Office demand grows in Poland's regions

When pan-European developer Skanska sold a building in its Krakow office development Kapelanka 42 to a Polish investment vehicle belonging to Reino Partners for €29m this month, it was the latest sign of a rapidly growing trend.

Poland's regional cities, long overlooked by property investors in favour of Warsaw, have discovered that small can sometimes be beautiful.

The development was Skanska's first scheme in Krakow and the building houses back-office operations for UK retailer Tesco, as well as software firm Apriso and IT company Sygnity.

International businesses that operate worldwide can choose to base many of their backroom staff anywhere, and Polish regional cities are becoming increasingly popular.

Thanks to strong universities, they have substantial numbers of well-educated, multilingual young people, and cost-wise they have become competitive. "It's only recently that places such as Krakow are seeing activity in office demand and development, being driven by back-office [services], with quite a lot of action coming back [to Poland] from east Asia," says Robert Martin, head of central Europe at fund manager Europa Capital.

"We are seeing investment activity in the regional cities. We have been waiting for 15 to 20 years for the regional office market to emerge," he adds.

As a result, investors are clamouring for assets in Krakow - and Katowice, Poznan, Gdansk and Wroclaw.

"For the first time this year, Krakow will have a higher volume of transactions than [previous regional leader] Wroclaw," says Pawel Debowski, a partner at law firm Dentons.

"Investors need long-term leases with high-quality tenants, and those buildings will find five to 10 buyers per property."

Although the emerging regional office market is causing the most excitement, it is just the tip of an iceberg.

A "wall of money" has been flowing into the Polish real estate market across the board since the start of this year, according to Hadley Dean, a managing partner at estate agent Colliers.

"Investors' appetite is very strong and the weight of money looking for assets is immense," he says. "It's not just offices - retail, logistics, everything is hot at the moment."

It is the office market that dominates investment activity, however. Polish office investment deals totalled €2.1bn in the first three quarters of 2014, up 8 per cent year on year, according to figures from property advisers CBRE. Neither retail nor logistics came even close to the €1bn mark.

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Investors' appetite comes despite - or, some argue, partly because of - the lingering tensions to Poland's east.

"US investors are nervous about what's happening in Ukraine," Mr Martin says. "Tenants generally are nervous about making any plans, people don't know what's going to happen and feel naturally cautious. The fact that the eurozone economy has faltered a little in recent months also makes people cautious."

But the growing tensions with Russia mean that western Europe will hug Poland more closely, others suggest.

"I think we can be a beneficiary of this [Russia] situation," Mr Debowski argues. "Our legal and political situation is stable, the population is growing. We are looking at a record year for investment activity, it is busier than 2007, and at that time I thought it wasn't possible to be busier."

This hubbub of activity may pose problems in the coming years, however. In Warsaw in particular, overenthusiastic developers risk killing the golden goose by throwing up too many buildings, outpacing tenant demand.

"If you are a large tenant [looking for space], you will have fun during 2015 and 2016," Mr Debowski says.

Colliers' Mr Dean agrees: "The development community has got a little overexcited, has built a lot of stock and there's a lot more in the pipeline. Tenants will use this as a negotiating point."

But all is not lost for developers: good-quality new buildings are in a better position to compete than older, shabbier rivals, suggests Mike Atwell, a senior director at CBRE.

He says: "People are moving from older buildings into better quality space. Landlords are being competitive and you can get some very good deals, and occupiers are therefore making cost savings."

It remains to be seen how long the capital's office-building boom will continue, but developers may be pulling back while a growing number of people in Warsaw still need homes.

Mr Atwell says: "The main developers are just beginning to consider the potential of office sites for residential [purposes], and residential developers in the past six months are starting to outbid office developers for some sites."

With Poland's economy continuing to grow, the likelihood is that any construction oversupply will be only a temporary mismatch.

"It's a two-year thing, not a five-year thing," argues Mr Dean. "Occupier demand will catch up."

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