Expert commentary by Piotr Mirowski, Senior Partner, Investment Advisory Department, Colliers.
The two-decade period following Poland’s accession to the European Union has been marked by dynamic growth and development for the nation and its commercial real estate market, a period used to professionalise the sector. This would not have happened without EU funding. According to the Ministry of Finance, from 1 May 2004 to the end of 2023, Poland received a total of EUR 245.5 billion, which, after deducting membership fees, amounts to more than EUR 160 billion for development and modernisation.
Inflow of foreign capital
In 2004, we became an integral part of the European economic area, which made foreign investors look at Poland more favourably – both in terms of relocating their businesses or branches here and in terms of investing capital. Indeed, thanks to EU accession, our image has changed, evolving from an economy marred by legal instability and lack of transparency to a stable, relatively liquid and secure market governed by the rule of law and strong property rights.
In 2018, Poland became part of the FTSE Russell developed markets index. While foreign investment in Poland’s economy predated EU accession, it was the burgeoning commercial real estate sector, largely driven by cash flow, that enabled the country to offer attractive returns. This drew the world’s largest funds from Germany, France, Italy, the UK, American REITs, Asian capital sources, and even sovereign wealth funds from nations like Malaysia, Singapore, South Korea, Japan, as well as superannuation funds from Australia.
In addition, investors with a presence in Poland stopped limiting themselves to opportunistic projects and started to acquire modern office buildings, shopping centres and logistics facilities, which started to increase in the market (over the past 20 years, the supply of office space in Warsaw has increased from 770,000 to 6.23 million sq m, warehouse space from 1 to 6.2 million sq m and retail space from 1 to 2 million sq m).
Investment blockade
The last 20 years have also left a certain sense of dissatisfaction. Despite the continuously growing scale of the market, the transaction volume in the Polish real estate market did not increase proportionally, remaining at a maximum level of 5-7 billion euros. Comparing these results to Sweden, where, with a population four times smaller, the investment volume was around EUR 16.8 billion in 2022, or Spain, where it exceeded EUR 17 billion, one is tempted to conclude that Poland has not yet used its full potential.
In 2023, for example, the value of investments reached exactly the same level as in the crisis year of 2008. In contrast, the results between 2020 and 2022 (between EUR 5.2 and 6.3 billion) were similar to the period before the global financial crisis.
Why such a block to growth? This is due to investors’ policy that each fund investing in Poland has its own allocation limits, often determined by the overall value of investments in the country. If their number or value is not increasing, this also means that there is no increase in trading activity and, as a result, the market is perceived as riskier. Currently, the paramount challenge for investors with a presence in Poland are liquidity windows – periods where there is huge buyer interest, and sales are easy followed by contrasting phases when there are fewer transactions and selling properties at a profit is difficult.
Lack of local investors
The lack of domestic capital also remains a challenge for the Polish commercial real estate market. This is partly the result of legislation from 2004 when the Investment Funds Act included a provision that pension funds could not invest directly in real estate. Instead, they can invest funds in the stock market or buy government bonds.
The absence of suitable legislation has also impeded the launch of open-ended investment funds. As a result, 92% of investment capital in the commercial real estate market in Poland comes from outside and only 8% is domestic.
This is also because there is a shortage of old money. Most of the existing domestic capital is relatively new, and their owners are not focused on protecting it by investing in commercial property, but rather on its rapid multiplication and the much higher expected rate of return generated by, for example, property development.
Anticipation of REITs
A notable legislative oversight that could have positively stimulated domestic investment in the real estate sector was the lack of provisions enabling the establishment of Real Estate Investment Trusts (REITs). This omission was particularly significant, as Poles willingly invest in residential properties and have amassed large savings[1]). The current government has tried to rectify this by announcing the introduction of REITs and plans to release some of the pension funds in Individual Retirement Accounts (IKE). The Polish commercial real estate sector is therefore likely to see higher trading volumes.
The real culmination of the Polish transformation, however, will be Poland’s entry into the eurozone, after which it will be possible to say with full conviction that the commercial real estate market in Poland has gone from being eastern to fully western European.
At the forefront of CEE
Compared to other countries in the region that entered the EU together with us or shortly afterwards, Poland made the biggest economic leap and benefited the most from EU accession (the Czech Republic the least according to a report by the Polish Economic Institute).
The last 20 years have made us the leader in the CEE region in terms of commercial property investment. And although in the first quarter of this year we temporarily lost this position to the Czech Republic, where the value of transactions amounted to EUR 545 million[2] (181 million less in Poland), we are still among the top European countries attracting investor interest. This is attributable, in part, to factors such as the size of the country and its large population. Also, our location within the CEE region gives us a significant advantage on the global stage. As recently as 20 years ago, the CEE-6 region was on the margins globally, whereas, according to Colliers projections, it will be the eighth-largest economy in the world by 2028.
However, it is impossible not to get the impression that, in the eyes of investors, Poland is gradually distancing itself from the CEE region, moving closer to Western Europe in terms of image. And this is despite the challenges that our market has faced over the past 20 years.
The first was, of course, the global financial crisis, after which it took as long as five years for the Polish economy to return to its pre-2008 condition. Not long afterwards came 2020 and the Covid-19 pandemic, followed shortly after by global inflation. It may take another two years or so to rebuild pre-pandemic performance, but its effects are also likely to coincide with the timing of the introduction of REITs. So, all the indications are that we are in for another significant leap that has the potential to define our next two decades positively.
[1] PLN 1.5 trillion, including the corporate sector, according to 2024 NBP data.
[2] Thanks to the involvement of domestic capital, which in the Czech Republic accounts for 50-60% of the value of all investments
