If someone asked me today how many years of stability lie ahead, I would no longer say five years. I would say three years at most – Jacek Wesołowski, Managing Director of Trei Real Estate Poland, told SCFNews | Retailnet.pl in an interview.
Why have there been so few transactions in the retail market recently, and how long-term is this trend?
Some of today’s estimates regarding trends are based on a very small number of transactions. This can lead to absurd conclusions, like in the well-known saying: “statistically, my horse and I have three legs on average,” because you see, when no transactions involving larger portfolios take place, it is difficult to speak of a representative scale indicating a certain trend for such transactions. One must consider the possibility that some market players are making decisions under pressure, such as selling off assets in order to raise urgently needed capital. I believe that only the large transactions ahead of us, involving portfolios worth more than 50 million euros, will reveal actual rates of return. For the time being, the only thing safe to say about Poland is that there are few entities capable of conducting such transactions.
When we talk about large transactions of over 50 million euros, we are referring to portfolio transactions concerning retail parks. Is this the direction investors will be heading in the near future?
As Trei, we have already completed one transaction with Patron Capital Partners, a UK-based fund that collaborates with us in the development of retail parks as part of a joint venture. This agreement also included the possible sale of the portfolio to a third party. So, we have already identified potential scenarios of this sort. It is worth noting that, aside from the JV with Patron Capital Partners, we retain the retail parks we developed in our own portfolio, and that we manage the portfolio in our own right.
We are also considering the possibility of portfolio transactions that will not only involve sales but also create opportunities for higher-end developments. I am deliberately speaking in vague terms because I cannot reveal too many details. Let me just say that both we at Trei and many of our competitors are actively reviewing such options.
Grzegorz Pękalski from Retail Concept says that he will be exiting current projects in two years’ time to push forward even more strongly afterwards.
Exactly. Everyone here will find some opportunity, and that is why I suggested earlier that today's average yield doesn’t truly reflect the real market situation. We observe individual transactions. Sometimes properties are sold at a fairly high price, and in other cases someone else will sell much cheaper, perhaps because they need capital to develop a chain of car dealerships, for example. One-off deals of this type cannot be used to obtain a reasonably accurate forecast of current yield rates.
So the market is somewhat obscure?
I believe that, unless we see changes in two key areas, the market outlook will be positive for less than five year.
Two key areas, meaning?
In my opinion, the first is the compression of exit yields, which were already below 7% before the pandemic. COVID-19 caused sharp increases to levels of 7.5% or even higher. This is where I expect to see stabilization, meaning the compression of yields.
When do you expect changes in this area?
I expect this to happen before the end of the year or within the next two year at the latest.
Yields are the number one topic. The second topic being?
The current phenomena of high inflation and a strong złoty are incomprehensible to me. Inflation in Poland stood at 20%, while the złoty strengthened by 15%. Could someone please explain to me how this is supposed to work?
The exchange rate of the złoty is another factor that complicates our business. Rental rates in retail parks are fixed in euros, and once the rent payments have been converted into the Polish currency, we – both as landlords and investors – are left with a smaller amount of złotys to spend on the construction of new properties.
And yet Trei has ambitious development plans. There are many new projects in the pipeline.
We have a buffer of roughly three years’ worth of projects due to our secured land bank. This year, we may realistically deliver four to six new projects. However, this line of work can at times get quite frustrating because risks emerge that simply shouldn't be there, yet there are rarely alternative ways to operate. The fact that our rental income is diminished by the unfavorable exchange rate as explained above necessitates optimally designed facilities, and there is no room for mistakes.
Do these risks arise from the pace at which you are growing?
No. They stem from operating with insufficient reserves. There should definitely be more reserves. All sorts of unexpected events can occur on construction sites, and we should be prepared for them. We currently assume that everything will go well, but only time will tell. It's a difficult topic.
Here at Trei, we take a broader view of the market. We want to build our strength based on different asset classes. We are very successful in selling apartments. We have started selling two more projects, one in Milanówek and the other in Łódź. We have built a certain reputation and want to remain in this market. We have secured several more investments, totaling 2,500 apartments.
We are also entering the PRS market in Poland. Our first major project is under construction in Poznań in a rather innovative way, using prefab technology. Other projects are already in preparation, with building permits obtained. Apartments for rent will be our third business line.
In today's economic landscape, how do you see the challenges related to ESG (Environmental, Social, and Governance)?
For our colleagues in Germany, for example, the process of obtaining building permits is so long-winded that they have to plan their projects for zero emissions even now. But there is currently no construction technology that would deliver zero-emission buildings. So, how do you obtain a permit when the building is supposed to be zero-emission when nobody has a specific approach to achieve that?
The second issue concerns the question who will finance ESG, specifically building projects that meet specific standards. Tenants fear that these costs will be passed on to them. But current lease agreements don’t include such provisions. So, the developer is left with the entire cost load.
What we are looking at is a whole spectrum of extra costs. We have ESG, rising construction prices, plus a strong złoty and the high yield level. Of course, some companies will survive this time of challenges, and they may even make above-average profits in the future. But other market players will need to consolidate.
It sounds a bit pessimistic. In which category would you place yourself? Realist, moderate optimist, moderate pessimist, market enthusiast?
I would describe myself as a pensioner and sailor, considering the long years I spent in the real estate industry, on the one hand, and my passion for sailing, on the other hand. But as a business man, I have to remain optimistic. And I am, because I believe that changes will occur in the market. Yield rates will return to more appropriate levels, and the current strength of the złoty cannot be sustained much longer. So, if someone asked me today how many years of plain sailing lie ahead, I would no longer say five years, but would say three, at most.
SCF Magazine, Retailnet.pl/ Radosław Rybiński
Interview with: Jacek Wesołowski, Managing Director Trei Real Estate Poland