- Anna Koval
Perspectives on real estate investment in Poland
Rising development activity during 2017 continued to add to the already substantial growth seen in office space across Poland and Warsaw over recent years, although the construction pipeline going forward does now seem slightly more modest in comparison. In any event, occupier demand showed some more promising signs, accelerating during the closing stages of last year. With tenant enquiries rising at the sharpest pace since 2010, a greater rate of absorption has led to a more evenly balanced supply demand dynamic than has been the case for some time. Nevertheless, given the overhang of previous years, even prime office rents are expected to do little more than tread water of the course of 2018, while projections continue to point to falling rents in secondary locations. Across other market sectors, rental growth prospects over the coming year seem firmer for prime industrial and retail space, although, again, rents may slip in secondary markets.
Despite the somewhat mixed picture regarding the rental outlook, commercial real estate across Poland continues to attract significant investment demand growth. Just recently, this growth has become more broad-based in nature, with foreign interest now gaining momentum across all sectors. As such, capital value projections over the year ahead are positive, albeit this is generally confined to assets in prime locations. The perception that commercial property in Poland represents fair value for investors, particularly in relative terms compared to other European markets, appears to be one of the forces under pinning demand for now.
The strengthening macro environment over the last twelve months has been another factor behind the improvement in sentiment toward the real estate sector. Economic growth is expected to have come in close to 4,5 percent during 2017 as a whole, compared with 2,9 percent in the previous year, representing the fastest pace of expansion since 2011. Private consumption has in large part fulled this pick-up, aided by a tightening labour market - the unemployment rate has fallen by more than 1 percent in the past twelve months - and significant real income gains as a result.
Going forward, the economy looks set to retain a solid degree of impetus over 2018, even if growth may ease a fraction. Indeed, stronger investment is likely to at least partly offset a somewhat slower rate of consumption growth, while global trends will continue to provide assistance, especially the brightening macro backdrop across the euro area. This should ensure economic fundamentals continue to play a supporting role in attracting demand within the commercial real estate market.
That said, as labour shortages continue to drive wages higher, inflation could breach the Polish National Bank's (NBP) 2,5 percent target in the latter half of the year. In order to curb this pressure, the PB could be prompted into beginning the process of normalising monetary policy. Consequently, tighter policy may prove something of a headwind for the economy.
Another risk as far as the property market is concerned is that a sharper than expected rise in bond yields could make values seem relatively stretched, potentally causing an adjustment in investor behaviour down the line. Even so, any rate hikes are likely to be limited and gradual, while recent PB comments continue to suggest a reluctance to raise rates too far in advance of the ECB. Although the ECB is widely expected to wind-down quantitative easing this year, it remains unlikely (on the basis of recent rhetoric at least) that rates will be raised while underlying inflationary pressures are still muted.