Introduction

The Polish real estate investment market in 2023 was predominantly characterised by the consequences of the Russian invasion of Ukraine as well as post-pandemic economic turbulence ‒ both of which brought a significant market slowdown and uncertainty.

The above-mentioned factors, to an extent affecting the wider European and global markets, have resulted in:

• an increase in energy, materials and labour prices;
• a decline in GDP of 0.21% year-on-year (which has now stabilised);
• high inflation (Harmonised Index of Consumer Prices, or HICP) of 10.82%;
• a drop in domestic consumption; and
• increased financing costs.

Consequently, the volume of commercial real estate transactions in 2023 decreased by 68.1% year-on-year to EUR1.8 billion.

According to the latest market forecasts, the unfavourable economic trends of 2023 are expected to reverse (although predictions vary as to how long that process will take) and the outlook for the second half of 2024 brings cautious optimism to the Polish investment market. This is related to the anticipated growth in household consumption, rising incomes and a decrease in global and European interest rates (the Polish investment market is largely financed in euro currency). The volume of transactions (with the industrial and logistics sectors most in demand) is predicted to increase, with intensified activity in the second half of the financial year. Although the volume of transactions may transpire to be lower than the record volumes of pre-pandemic times, investment activity is predicted to remain high in terms of the number of deals but to be dominated by smaller projects.

In addition, the new Polish government ‒ elected in Q4 of 2023 ‒ has announced various new economic programmes as well as amendments to the law and tax system. These are mostly designed to tackle the impact of high inflation, stimulate economic growth and improve conditions on the Polish real estate market (in particular, the residential market).

By way of example, the new government intends to resume work on establishing a legal framework for REIT funds ‒ ie, real estate funds with preferential tax treatment that invest in various types of properties and pay dividends to private investors with certain regulatory protections. If introduced to the Polish system, REITs are likely to boost transaction volumes on the commercial real estate market.

As in previous years, investors, developers, financing banks, tenants and consumers from all parts of the real estate market are paying more attention to ESG. The requirements of institutional buyers have made ESG factors a prerequisite to be considered at the design stage of projects. When searching for the right leasing/investment opportunities, tenants and potential buyers treat ESG issues ‒ and the related reputable certification, such as BREEAM (Building Research Establishment Environmental Assessment Method), which has already been a standard requirement in many sectors for some time ‒ as one of the key commercial elements of the deal, which they are ready to factor in the increased price.

Logistics (Industrial) Sector

Based on strong fundamentals, the logistics sector once again proved to be the most stable. Although the logistics market experienced a slowdown in 2023 compared with the previous two years, newly completed industrial and logistics space reached 3.7 million square metres ‒ the second-highest result in history. With such a result and considering the almost 3 million square metres of space under construction, Poland is one the fastest-developing countries in Europe in terms of industrial and logistics supply.

Total leasing activity was higher than expected and stood at 5.7 million square metres, constituting the third-highest recorded level in the history of the market (only 15% lower than in 2022). 2023 also brought some landmark transactions on the leasing market. Specifically, three new transactions for space exceeding 100,000 square metres were signed in Warsaw, Silesia and Wrocław.

In 2023, industrial and logistics transactions accounted for 51% of the total investment market in Poland. This includes a transaction in which Nrep acquired 80% of shares in one of the leading logistics developers and investors in Poland, 7R. In 2023, as in previous years, the construction of many projects began as a result of co-operation between fee developers (providing know-how and co-ordination/management of the construction and leasing of the project for a fee) and passive investors (providing the equity) on the basis of development management agreements.

Some market players with the capacity to both invest equity and develop projects independently have decided to act as fee developers in some new projects avoiding the land/construction risks. The new pricing reality has encouraged some of those logistics developers whose business is to keep assets in operation to acquire standing assets rather than develop assets independently. Given the rising development costs and limited availability of land in attractive locations, acquiring standing assets has become an attractive alternative for many of these developers.

2022 accounted for unprecedented rent increases of approximately 20‒30% in the logistics/production market. Given the relatively high availability of new space and stabilisation of construction and financing costs, it is expected that in 2024 ‒ as in 2023 ‒ rents are expected to remain stable and no significant rental increases are forecast. Currently, headline rents in prime locations stand at EUR5.5 per square metre per month and average EUR4.4 per square metre per month.

As companies active in the market – both from the e-commerce and production sectors – extend their supply chains and many new companies enter the market relocating their productions capabilities to Poland, there is a constant demand for logistics and production space. Owing to the high demand for out-of-home parcel delivery services, Poland is currently the regional leader in e-commerce, with a 4% share in the total European e-commerce spending. In contrast to other CEE and Western countries, the e-commerce share in total retail spending is currently higher than during the closure period, and this trend continues to grow.

The above-mentioned trend is expected to increase as many companies decide to locate their production facilities in Poland ‒ ie, closer to their sales markets (nearshoring/friendly shoring) ‒ owing to disruption in the supply chain related to the COVID-19 pandemic and the war in Ukraine. This can already be seen in the market. Poland, with its still relatively low labour costs and good transport links, is considered one of the best locations for nearshoring/ friendly shoring in CEE.

Residential Sector

Due to the increase in financing and construction costs, the housing market saw a significant decline in the sale of apartments and of mortgage loans at the beginning of 2023. Nevertheless, a reversal of this trend in the sale sector was observed throughout the remainder of 2023, owing to the introduction of the 2% safe credit government programme designed to stimulate housing demand in the form of a subsidy equal to the difference between 2% and the average fixed mortgage rate.

This 2% government programme led to an increase in new mortgages and transactions in the resi-for-sale market. Although the value of new transactions is still below the record levels of 2021, there has been a positive change in the mortgage market. However, this has also led to an increase in apartment prices (average asking prices increased by 17% year-on-year between the end of 2022 and end of September 2023 in the largest metropolitan areas). The government announced a new subsidy programme at the beginning of 2024, which is intended to result in greater affordability of owner-occupied apartments.

However, the increase in prices is not accompanied by a corresponding increase in projects under construction and the number of construction permits issued (23% lower in Q1‒Q3 2023 than in the same period in 2022). This may indicate that developers are taking a more conservative approach to customer demand, but it also relates to the shrinking availability of residential land in Poland.

The development of the private rented sector (PRS) in Poland is heavily dependent on the mortgage lending situation in the resi-for-sale market. Given that the average rent in Poland at the end of Q3 2023 was approximately PLN1,150 higher than the average mortgage payment (assuming a 2% government subsidy), the mortgage market prevails among individual investors and does not encourage developers to seek alternative revenue sources among PRS investors.

Currently, the Polish residential market is still dominated by owner-occupied apartments, with only 13% of the population living in rented accommodation. Although an institutional build-to-rent sector is emerging, it is still in the early phase of development despite dynamic growth in recent years (both in terms of construction and investment activities). As a result, build-to-rent premises accounts for approximately 1% of the entire residential stock for lease in the main Polish cities.

Irrespective of the factors hindering or delaying the development of the PRS market in Poland, an increased number of PRS projects were completed in 2023 (with the existing stock in Q3 2023 standing at approximately 15,000 units, compared to circa 8,000 units in Q3 2022, giving a year-on-year increase of 83%). Although the number of announced PRS projects under construction remains stable (circa 10,000 units), some PRS projects have been abandoned at the design phase (the number of planned projects decreased from approximately 35,000 to 27,000 units). In view of the dwindling availability of attractive land, some investors are increasingly interested in converting office and retail buildings into PRS buildings.

The main challenges for PRS investors in terms of finance are high construction and land acquisition costs (the cost of constructing 1 square metre of a new multi-family building have increased by 50% in the past seven years) and financing costs (given the fact that tenants typically only accept rent paid in Polish zloty, while financing is generally available in euro ‒ although some PRS operators have been testing euro-denominated rent structures). A number of legislative changes may affect the PRS market and the viability of business models. These include newly adopted zoning regulations and changes in the technical requirements for buildings, such as the minimum size of the residential premises. Despite these challenges, the PRS market is still perceived as attractive and ‒ according to surveys conducted by commercial advisors ‒ more than 20% of investors in the CEE region are considering investments in the PRS sector. The potential of this market is also confirmed by very low vacancy rates in the existing PRS stock.

The student housing market has strong development foundations as the demand for student accommodation remains high (due to ‒ among other things ‒ the growing number of foreign students, the decreasing affordability of accommodation on rental market and the increasing popularity of modern private student dormitories already operating on the market). The latest announcement of the joint venture transaction between Signal Capital Partners, Griffin Capital Partners and Echo Investment for the launch of a new student housing platform (which awaits merger clearance at the time of writing (April 2024)) supports this trend.

In respect of senior housing, the institutional market is currently at a very initial stage. However, according to the latest research (eg, the report prepared by CBRE in co-operation with Greenberg Traurig entitled “Senior Housing in Poland”), there is an increased interest in this market among investors, who are currently assessing the market’s potential and investment opportunities. Owing to demographic changes, it is expected that the senior housing sector will boom in the coming years. The authors will therefore monitor future developments in this area with curiosity.

Office Sector

The office sector accounted for 20% of the investment volume in 2023. Sellers who have decided to market office assets from their portfolios are generally reluctant to sell at the higher yields being offered by potential buyers. This price conflict usually leads to a situation where the seller decides to keep the asset and carry out certain quality improvements to prepare the asset or portfolio of assets for a more favourable market ‒ for example, in terms of ESG aspects, technical conditions, and tenant mix. While such demanding market circumstances usually discourage more cautious, regulated investors with a more conservative approach, they at the same time attract opportunistic buyers looking for strategic purchases; in this respect, 2023 brought new players to the Polish market. The above-mentioned sellside-buyside price expectation mismatch is expected to stabilise in the near future.

The limited new supply of office space (approximately 61,000 square metres in Warsaw) has already been almost fully leased and approximately 221,000 square metres is currently under construction in Warsaw. Within the planned office investments, a new category of properties undergoing refurbishment is becoming increasingly visible on the market, posing an alternative to completely new office space.

In terms of vacancy rates (currently averaging 10.38% in Warsaw), we are witnessing a two-speed market. While buildings more than ten years old and in less prime locations can have a vacancy rate of more than 20%, only 3% of space is available for lease in prime locations in the centre of Warsaw. Due to this supply gap and the limited opportunities for tenants to relocate to a more suitable space (particularly those tenants requiring more space for their operations), it is expected that the renegotiation of concluded lease contracts will intensify.

Other major cities are experiencing record-breaking occupier activity, with around 740,000 square metres being leased in 2023. However, the supply of new offices and pending construction activities remain at lower levels than in previous years. Given the foregoing and the high tenant activity, the vacancy rate is expected to decrease in the upcoming quarters. In 2023, the highest supply of new office space in cities was in Wrocław and Kraków, whereas Warsaw ranked third.

In line with the trend evident in previous years, the expansion of flex office operators areas continues to attract interest. In Warsaw, more than 50% of the buildings delivered in the past eight years offer flex space and the flex office market continues to grow.

Currently, tenants from business services as well as manufacturing and energy sectors are very active on the leasing market and – together with landlords – create new office standards. A number of companies relocating their business to new offices are simultaneously reducing space (owing to hybrid and remote models of working).

Retail Sector

In recent years, the retail sector in Poland has been dominated by retail parks in terms of newly completed space. In 2023 and early 2024, a total of approximately 70 new retail projects opened, adding more than 470,000 square metres of gross leasable area (GLA) to the total stock.

Strong development activity has been observed in retail parks, with an area below 10,000 square metres GLA and “convenience” projects (usually not exceeding 5,000 square metres GLA). Continuing the recent trend, the developers have clearly shifted their interest towards towns and smaller cities. Retail space in towns and smaller cities (under 100,000 inhabitants) accounts for around a quarter of the total retail stock in Poland. Compared with Western Europe, coverage of modern retail projects (calculated per 100 inhabitants) in Poland is significantly lower, which also encourages developers and investors to fill this gap.

This shift towards towns and smaller cities and the retail park format is also clearly visible in the retail space currently under construction. By the end of 2023, almost 45% of the approximately 500,000 square metres GLA of new retail space under construction was located in towns and smaller cities, and 75% was designed in the retail park format.

Although the retail market has recently been dominated by smaller retail formats, some activity in respect of shopping centres is also underway, particularly in the regions; however, this is not yet visible in the investment or leasing volume. Operators of large shopping centres are currently carrying out a number of revitalisation, recommercialisation and rebranding projects. Older shopping centres designated for redevelopment and to be sold at competitive prices will be an attractive alternative for more opportunistic investors.

In larger shopping centres, tenants are increasingly implementing an omnichannel strategy ‒ ie, simultaneously developing hybrid online and in-store sales. As consumers value the comfort of e-commerce and the opportunity to see a product in person in a “brick and mortar” shop, omnichannel fulfils the ROPO (Research Online, Purchase Offline) trend. To some extent, the ROPO trend and the associated change in consumer habits has also revived leasing activity on the high street, as more and more tenants are willing to open a store in this format.

Lower inflation and rising purchasing power (linked to the improved financial condition of Polish households) are expected to further boost consumer growth. This, together with the growth of the omnichannel format, will have a positive impact on retail sales. The attractiveness of the Polish retail market is also confirmed by the increasing number of new brands opening their first stores in Poland. At the end of 2023, the number of new brands entering the market was the highest since the outbreak of the pandemic, which is also an optimistic sign for the market.

Renewable Energy Sector

The energy market in Poland, which strongly influences and intersects with the real estate market, offers a wealth of opportunities and plays a significant role in the Polish economy. A key area of growth is the renewable energy sector, with investment in wind and solar power on the rise. In 2023, Poland once again set a record for electricity production from renewable energy sources (RES). At end of 2023, Poland’s solar capacity reached around 17 GW (a 15% year-on-year increase) and wind power reached almost 10 GW (a 40% year-on-year increase).

Increasing the share of RES electricity in energy production is one of the biggest challenges for Poland as part of the energy transition. RES are growing in number, and transmission and distribution networks have difficulties managing this potential. This has led the Polish transmission system operator (Polskie Sieci Elektroenergetyczne SA) to focus on expanding the network infrastructure. Such expansion is not only necessary to meet the current demand but is also a forward-looking measure. It is a crucial step towards accommodating future growth in the energy market and ensuring Poland’s energy security.

In terms of legislative changes, the market has called for further liberalisation of the Act on Investments in Wind Power Plants. According to the current provisions of that Act, wind turbines must be located at a minimum distance from the nearest buildings of ten times the height of the installation, unless the local zoning plan specifies another distance (but not less than 700 metres). The liberalisation of the Act would unlock a vast amount of land for potential turbine development and it is expected to facilitate the expansion of wind energy in the country, accelerating the transition to a greener energy mix. Plans to reduce the above-mentioned minimum distance to 500 metres have already been announced by the new government.

On the legislative front, the Act on Spatial Planning and Development has undergone dynamic and significant changes during the past year. Almost 70% of Poland is affected by the key changes. In theory, streamlining the planning process and the amendment of the Act on Spatial Planning and Development was expected to make land development more efficient and enable faster responses to the needs of the energy sector. In practice, implementation has been hampered by problems ranging from a lack of financial resources for municipalities to a shortage of specialists and unclear regulations. Nonetheless, the amendment provides for some facilitation in implementing RES during the transition period and is generally viewed positively by the market.

Notwithstanding the foregoing, 2023 brought some landmark RES investments, such as the commencement of the operation of a solar farm in Przykon with a capacity of 200 MW ‒ the second largest investment of its kind in Poland, located on 270 hectares. After its planned extension, it will be the largest solar farm in CEE.

As the energy market in Poland is evolves and changes, Power Purchase Agreements (PPAs) ‒ in particular, virtual Power Purchase Agreements (vPPAs) ‒ are gaining importance as a key instrument to support decarbonisation, ESG goals and the development of renewable energy. PPAs allow for the purchase of energy at predetermined prices, which is driven by the desire for price stability and the need to secure RES in Poland. They provide long-term price stability, facilitate the financing of new energy projects, and help companies meet their sustainability goals. PPAs promote renewable energy by enabling projects to be developed and financed externally, secured by revenues from long-term contracts, thereby contributing nationally and globally to the reduction of the carbon footprint and the energy transition of economies. In 2023, some landmark PPAs were signed with international corporations such as Orange and Mondelez International, securing the energy supply for their operations.