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Trends Radar: real estate sector waiting for stabilisation

Ewa Derlatka-Chilewicz • 10/01/2024

Turning the tide of the Polish real estate

The fundamentals of the Polish real estate market remain strong, even though 2023 has been another year of a range of challenges for each sector. Lower economic activity, still high project financing costs and rent indexation may have caused distress, but towards the end of the year there are early signs of stabilisation. Moderately positive sentiments are expected to carry into 2024, which is anticipated to see Poland’s macroeconomic situation improve. In the longer term, the property market will be shaped by megatrends, but above all by ESG and new technology. These are the key findings of the fifth edition of Cushman & Wakefield’s ‘Trends Radar’ report, which presents an outlook and growth trends for the Polish real estate market.
2023 has witnessed many significant changes which are expected to have a considerable impact on both the Polish economy and the real estate market in Poland. The outlook for 2024 remains moderately positive in many respects, bolstered by anticipated improvements to key macroeconomic indicators and, subsequently, a recovery in the property market. The real estate market is expected to be shaped in the long term by several megatrends, including sustainability which will fuel demand for energy-efficient and smart buildings, renewable energy and eco-friendly building materials. New technology and AI are also on the radar as they are likely to revolutionise the world as we know it, comments Ewa Derlatka-Chilewicz, Head of Research, Cushman & Wakefield.

Stabilisation on the horizon for the office, retail and industrial sectors?

The current situation on the Polish property market is essentially marked by diversity. The office sector is experiencing a slowdown in development activity, continued upward pressure on rental growth and - most importantly - a gradual recovery in demand. Cushman & Wakefield notes that the number of office deals on the Polish office market is already up by nearly 33% compared with the peak year of 2019. This is evidence of high liquidity on the office leasing market despite the ongoing economic downturn.

Retailers - similarly to office tenants - will see rents indexed annually by inflation. In early 2024, rental growth is expected to reach around 5%, 5 pp less than a year ago. Positive economic growth predicted for 2024 is likely to boost consumer sentiment. This will most likely be reflected in increased consumer spending and higher retail sales in 2024, which is expected to tangibly improve retail tenant, landlord and investor sentiment.

The Polish industrial market is witnessing green shoots of recovery after a marked slowdown in the first half of 2023. In the third quarter of the year, total take-up reached 1.5 million sq m - by far the best result for occupier activity this year. 2023’s total new supply is expected to reach nearly 4 million sq m, with Poland’s industrial stock, which surpassed 31 million sq m in September, recording double-digit growth over the year.
Looking ahead, we expect to see tenants and landlords in each property sector redesign their business strategies to better respond to hybrid working trends, changing consumer sentiment and growing ESG regulatory pressure. Poland is already a mature market, which means that some properties may be past their prime and no longer meet the current needs of their users. That’s why we expect repositioning, reformatting and upgrading of older buildings to gather pace in the long term, explains Krzysztof Misiak, Head of Cushman & Wakefield Poland.

Residential market sees prices rise

Despite robust development activity and a boom in the residential market in recent years, Poland continues to face a shortage of dwellings which is estimated at 2.4 million. At the same time the overcrowding rate in Poland - defined as a percentage of the population living in overcrowded flats - is 36.9% and is higher than the EU average by 19.4 pp. Rising rents and flat

prices will only make things worse. In addition, 2% Safe Mortgage, a government-run scheme for first-time buyers, pushed up the prices of smaller flats further.

The PRS is expected to grow in the long term, says Cushman & Wakefield, and to increase its share in the CEE investment market from 5% to 10% in the next decade, thereby significantly improving the availability of rental flats and helping bridge the housing gap in Poland. The development of co-living, student accommodation and mixed-use projects is also expected to gather momentum.

The fundamentals of the investment market remain strong

High volatility and uncertainty levels are the key trend shaping the commercial real estate landscape and impacting the investment market.

The events of the last three years and high interest rates have caused a slowdown in buying activity, forcing market players to capture alternative investment opportunities to generate relatively higher returns. This has boosted interest in higher risk projects, such as value-add and development projects, distressed assets and repriced properties. The fundamentals of the Polish investment market remain solid, but it needs some time to regain equilibrium, adds Krzysztof Misiak.

ESG as the common denominator for all real estate sectors

One of the strategic areas of focus for the entire real estate market in Poland and beyond is sustainability and ESG, and related regulatory pressure.

Market players are changing their perception of ESG as they become more informed and realise that properties with high sustainability credentials will be able to generate higher returns on investment compared to other assets. That is why ESG will become an integral part of investment fund strategies. Both tenants and investors - especially in the office sector - are increasingly targeting the most modern buildings in prime locations. The flight-to-quality trend is shaping up to be the defining theme of the real estate sector in the coming years. Hence the growing importance of developing market standards and harmonizing regulations, including with regard to the impact on property values of owners taking action or failing to act, concludes Krzysztof Misiak.

The Polish hotel market has bounced back

According to Trends Radar, demand on the Polish hotel market has been on a steady upward trajectory in recent years. For example, in 2022 the number of nights rose by 23% year-on-year while 2023 is expected to finish with a year-on-year increase of 5%.

“These positive trends have been mostly driven by the increase in domestic demand while a recovery in the number of international nights is expected in 2024. Next year, the number of nights sold in Polish hotels is expected to surpass the 2019 level by 7%,” says Maciej Prończuk, Hotel Market Expert, Cushman & Wakefield.

A further recovery in the Polish hotel market will also largely depend on an increase in business trips. While Oxford Economics expect business demand in Poland to bounce back to pre-pandemic levels in 2027, there are signs this might be notably earlier. Warsaw hotels have already reported an increase in corporate demand. At the end of Q3 2023, the number of room nights and revenue reached 81% and 98% of 2019’s levels respectively. Meanwhile, conference demand increased by nearly 20% compared with the same time last year. Although it remained 25% below the 2019 level, revenue was only 5% below 2019’s figure.

Meanwhile, the future of the market will be marked by retrofitting and ESG - due to the growing expectations of hotel guests, increased operational costs and the need to meet ESG requirements, more and more hotel investors are deciding on upgrading their existing installations, systems and procedures, and on undertaking investments in new technologies. ESG aspects represent a challenge but also an opportunity, as sustainability policies can have a positive impact on revenues and notably reduce operational costs.

“ESG is also becoming an important criterion in lenders’ and operators’ decision-making processes. According to Cushman & Wakefield’s ‘Hotel Operator Beat H1 2023’ report, 42% of surveyed operators are likely to offer higher rent and 30% to offer more key money for hotels with the highest sustainability and ESG credentials,” concludes Maciej Prończuk


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