Macroeconomic background

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1 INVESTMENT MARKET UPDATE Polish assets draw investors attention Poland, 215 March 216 Contents Macroeconomic background 2 Investment volume 3 Preferred locations 5 Source of capital 5 Yields 6 Outlook 6 Definitions was another record year for the Polish investment market, with EUR 4.12 billion having been transacted in the commercial real estate sector outperforming the result from 214 by 28%. Unlike previous years, the retail sector dominated transactions during 215, accounting for over 54% of the total value of all transactions. Retail investors were focused on assets located in the major agglomerations and cities with 1,-2, inhabitants. The office sector, with reported transactions of EUR 1.36 billion, accounted for 33% of the total investment volume. Property buyers were attracted mainly by the high-class schemes situated in major regional cities which have become favourable destinations for BPO/SSC occupiers. Since 212 the industrial sector has gradually been gaining importance, with record investment volumes reached in 214. The past year has seen a slowdown in investments in this sector and, with EUR 467 million transacted, accounted for just 11% of the overall share of investment volume, down by 43% on the previous year. Portfolio assets are invariably preferred by most active purchasers. Yields for prime retail assets in major cities compressed to 5%. This is clearly triggered by the increasing attractiveness of the retail sector for investors seeking to diversify their property portfolio. Prime office yields dropped slightly below 6% at the end of 215 settling at 5.75%. Finally, prime yields for industrial properties dropped to 7%-7.5%. Figure 1 Investment volume and number of transactions Contacts Kamila Wykrota Director, Consulting & Research kamila.wykrota@cushwake.com Magali Marton Head of EMEA Research magali.marton@cushwake.com Investment volume (EUR mn) Number of transactions cushmanwakefield.com INVESTMENT MARKET UPDATE

2 Nov-15 Poland, 215 Macroeconomic background Economic growth and inflation According to the National Bank of Poland (NBP), the Polish economy grew by 3.4% in 215, growing further than the previous year (3.2%). GDP growth was driven mainly by strong domestic demand, bolstered by the increase in private consumption levels of 3.1% and a dynamic surge in investment (by 6.9%). The Consumer Confidence Index also grew in the analysed period, reaching -3.9 in November, which was the best result recorded since September 28. Another factor that significantly influenced economic growth in Poland was the ongoing recovery in EU member states, which continue to be the biggest recipients of goods and services produced in Poland. In the years 216 and 217, our economy is expected to continue to grow. According to NBP s latest forecasts, Polish GDP will reach 3.3% and 3.5%, respectively. NBP reports the 215 level of deflation in Poland as.8%, mainly due to the decrease in the prices of food and fuels. In March 215, the Polish Monetary Council (RPP) decided to further decrease interest rates in order to stimulate new loans and private consumption. Between January 212 and March 215, the reference rate fell from 4.5% to 1.5%. No changes were made later in the year. In January 216, it was decided by the RPP to keep interest rates at the same level. Foreign direct investment (FDI) A positive economic outlook and the relative political stability are encouraging foreign investment in the Polish market, which is reflected in the growing FDI inflow. In 214 the FDI flow into Poland amounted to nearly EUR 9 billion, exceeding by over four times the result recorded in the previous year (EUR 2.6 billion). The majority of foreign capital invested in Poland (nearly 9) came from the European Union. Exchange rates Figure 2 GDP growth and inflation 8% 7% 6% 5% 4% 3% 2% 1% -1% -2% Source: National Bank of Poland, (f) forecast Figure 3 GDP growth Exchange rates (annual average) 5, 4,5 4, 3,5 3, 2,5 2, EUR/PLN Source: National Bank of Poland Inflation USD/PLN At the end of 215 the Polish zloty depreciated against both the Euro and the US dollar, achieving the level of 4.26 PLN/EUR and 3.94 PLN/USD as of the end of the year (average rates for 215 amounted to 4,18 PLN/EUR and 3,77 PLN/USD). The weakening of the Polish currency resulted both from internal (political situation) and external factors (including the raising of interest rates by the FED and the quantitative easing program introduced by the ECB). Labour market Figure 4 Unemployment rate and average monthly salary (PLN) % 3 12% 2 8% In 215 the Polish labour market improved, which is reflected by the decrease in unemployment rates to 9.6% in November, down from 11.5% at the end of 214. At the same time, the average gross salary increased by nearly 5% (from PLN 3,98 to PLN 4,164). 1 Average monthly salary Unemployment rate 4% Source: Central Statistical Office cushmanwakefield.com INVESTMENT MARKET UPDATE 2

3 Poland, 215 Investment volume The largest investment volume since 26 The commercial real estate investment volume in Poland in 215 amounted to EUR 4.12 billion, representing a 28% increase on the previous year. Lower investment volumes recorded in Poland in the first half of 215 was a result of a lack of large transactions which had been dominant in the first half of recent years. The average transaction concluded in the first half of 215 amounted to only EUR 23 million, compared to the second half of 215 EUR 63 million. In terms of the number of transactions concluded, 215 recorded the highest number since purchase and sale agreements were signed. The positive economic outlook is influencing investors perception of the Polish real estate market as favourable and attracting new global players. Increased activity in regional office markets In 215, total transaction volume reached around EUR 1.4 billion, a 19% decrease on 214. This underperformance was the effect of the shrinking supply of attractive and fully leased properties in Warsaw. The record-high provision of new office space for more than a year brought rents down and pushed vacancy rates up, which discouraged investors interested primarily in investment security. Consequently, the office transaction volume in Warsaw fell by 58% compared with 214, with the largest deals being the acquisition of 5 of shares in Empark by Immofinanz for EUR 9 million and 5 of shares in Poleczki Business Park by UBM for EUR 8 million. Investor focus is increasingly shifting to regional cities, which in 215 outperformed Warsaw for the first time ever with trading volumes rising to EUR 823 million, which doubled the figure recorded in 214. There were 17 transactions in total, the largest included Echo portfolio of office properties for EUR 125 million (as a part of Echo acquisition by Griffin RE), Dominikański Square in Wrocław sold to Union Investment for EUR 117 million, B4B in Kraków transacted as a part of TriGranit acquisition by TPG for EUR 95 million, Enterprise Park A-C in Kraków purchased by Tristan Capital Partners for EUR 66 million and Green Horizon in Łódź bought by Griffin Group for EUR 65 million. Office transactions took a 33% share in the total investment volume with 35 assets purchased at EUR 39 million average price. Compared to previous years, smaller transactions below EUR 5 million dominated the market. Only ten agreements were concluded for sale of assets below 1, sq m office area. Investor activity was concentrated during the second half of 215, when 21 transactions accounting for 73% of total investment volume took place. Figure 5 Investment volume by sector Retail Office Industrial Mixed use Other Table 1 Major asset transactions in Poland in 215 Sector Office Retail Industrial Figure 6 Property / Location Dominikanski Square / Wrocław B4B Bonarka for Business / Kraków EMPARK (remaining 5 shares) / Warsaw Centrum Riviera / Gdynia Stary Browar / Poznań Bonarka City Center / Kraków Amazon Warehouse / Wrocław MLP Tychy / Tychy Europolis Park Błonie / Warsaw suburbs Office investment volume by region Warsaw Regions cushmanwakefield.com INVESTMENT MARKET UPDATE 3

4 Poland, 215 Retail market targeted by investors In 215 investment in the retail sector reached a record-high EUR 2.22 billion and was the dominant driver of the overall real estate investment volume in Poland. It has more than doubled compared to 214 s figure. 214 s weakened activity in the retail investment sector was to a large extent the result of low available premium class assets offered for trading. Investors' appetite, whilst strong, has been curbed by a deficit of premium quality stock for sale. Investor activity was concentrated during the last quarter of the year, when 12 transactions accounting for 74% of retail assets investment volume took place. The largest transaction was the acquisition of Riviera by Union investment for EUR 291 million. Other notable examples include the acquisition of Bonarka City Center by TPG for EUR 285 million, Stary Browar by Deutsche Asset & Wealth Management for EUR 285 million, Galeria Sfera by CBRE GI for 23 million, as well as the acquisition of Blackrock Portfolio comprising Karolinka in Opole and Pogoria in Dąbrowa Górnicza by Rockcastle for EUR 221 million. Compared to previous years, smaller deals under EUR 5 million dominated the market. Purchase transactions of largescale projects with gross lettable area larger than 5, sq m accounted for 55% of the overall retail investment volume. Decrease in industrial investment volumes but positive outlook expected Following 214 s record year, with total transaction volume reaching EUR 819 million (supported by large portfolio deals), 215 witnessed a 43% decrease in volume invested during the year, to EUR 467 million, reaching similar levels to those reached in 212 and s underperformance was the result of the scarcity of portfolio assets for sale in the Polish commercial real estate market. Industrial transactions accounted for 11% of the overall investment volume, with 16 assets purchased at an average price of EUR 29 million. The majority of transactions occurred during the second half of 215, with 68% of the overall investment volume secured in the third and fourth quarters of the year. The largest transaction was the sale of Amazon Warehouse in Wrocław by Amazon to GLL for EUR 7 million. A significant share in the investment activity on the warehouse market also came from the German fund DEKA, which acquired MLP property in Tychy for EUR 63 million and Europolis Park Błonie bought by American fund P3 for EUR 56 million. Investment activity is expected to step up in 216, with a larger number of deals and larger lot sizes expected to come on the market. This is due to the increasing importance of the logistics sector in the Polish economy and overall increased demand for high quality warehouses. The majority of new supply being built-to-suit developments like Amazon assets or warehouse properties with secured high levels of pre-lets. Figure 7 Investment volume in the retail sector by location Figure 8 Annual volume of retail transactions according to asset size Figure Multi-city/portfolio transactions Other agglomerations > 4, inh. 1 Annual industrial transaction volume by type (EUR million) % 17% 29% 26% Other cities < 4, inh. Warsaw agglomeration over 7, sq m GLA 5, - 69,999 sq m GLA 2,-49,999 sq m GLA below 2, sq m GLA portfolio transactions Portfolio deal Single deal cushmanwakefield.com INVESTMENT MARKET UPDATE 4

5 Poland, 215 Preferred locations Regional markets attract investors For the third year running, the majority of the investment volume related to transactions occurred across regional cities. In 215 only EUR 631 million, accounting for 15% of the total investment volume, took place in Warsaw compared to 41% in 214. This, together with increasing supply of new attractive office, retail and warehouse assets delivered in regional cities are signs of a more mature market. Approximately 39% of the overall office volume transacted in 215 took place in Warsaw. The attractiveness of this market derives from its maturity, different and more attractive tenant profile as well as the fact that it is being considered as a gateway city for Poland. Among the most popular in 215 were Kraków where four project were sold for EUR 248 million (18% share in total office volume), Wrocław with three transactions (EUR 162 million, 12% share). While prime retail schemes in the largest Polish agglomerations were the most sought-after asset class in the last few years, investor interest has shifted towards smaller projects located in regional cities. The best secondary class retail assets with established positions in their respective regional markets have gradually drawn higher interest from potential investors, thus compressing yields slightly. Regional cities garnered major retail investor interest, 24% of retail investment volume was traded in cities with 1,-2, inhabitants, while Warsaw market has experienced only five minor transactions totalling to EUR 43 million (2% of total retail investment). Source of capital American funds dominate the Polish investment market Throughout the whole of 215 international investors were responsible for approximately 93% of all acquisitions in Poland. Polish companies purchased properties with a total value of EUR 273 million, with the most active domestic players including Reino Partners, Bergold Holding, PHN and Octava NFI. The Polish investment market in 215 was dominated by investors with American origin. Spending almost EUR 1.75 billion, their share in total transaction volume reached 42%. Griffin Real Estate, TPG and CBRE Global Investors were the most active players among US funds focusing primarily on the retail assets. Similarly to the last few years, German investors were among the most active buyers - share of their purchases accounted for 26% driven by transactions of Union Investment and DAWM. US investors accounted for 43% of the office transaction volume recorded in 215 with EUR 578 million increasing their share in the Polish investment market by 8 points compared with 214. The share of German investors in the office transaction volume fell by 35 pp. to 13% similarly to Polish investors market share. Figure 1 Total investment volume in 215 by the location 16% Figure 11 Office transaction volume in 215 by asset location 6% 9% Figure 12 16% 15% 53% Foreign investment by nationality % 12% 5% 5% Warsaw 18% 39% Warsaw agglomeration Other major agglomerations > 4, inh. Other cities < 4, inh. Multi-city/portfolio transactions Kraków Wrocław multi-city portfolio transactions Łódź Poznań Katowice Tricity German American Austrian Polish Rest of Europe International other / unknown cushmanwakefield.com INVESTMENT MARKET UPDATE 5

6 Poland, 215 The retail investment market was dominated by American, German and South African entities. US investors accounted for approximately 43% of the transaction volume recorded in 215, significantly increasing their share in the Polish market by 32 points compared with 214. The share of German investors in the deal volume increased by 19 points to just over 31%. South African fund Rockcastle, a new entrant to the market, contributed approximately 15% to the total transaction volume in four transactions. In 215 there were no transactions concluded by Polish investors and the industrial investment market was very much dominated by foreign investors. Similarly to 214, US capital drove the industrial sector with increased activity resulting in almost 5 of the transacted volume. The major American players included Hillwood, WP. Carey and Gramercy Property Trust. At the same time, the share of German investors recorded a slight increase to the level of 32% of total investment volume mainly due to the acquisitions of DEKA and GLL. Figure 13 Prime yields in Polish investment market 1 9% 8% 7% 6% 5% 4% Office Retail Industrial Yields Yields are compressing Throughout 215 yields for prime assets have experienced slight compression. At the end of 214 prime office yields in Warsaw stood at 5.75%, having fallen from 6.25% at the end of the previous year. High investment activity is pushing prices up outside Warsaw with office prime yields in regional cities falling below the 7% mark, to 6.5%. High demand for attractive retail properties, combined with limited supply, led to a fall in prime yields compared with the previous year, standing now at just over 5% for the largest cities and at 6.5% for medium-sized ones. Prime yields for industrial properties dropped below 7.5% for the single buildings and 7% for larger assets or portfolios over the last twelve months. Table 2 Yields for prime and secondary assets in the office and retail sectors - forecast Sector Yields Office Prime 6.25% 5.75% Office - Secondary 7.25% Retail - Prime 5.75% 5. Outlook Abundant pipeline Yields for prime assets in all sectors may experience further compression. It is expected that both domestic and international capital remain very active in the coming quarters targeting prime assets as well as value-add/opportunistic products, being enticed by attractive yields and an expectation of reemergence of rental growth on the back of robust occupier demand. cushmanwakefield.com INVESTMENT MARKET UPDATE 6

7 Poland, 215 Definitions Investment transaction / Subject of the report Inclusion in the statistics Property type Refers to the purchase of commercial real estate for the purpose of receiving an income or rent. Covers purchases of properties with commercial use where value exceeds EUR 1 million. Determined by the date of signature of contract. Cushman & Wakefield tracks commercial property transactions made primarily in the office, retail, industrial and mixed use sectors. Land sales are not recorded. Volume of transactions Aggregate of total purchase prices agreed for the registered purchases. Yield The attainable prime yield for top of the range properties is given. This is based on the annual rental income and the purchase price. Purchaser (vendor) type Classification of purchasers and vendors by type enables us to track trends in transactions and also to assess the type of capital committed to property investments. Purchaser/Vendor Type and subtype definitions are as follows: Institution: financial institutions/banks, pension funds and insurance companies. Private Property Company: companies and developers, whose principal activities involve the development, buying and selling of commercial real estate but which do not have a stock exchange listing. Private Property Vehicle: non-listed investment vehicles whose principal activities involve the development, buying and selling of commercial real estate. Private investor: private individuals. Quoted property company: companies and developers, whose main activities involve the development, buying and selling of commercial real estate that is listed under Real Estate on a stock exchange. Quoted property vehicle: listed real estate vehicles i.e. funds and tax efficient structured vehicles, whose main activities involve the development, buying and selling of commercial real estate Corporate: companies whose main activities do not involve development or investment in real estate. cushmanwakefield.com INVESTMENT MARKET UPDATE 7

8 EMEA John Forrester Chief Executive +44 () john.forrester@cushwake.com Office Agency Richard Aboo richard.aboo@cushwake.com Consulting & Research Kamila Wykrota kamila.wykrota@cushwake.com Valuation Mark Freeman mark.freeman@cushwake.com Poland Charles Taylor Head of Poland charles.taylor@cushwake.com Retail Agency Renata Kusznierska renata.kusznierska@cushwake.com Asset Services Christopher Rasiewicz christopher.rasiewicz@cushwake.com Occupier Services Ian Scattergood ian.scattergood@cushwake.com Poland Alan Colquhoun Chair alan.colquhoun@cushwake.com Industrial & Logistics Agency Tom Listowski tom.listowski@cushwake.com Capital Markets James Chapman james.chapman@cushwake.com Project Management & Consultancy Andrew Frizell andrew.frizell@cushwake.com Disclaimer This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, Cushman & Wakefield can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to Cushman & Wakefield. 216 Cushman & Wakefield LLP. All rights reserved. To see a full list of all our publications please go to cushmanwakefield.com or download the Research App Cushman & Wakefield (Lumen) Złota 59 Warszawa, -12 tel fax info.poland@cushwake.com Cushman & Wakefield (Metropolitan) Plac Pilsudskiego 1 Warszawa, -78 tel. fax info.poland@cushwake.com cushmanwakefield.com