can only really rationalise it as a function of the lack of existing homes on the market for sale. This leaves potential buyers little option but to to buy newly constructed homes. New home sales are stronger than mortgage applications imply they should be Source: Macrobond, ING Challenges remain for US housing Nonetheless, the doubling of mortgage rates over the past 16 months and tightening of bank lending standards – which recent bank stresses are likely to make even worse – means that demand will start to soften again. In January 2022, borrowers could take out a $400,000 30Y fixed-rate mortgage and their monthly payment would be $1,750. Based on today’s US mortgage rates, if that person were to pay the same $1,750 monthly payment, they would typically only be able to borrow $280,000. Read next: Rates Spark: Bonds are back...in their range| FXMAG.COM Moreover, with house price to income ratios above where we were at the peak of the 2006 housing bubble, the affordability metrics continue to point to downside risks for transactions and prices. Should the US economy experience a hard landing and the start of a rise in unemployment, this would threaten a rise in default rates and an increase in the supply of homes for sale. Falling property prices at a time when construction costs and labour remain elevated also means squeezed profit margins, which is another disincentive for construction. Read this article on THINK TagsUS Housing Home sales Construction Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
PRS sector with ambitious construction plans

PRS sector with ambitious construction plans

Finance Press Release Finance Press Release 23.03.2023 15:42
Conditions for the development of the Private Rented Sector (PRS) The prolonging conflict in Ukraine (the refugee wave) and the significantly reduced credit scores increase the demand for renting apartments and thus, affect the development of the PRS market in Poland. The institutional rental sector will also grow due to the changing perception of homeownership by young people, who value mobility and do not necessarily need to own a home. According to Eurostat data from 2021, about 30 per cent of the population in the European Union live in rented apartments, while in Poland this number amounts to only about 13 per cent. Among the factors creating a good background for the development of the PRS sector, Avison Young also mentions the supply gap in Poland. About 35 percent people live in the overcrowded apartments, while in the EU this figure is estimated at 17% (Eurostat 2021). It is confirmed by investors' statements that PRS sector is to develop in Poland. Projects with 20-25 thousand apartments for rent are to be delivered. Avison Young advisers add that due to the early stage of development of this sector, Polish market is attractive to both domestic and foreign investors, who can obtain higher rates of return on investment in Poland than on Western European markets. Warsaw vs. regional cities According to the latest Avison Young report, at the end of 2022, there were over 9.4 thousand units in the pool of apartments for institutional rent in Poland, and another 13 thousand flats were under construction. About 75 per cent of PRS projects currently under construction belong to four investment funds, that is Heimstaden Bostad, Echo Investment / Griffin Real Estate (Resi4Rent), TAG Immobilien (Vantage Rent) and Cavatina Holding (Resi Capital). Interestingly, according to investors' statements, smaller regional cities, such as Szczecin and Zielona Gora, will soon appear on the PRS map. About 40 percent of all existing PRS premises are located in Warsaw. There are over 4,000 more apartments in this formula under construction on the Warsaw market. Warsaw is the largest PRS construction site in Poland, while regional cities are responsible for the largest number of new PRS projects - the number of apartments under construction in regional cities already exceeds their existing stock. This shows how much demand and interest in this sector exists also in the regional cities, not only in the capital. On the other hand, the leader in terms of the share of PRS premises in the existing housing stock of the city is Wroclaw with the result of 4.2‰; followed by Warsaw (3.6‰) and Cracow (3.6‰). It is clear, however, that these are still marginal shares, well below 1%. For comparison, in Berlin, the share of PRS in the total housing stock is 30%. If we look at the numbers, there were almost 3,800 apartments for institutional rent in Warsaw at the turn of the year, around 1,550 in Cracow and Wroclaw, around 1,100 in the Tri-City, over 700 in Poznan, and 550 in Lodz. Wroclaw right behind the capital Wroclaw is currently the second largest market after the capital, in terms of PRS housing stock – both existing and scheduled combined - in Poland. At the end of 2022, the number of apartments offered on the Wroclaw market in the PRS formula exceeded 1,500, and another 3,100 were under construction. Wroclaw has 16 per cent share in the functioning national stock of flats for rent. Since 2020, the number of PRS premises commissioned in the city has doubled. The offer of apartments for institutional rent in Wroclaw is concentrated mainly in the city center. Currently, it is also slowly expanding towards the north-west, that is the vicinity of Popowice, Nadodrze and Legnicka Street, where many residential estates with apartments for rent are being built, due to its attractive location. Avison Young draws attention to an interesting enclave of apartments for rent, which was created in Wojszyce, in the south of Wroclaw - the dynamic development of this area attracts not only individual, but also institutional investors. Vantage Rent delivered 150 PRS units in 2021, and later Life Spot brought another 244 units to the market. The leading PRS operator in Wroclaw is Resi4Rent with 37 per cent share in this market, also responsible for more than 40 per cent apartments under construction. An active investor in this location is also TAG Immobilien (Vantage Rent), which owns over 30 per cent of Wroclaw PRS market under construction. Heimstaden Bostad also has expansion plans in WrocÅ‚aw. The company bought a portfolio from Budimex in 2021, including a part in Wroclaw. Vantage Rent project is a good example of how great the interest in PRS apartments in Wroclaw really is. All apartments in the investment were rented in a few months from the launch of the offer on the market in mid-2021. The resources of Fundusz Mieszkan na Wynajem fund were distributed just as quickly, with no more available premises. While, about 10 apartments out of the 570 units offered by Resi4Rent were available at the end of 2022. Also at the end of 2022, the average rental rate for a one-room apartment in the Resi4Rent project at Zakladowa Street in Wroclaw was gross PLN 2,400, and PLN 2,900 at Mieszczanska Street. In the case of two-room apartments, rents ranged from PLN 3,400 to PLN 3,900, and for three-room apartments they ranged between PLN 4,600 and PLN 4,900. However, these rates are also rising, driven by inflation and rising operating costs. The analysis of Avison Young's market data shows that institutional apartments in Wroclaw are characterized by approx. 5% lower prices per square meter compared to the offers of private owners, which, on the other had, are larger on average. It should be mentioned that PRS units, unlike private apartments, offer additional services, such as 24-hour security, amenities in the common areas, professional management and operator’s support. Author: Paulina Brzeszkiewicz-KuczyÅ„ska, Research and Data Manager Avison Young Avison Young creates real economic, social and environmental value as a global real estate advisor, powered by people. Headquartered in Toronto, Canada, Avison Young is a collaborative firm owned and operated by its principals. In the Central Eastern Europe and South Eastern Europe the firm is operating in Bulgaria, Czech Republic, Hungary, Poland, Slovakia and Romania, offering a broad range of consultancy services. In the Polish commercial real estate market, Avison Young is providing professional consultancy services such as office agency, investment advisory, valuation consultancy, technical advisory and project management.
Mood after MIPIM

Mood after MIPIM

Finance Press Release Finance Press Release 22.03.2023 14:58
In March, one of the most important events on the real estate market - MIPIM - took place in Cannes. Every year, participants meet in France for several days to conduct talks, negotiations, study the mood on the market and participate in thematic conferences. Representatives of Avison Young could not miss the MIPIM. Their conclusions after numerous meetings and talks are presented below.   Poland on the radar The mood among investors was mixed: we all expected that the beginning of this year would not be rich in transactions and new projects, and it is true - we are seeing an investment slowdown across Europe. However, in this time of uncertainty, we can say that Poland is enjoying and will continue to enjoy the interest of investors - it is one of the most active markets, across all segments, offering higher rates of return than Western Europe. We have an influx of new capital from the Baltic countries and Scandinavia. Also, the already present capital is still active, such as investors from Central and Eastern Europe, as well as a few from Western Europe. Office sector In the uncertain market conditions of 2022, many investors in the office sector turned to stable assets. Almost 90% of the EUR 2.1 billion invested in the sector in 2022 fell on core or core+ properties, which are in line with low-risk strategy. Despite that, in the second half of 2022 there was a sharp turn and a noticeable increase in value-add and opportunistic transactions. We expect many investors to continue to oscillate around value-add and opportunistic assets in 2023. We are already seeing a lot of interest in many such buildings, in both Warsaw and major regional cities. Unfortunately, there will be less interest in core assets, as there has not yet been a noticeable lowering of expectations regarding price levels, and rising funding costs are not helping to achieve the expected returns. However, it is only a matter of time before the towers in the center of Warsaw are traded again. Warehouse sector The investment volume in Poland in January and February was not spectacular, amounting to approx. EUR 260 million. Warehouses dominated in this period in terms of the number of transactions. 2021 was a record year for the sector in terms of the volume of transactions, but last year was characterized by a certain weakening of the transaction volume. We expect the amount and volume of transactions to be even lower this year, unless sellers accept price reductions, so that buyers can achieve the expected returns. Read next: Softer Federal Reserve could play in favour of S&P 500 index| FXMAG.COM Retail sector Retail parks are one of the most sought after investment products at the moment. This segment broke a record last year, accounting for 65% of the total number of transactions in the retail sector. We believe that retail parks will continue to be an important element of the sector and investors will continue to buy these assets. Whereas when it comes to the shopping center sector, the main focus will be on cheap assets in good locations with a possibility to obtain financing from an existing lender. PRS sector It is currently the second hottest market segment, which closed the year 2022 with a record volume of finalized transactions of 150 million. It should be noted that the PRS sector in Poland is still in its initial stages, as the share of PRS premises in the existing housing stock in the cities is still marginal - well below 1%. For comparison, in Berlin their share amounts to 30%. Although some development projects in this sector have been temporarily suspended, we expect its further development and new players on the market. An increasing number of active developers are converting part of their housing portfolio into PRS, which is related to the slowdown in individual sales and the lack of availability of mortgage loans. It also seems natural that new investors may appear in the sector, as well as new projects or platforms. In the upcoming months, we can expect difficult discussions between buyers and sellers, which will concern the downward pressure on prices. Funding will also be a key issue. At present, banks are very selective in granting financing, preferring cooperation with entities that already have a strong reputation on the market. We expect, however, that Polish commercial real estate market, despite the smaller number of transactions, will continue to be one of the most liquid markets in Central and Eastern Europe. Comment by: Marcin Purgal, Senior Director, Investment at Avison Young Avison Young Avison Young creates real economic, social and environmental value as a global real estate advisor, powered by people. Headquartered in Toronto, Canada, Avison Young is a collaborative firm owned and operated by its principals. In the Central Eastern Europe and South Eastern Europe the firm is operating in Bulgaria, Czech Republic, Hungary, Poland, Slovakia and Romania, offering a broad range of consultancy services. In the Polish commercial real estate market, Avison Young is providing professional consultancy services such as office agency, investment advisory, valuation consultancy, technical advisory and project management.
SAVILLS: American buyers increasingly attracted by European real estate

SAVILLS: American buyers increasingly attracted by European real estate

Finance Press Release Finance Press Release 16.03.2023 13:51
According to Savills latest research, pricing levels are increasingly attracting North American investors to European real estate. In 2022, North Americans invested more than Europeans cross border, €48bn compared to €36.6bn, which is 31% above the five-year average for the former. The international real estate advisor anticipates that North American investors will again be the largest investor group in European real estate by the end of the year. Looking to Asia, given the typical flexibility of Singaporean investors, Savills expects continued deployment across various sectors and geographies in Europe during the course of 2023. Singapore is increasingly viewed as the hub for economic activity in the region and as such acts as a funnel for outbound capital flows from other Asia Pacific jurisdictions. James Burke, Director, European Capital Markets & Global Cross Border Investment at Savills, says: “We foresee a diverse range of cross border investors being attracted to European real estate during the course of 2023. Much of this will be opportunity-led, with investors engaging on processes where there is a discernible pricing adjustment.” Read next: Is the end of NFT flipping and speculation near? LiveArt announces an NFT membership card| FXMAG.COM “Investors with less appetite for risk should focus on strategies targeting income-driven assets in the most appealing locations and sectors in Europe. These should be chosen based on long-term trends, thereby offering greater stability and resilience to market fluctuations.” Lydia Brissy, Director, European Research at Savills, comments: “All in all, we expect investment activity to remain subdued in Europe until the second half of the year when the economy will slowly start to pick up. We anticipate total European real estate investment volumes for 2023 to range between €230bn and €240bn, a decrease of 17%-20% yoy.” Tomasz Buras, CEO Savills Poland, says: “In Poland, the rental growth compensates for some softening of yields, providing a safety buffer for capital values. A significant slowdown in the construction sector brought construction costs back to the levels recorded at the turn of 2021 and 2022. In 2023, we will certainly be dealing with a continuation of last year's trend, which results from the financing costs, translating into mismatch of pricing expectations of sellers and buyers. As economic indicators normalise, we can expect a return to trading activity. Meanwhile, the market will focus on selective investing protecting capital against inflation and opportunistic acquisitions.”
Investors are searching for attractive assets

Investors are searching for attractive assets

Finance Press Release Finance Press Release 08.03.2023 10:21
Which industry will win the investment race this year? Will the investors who look for a bargain on the Polish market continue to focus on office buildings as they did last year? Or will the investment transaction market be dominated by warehouses and retail parks? The ongoing changes in the global economy haven't materially affected the decisions of investment funds and their perception of Poland as an attractive investment spot. Even though the investors are more cautious in their deal-making decisions, on the domestic market the year 2022 ended with a similar investment volume in the commercial property sector as the year before. That was the case for the entire CEE region. With its major share in the total investment volume in the region, Poland has maintained its leading position in the CEE. Warehouses overthrown The assets that most frequently changed their owners in the past year are office properties which managed to overthrow the logistics sector from its leading position that it had occupied two years in a row. In 2022, the total investment volume in Poland amounted to over EUR 5.8bn, with the warehouse deals constituting one third of that value. The deals involving logistics properties totalled to EUR 2 billion and ranked second in terms of value, right after offices. In 2022, the investors' activity in the warehouse sector dropped by over 30 percent year on year, while the commercial properties market recorded its best results in years. The deal volume was way beyond the one documented in the previous year. The acquisitions in the commercial sector on the Polish market totalled to EUR 1.5bn in 2022. The majority of transactions involved small-scale retail parks and convenience stores, but several large commercial centres in the major Polish cities changes their owners, too. Detailed asset value analysis and waiting for a bargain Nowadays, the investors pay greater attention to the location of the properties and more closely look into the tenant structure. Particularly interesting are still the attractively located warehouses and retail parks, secured with beneficial lease contracts. The investor search also for plots for retail park development and residential properties for the PRS purposes. However, the negotiations processes are accompanied by an in-depth analysis to verify the investment value of the assets, as well as ESG-related matters. Another key element in the decision-making process in the quality and stability of lease contracts with tenants. Poland continues to be an interesting market for investment funds, particularly from the US, Germany and South Africa, yet capital of the CEE-origin begins to play an increasing important role, too. Still, certain slowdown is expected to be visible on the investment market this year, as the buyers anticipate price discounts. In a number of cases, there is a significant discrepancy between buyers and seller as to the estimated property value. What additionally hinders a successful deal-making is also high borrowing costs for the investments, rigid conditions for granting loans, as well as the expected global recession. All these are accompanied by surging energy prices and increasing more demanding EU climate policies. Borrowing costs vs yields Unfavourable economic climate, inflation, growing maintenance expenses, and high costs of financing investments have resulted in an adjustment in asset prices on all European markets, which in Poland continues to be less severe that in the Western Europe. The slowdown on the investment deals market is becoming more visible across all European states. This is hardly surprising, considering increased borrowing costs whose level is currently similar to the yields for the most attractive assets. Yet, the situation could improve soon. Some significant increase in rents in the warehouse sector was observable already last year, both in Poland and on other European markets. Despite ongoing changes, the Polish market remains one of the least expensive in Europe. Apart from the lower lease rents, the country offers also highly skilled staff, lower operating costs, and convenient location in the vicinity of the outlets, which is particularly relevant in the context of nearshoring and transfer of the manufacturing processes from Asia. As per the latest Reuters report, in that respect Poland is the first choice for the European companies. It competes for manufacturing investments of the Asian origin with Czechia and Hungary. The time will tell how many projects that are currently being analysed will actually be moved to the country. Warehouses under construction Last year, the warehouse and commercial sectors were the fastest growing parts of the commercial property market in Poland. As a result of delivery of the largest volume of new space in the history of the Polish market, more than 28 million square meters were added to the domestic warehouse resources. The record-breaking supply is accompanied by a high demand. The contracts executed last year covered 6.8m square meters of warehousing space, which is just slightly below the record-breaking 2021. The industrial and logistic properties in Poland continue to develop dynamically. And there is still a large potential for growth in the most valuable locations, such as the regions around Warsaw and Poznań, or in Silesia. A relatively large volume of space - 3.4m square meters - is currently under construction in Poland. Yet, an incremental quarter-on-quarter drop in the number of the launched investments projects was observable last year. That resulted mainly from higher construction material prices and borrowing costs, as well as lower activity of investment funds. The adjustment in property value brought also a drop in new supply on the majority of European warehouse markets. High demand for logistic facilities The market forecasts indicate a further increase in the warehouse lease rents. Following the last year increase in rents, which went up on average by 20 percent, we continue to be a competitive market compared to the rest of Europe. The main driving force for the warehouse market are currently the logistic companies and manufacturers, as well as e-commerce, which is, however, developing slower than before. The high demand for space results in a low vacancy rate in the industrial and logistic industries in the CEE market, which is on average below 5 percent. In the most popular locations, the demand for warehouses is often higher than the supply. Deceleration of commercial project development Higher liquidity on the investment market recorded in the Polish commercial property sector in 2022 could be suppressed this year by certain unfavourable economic developments and high project financing costs. Decreased dynamics in retail sales has been a threat to the sector, next to the higher maintenance costs of buildings. This year, the lower pace for new project development is expected also on the commercial market. In 2022, as much as 350 thousand square meters of new space was added to the sector in Poland, and the majority of that volume was delivered in the cities over 100 thousand residents. Some 300 thousand square meters of space for commercial purposes is currently under construction, even though the initial plans were significantly bolder. The vast majority is located in the retail parks under construction whose supply is expected to increase in the years to come. The characteristic element of the domestic commercial market are the redevelopment projects of properties which used to be rented by Tesco and are on regular basis transformed into new commercial centres. Ironically, the growing popularity of retail parks among both customers and investors is a result of a higher inflation rate and lower purchasing power of money. That is linked to the nature of such projects whose offer tend to include value retailers. Smaller, local commercial centres that facilitate convenient, daily shopping close to home become increasingly important year-on-year. Retail parks are developed mainly in smaller towns with an existing supply gap. Their competitive advantages are lower investment costs and maintenance costs compared to large commercial centres. In the coming years, the market will continue to boost its investment potential and remain interesting for the investors. Author: Agata Karolina Lasota, Managing Director at LBC Invest
Investments with demolition in the background

Investments with demolition in the background

Finance Press Release Finance Press Release 15.02.2023 10:54
Author: Piotr SzymoÅ„ski, Director at Walter Herz Investors are looking for projects that can ensure a good profit. Will we soon see a flood of investments based on changing the function of existing real estate on developed land? Real estate conversions trend is becoming a permanent element of the investment landscape on our market. There are almost no empty plots in attractive locations in the large cities, so developers are forced to reach for already developed plots. All real estate market participants agree that the number of such projects will increase in the upcoming years. Investors are looking for projects that can ensure an attractive investment return. In many cases, new commercial buildings can provide a much larger GLA, than the already existing ones. The purchase of a developed plot is also, in many cases, the only possibility to implement a project of a certain scale in a given location. Therefore, we expect that developers will reach for already developed plots more often and invest in more challenging projects that include demolition or transformation of the buildings functions, in order to provide the expected profit. We are talking about demolition of the buildings, unless they are historic, because the reconstruction of an office building or a shopping center in order to give it a new function is often unprofitable. The trend of replacing older buildings with new ones will increase due to the lack of local zoning plans, which cover only about 30-50 percent of agglomeration areas. Demolition of decapitalized office buildings Looking at the market, it is not difficult to notice that some older office buildings are not attractive to potential tenants. This is especially true for properties that are not energy efficient and require substantial expenses to meet the energy consumption standards expected by tenants today. In such buildings, the effective rent value is lower than the value of the land on which they stand. As a result, investors are often analyzing the possibility of using such plots for residential projects. An example of this type of transaction is the purchase a part of the Empark office complex in Warsaw from the Austrian investor Immofinanz by Echo Investment in 2020. The company is planning to develop a project of about 1 200 apartments. The upcoming months will show whether further investments are carried out using demolition of the unattractive buildings in Warsaw's SÅ‚użewiec, where almost a quarter of the offices in the largest business zone in the country remains vacant. Another example of the purchase of a plot with an office building to be demolished for a residential project is Develia’s project. The developer will build apartments and commercial premises on the plot with an old office building on Åšlężna street in WrocÅ‚aw. Also Dom Development purchased a plot with an unfinished office and administration building in Warsaw's Bielany. The company intends to demolish it. Atrium International office building in Warsaw is also subject to demolition. Strabag Real Estate is planning to build Upper One office and hotel complex in the place of the closed office building in the corner of Grzybowska and Jana PawÅ‚a II streets. The developer wants to build a 131.5-meter office building and a 55-meter hotel in this location. The complex will offer 35.9 thousand sq m. of offices and about 11 thousand sq m. GLA of hotel space. The investor has already received the demolition and construction permits. Upper One is scheduled to be completed in 2026. This is not the first project of this type completed by this company in Warsaw. Earlier, the developer had already demolished an old office building on Tamka Street and built a hotel for the German chain Motel One in its place. The Ilmet office building located at the ONZ roundabout is also to disappear from the landscape of the Warsaw city center. The building was bought a few years ago by Skanska. The company plans to demolish the building completed in 1997 and replace it with a modern office tower. Ghelamco Poland has recently applied for a building permit for an office and retail building at Towarowa Street in Warsaw, which is to be erected on a plot where a block of flats with 21 apartments is to be demolished. Commercial buildings scheduled for demolition Market changes are also a big challenge for shopping center owners due to rising operating costs. Many of the key tenants have contractual restrictions on the increase of such fees, which will result in a growing budget shortfall directly impacting operating income (NOI), which is the basis for asset valuation. Numerous shopping centers are doing very well, providing tenants with high turnover that justifies the amount of rent and service charges. However, some of the shopping malls that have lost key tenants are struggling to make a profit. The value of such properties from an investment point of view is getting closer and closer to the value of the plot on which they stand. The purchase of Land shopping center in Warsaw's SÅ‚użewiec by the Belgian developer Ghelamco is a good example of this. After the demolition of a twenty-year-old building, a mixed-use project offering over 37 thousand sq m. of office and commercial space is to be built in its place. Another example is the conversion of the CH Sosnowiec mall into a logistics center. In Cracow, Galeria Plaza mall has also been demolished. In order to replace the shopping center, Strabag Real Estate will build a complex of several buildings. The project is at the design stage. The construction of the mixed-use complex is scheduled for 2023-2025. Another example of the implementation of mixed-use projects in the place of former buildings is an investment by Echo Investment in the area of the current CH Jupiter in Warsaw located at Towarowa Street, as well as a residential and commercial complex, which is to replace the Tesco Kabaty supermarket. Development of industrial areas The development of urban agglomerations over the last decades has meant that many industrial areas are now adjacent to residential estates or commercial complexes. From the urban planning point of view, changing the function of the industrial areas seems to be a necessity. Recently, there has been no shortage of examples of these types of transactions. In August 2022, Arche Group purchased the site of the former Szombierki heat and power plant in Bytom. On nearly 18 hectares of land, the investor plans to implement a city-forming project with a hotel and catering establishments. In September 2021, White Stone finalized the purchase of 20 hectares of land in the vicinity of ArcelorMittal steelworks in Warsaw. The company wants to build a mixed-use project with apartments and offices there. In August 2021, Okam acquired the FSO industrial plant in Å»eraÅ„, on the other side of the Vistula river. So far, the facility where our agency recommercialized over 150 thousand sq m. of space last year, is used for storage and production purposes. A good example of the revitalization of industrial area can also be Warsaw district of Wola, where modern quarters of the city have been erected to replace the post-industrial buildings. Praga is also changing in a similar way, with such projects as Koneser, Bohema, Port Praski, Soho, and a new complex that replaced the PZO factory. Chances and risks An important element that will affect the dynamics of real estate conversion in the upcoming years will be the final shape of the act that the Ministry of Development and Technology is working on. The new bill is intended to facilitate the conversion of commercial and office buildings into apartments, regardless of the zoning plan in force in a given location. These types of investments are associated with higher costs related to the demolition of buildings and extended implementation time. It is a process that takes three to eight years. On the other hand, the rental income generated by the property during the preparation for change of function significantly improves the financial parameters of these long-term projects, balancing the risk. The supply of attractively located plots of land is getting smaller every year. Therefore, we expect that in the upcoming years more and more projects with transformed functions will be implemented. It is already clear that investors are often analyzing the potential of assets in this respect. At the same time, more and more projects require consulting support in the field of leasing. Transformations of functions on the real estate market are a hot trend, however, planning and legal and administrative restrictions will verify the final number of such projects, primarily on the basis of achievable margins for developers. About Walter Herz Walter Herz company is a leading Polish entity operating in the commercial real estate sector across the country. For ten years, the company has provided comprehensive and strategic investment consulting services for tenants, investors, and real estate owners across the country. Walter Herz experts assist investors, property owners, and tenants. They provide full service to companies from the private and public sectors. Walter Herz advisors support clients in finding and leasing space and provide consulting in implementing investment projects in the warehouse, office, retail, and hotel sectors. The company is based in Warsaw and runs regional branches in Cracow and Tri-City. Walter Herz has created the Tenant Academy, the first project in Poland, which supports and educates commercial tenants from all over Poland by organizing specialized training meetings. The agency introduced the Code of Good Practice to ensure the highest ethical level of services.

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