What is the impact of investment funds on the industrial market?
29 april 2020
The industrial market in Poland has been growing at a very quick pace for several years, with record-breaking transaction sizes, new warehouse locations and growing net take-up levels. The focus is usually on demand as everything starts from tenants looking for warehouse and manufacturing space for their business operations. The warehouse market has been led in recent years by the e-commerce industry, which has been reporting annual growth of over 20%. Other leading sectors are logistics and distribution, household appliances, the automotive sector and manufacturing.
Warehouses as an investment product
Warehouse space requirements translate into demand that needs to be met. This leads to new projects breaking ground – usually developed under pre-lets or on a speculative basis in prime locations. More than 6.5 million sq m of warehouse space was built on the Polish market in the last three years, accounting for 37% of the nation’s total stock. New class A industrial space becomes an investment product not only after it has been let, but often even before that.
Why invest in warehouses?
Although the office and retail sectors in Poland provide attractive investment opportunities for overseas investment funds, warehouse properties have also been in demand in recent years. Poland’s key strengths include its geographical location, relatively strong economy, high-quality properties offering better rates of return compared to Western markets, and stable or growing demand – all this attracts overseas capital to Poland.
Investment funds have been targeting either retail or office properties for years. The last five years have seen steady growth in interest in the warehouse market, driven by several key factors, including the following:
- the disruption on the retail market, making it less attractive for investors;
- the focus on portfolio diversification (“What else can we add to our shopping centres and offices?”);
- the stability of operations in industrial schemes (most leases are for five years, but some are made for seven or ten years or even longer);
- yields at 5.70-6.00% - higher than in other markets (4.30% for offices and 4.75% for retail properties); and
- the growth momentum of the Polish warehouse market, including the record take-up levels in the last three years.
Investment funds act as a catalyst for the warehouse market
Above all, the relationship between the warehouse market and investment funds is a two-way street. The strong interest of investment funds generates demand for warehouse products, thereby leading developers to commence new projects.
As there is a large group of potential buyers of an end product, developers will deliver projects more quickly. They are driven to build more since the end product - delivered and commercialised up to relevant standards - can find a new owner relatively easily.
Investment funds therefore act as an additional catalyst for the warehouse market.
How strong is the interest of investment funds?
2018 was the peak year with the total transaction volume at EUR 1.79. 2019 ended with EUR 1.54 billion. The beginning of 2020 was exceptional for the industrial sector, which turned over more than EUR 1 billion (EUR 1,023 million), accounting for 58% of the total transaction volume in the first three months of this year (ahead of offices with EUR 618 million and retail with EUR 108 million).
The most active investors on the Polish warehouse market include investment funds from the US, Asia (China, Malaysia, Singapore, South Korea), South Africa, and Germany.
In the face of COVID-19
It remains to be seen how the industrial market will get through the difficult pandemic situation. It has been doing quite well so far, especially in comparison with other commercial real estate sectors. The overall picture is, however, more complex. Some tenants are struggling with huge business difficulties. Some are reporting moderate falls or are balancing less profitable business operations with those that will perform better in the current situation. On the other hand, some companies are growing and developing at a much faster pace than ever before. One thing is certain: the current situation will have a significant impact on how companies operate - some will go through a period of transformative disruption. So, the growing interest of overseas investors in the Polish warehouse market appears justified. Therefore, sectoral changes and the shift of investment funds’ focus towards the industrial sector are believed to be very likely.
As overseas investors play a major role on the Polish warehouse market and are a catalyst for its growth, whether these predictions come true will be key. Sentiments are changing rapidly though and it is difficult to accurately predict how the market will behave in a few months’ time. Today, while some investors are moving forward with deals in the pipeline, some have taken a ‘wait-and-see’ approach in their strategies. There is also a growing number of bargain seekers. Prime industrial assets in good locations and with strong covenants and long-term leases will certainly fare well - Joanna Sinkiewicz says.
That being the case, investment confidence is now the strongest on the warehouse market.
It is important to note that the current crisis does not have its roots in financial markets which were very strong before the pandemic outbreak and continue to be resilient. Governments and international organisations have taken swift and firm action to fight the pandemic and stimulate the economy by cutting interest rates and providing bailouts to troubled companies - all this is expected to relatively quickly boost demand that currently remains limited. We expect commercial real estate, and industrial properties in particular, to attract strong investor interest in the second half of 2020.
Polish warehouses on the investment map of Europe
Poland has a unique opportunity to play an instrumental role in shaping the European warehouse market. The changes that appear almost inevitable will shift the focus towards business operating costs, protection of supply chains by reducing the dependence on Asian countries, and stockpiling.
Poland is ideally positioned to respond to such changes. With its relatively low warehousing costs compared with Western Europe, geographical position, strong road network, seaports, many airports and a large pool of high-skilled labour, Poland has already become a major European distribution hub. At the time of the current pandemic, some companies are already considering moving distribution or manufacturing operations to Poland to bring costs down. We believe this trend will continue - Paweł Partyka adds.
This is also very important from the investment market’s perspective. Investment funds rely on the ‘follow the occupier’ principle in formulating investment strategies. We are therefore confident that the growing occupier demand for warehouse and manufacturing space in Poland will encourage investment funds to increase their allocations to industrial real estate on the Polish market.
Authors of the article:
Joanna Sinkiewicz, Partner, Head of Industrial & Logistics Agency
Paweł Partyka, Partner in Capital Market Department