SCF Magazine, Retailnet.pl/September 2023
Jacek Wesołowski, Managing Director, Trei Real Estate Poland, for SCF Magazine (Katarzyna Łabuz)
Trei is traditionally an exhibitor at the SCF 2023 Fall trade fair. What projects will you present at the fair this time, and to what stage of investment and commercialization have these projects progressed?
This year, we will present investments that we intend to launch next year. The two Vendo Parks we plan to open later this year—these being Konin and Lubin—are almost fully leased already. For next year, we are planning openings in Wrocław, Ciechanów, Bolesławiec and Szczecin. About 50% of these projects already have tenants, which means that about 50% of the leasable space remains available still. We have scheduled as many as eight openings for next year, and these projects will be presented at the SCF.
So, we are keeping up the same pace of investment as every year. We develop about seven to eight projects per year, and this doesn’t seem about to change. I think the present moment is extremely challenging. Things may get easier in the years ahead, so if we succeed with our plans today, I am all the more confident that we will be able to succeed in the years to come, and that we will manage to maintain our growth rate.
What is the biggest challenge for Trei today in terms of investment execution?
Looking back, each event that transpired over the past few years seemed like the absolutely worst possible news yet. For example, you got the feeling it couldn't get any worse when COVID-19 and the threat of lockdown came along, which fortunately didn't affect all retail parks, only the biggest ones.
However, the loosening of the Polish Code of Administrative Procedure policy continues and causes many difficulties. Even if we get a simple solution to the issue of real estate sales and zoning rights, we have to expect that government authorities will continue to apply legal aspects that are not currently in effect but that meet the deadlines set by the Code of Administrative Procedure. As a result, it still takes a long time to obtain permits, and this complicates schedules, especially in the context of leases and execution works. So, this continues to be a challenge.
The next problem that seemed to present itself was inflation, caused by the outbreak of war across our eastern border, and rising energy costs. Initially we had an 80% increase in prices. Later, prices dropped somewhat, although they still remained 30% higher than those assumed in our construction budgets. This cost hike also affects tenants, making it difficult to negotiate higher rents. Price increases are therefore still a major concern. Another challenge is high inflation and with it the cost of money and credit. These factors have actually stalled transactions in the secondary market and have made it difficult for many developers to operate.
But the most frustrating thing, in my opinion, is the unjustifiably high exchange rate of the zloty. We have twice the inflation rate of the eurozone, our economy is still weaker than the EU’s, and yet the value of the zloty against the euro is rising. It is difficult to find a justification for this, or at least I’m not aware of any good arguments to explain this situation.
Despite all these challenges, investors are still willing to build more retail parks. The number of these developments keeps growing.
That's right, although the current situation may be more difficult for smaller market players. It seems that the larger and stronger players already prepared for these challenges, while the weaker ones are not coping very well yet. The situation has strengthened the position of large developers while weakening the smaller ones.
Those who planned their exit scenario based on one small project from which they intended to make a profit may now find it difficult to return to the market. During the times of COVID-19, many of the small players were struggling. And it’s still not an easy time for them, as they continue to find it hard to communicate with tenants and to generate income from banking systems. Some of them may conclude that such a project is simply not profitable.
The current reality is that the market is becoming increasingly competitive, and it can be harder for small players to stay afloat. So it's worth working on strategies and long-term plans that will help you get through the tough times and keep your property attractive.
Market experts warn that many projects are created only on paper, and that in reality they will never proceed. Do you share this opinion?
Indeed, it is a process that seems to be underway. Last year, there were already signs of project delays in some cases. I've heard from major tenants that about a quarter of projects are not on schedule, that is, they are not delivered on time. My impression is that projects, while often postponed, are not necessarily canceled, they are just not able to meet their stated deadlines.
Such delays involve additional work, as negotiations and adjustments become necessary once a lease is signed. The market is dynamic, and this means that even if you are the only player in a particular market, in a particular region, you won't necessarily remain the only one, and the situation may change within a year. This can cause significant turbulences, and while some projects may indeed be shelved altogether, most are simply delivered late.
In your opinion, what is the availability of land for investment? Is it true that developers reserve plots of land in a given city or town just to keep out the competition?
It’s true, you will sometimes see this happen in the market. Over the years of working with projects, including the 10 years as a developer with Trei, I noticed that for roughly the past 5 years we have been in a developed market with many other players. My feeling is that there is much more awareness among investors today when it comes to distinguishing between those who are bluffing and those who are telling the truth.
Today, more and more tenants realize that the key to success is honesty and transparency. If someone says he has already secured tenants, he better be telling the truth, because otherwise his plans could fail. Tenants have their own plans, bonus systems, training and logistical issues to consider. Today's market is mature enough to let you easily recognize who is trying to cheat and who is actually good to his word. It is worth noting that sometimes companies will suddenly appear on the market, only to disappear just as quickly, and this is another aspect of the complexity of today’s real estate market.
How do you rate the current condition of the tenant side? Is space in new projects still absorbed as quickly as it used to?
Well, the world is rarely just black and white, and usually you get various shades of gray. There are industries that are struggling but were strong enough to survive. Many of them are involved in the housing sales market. For example, whenever the real estate market is not doing well, it negatively affects related industries such as home appliances or self-storage facilities.
Such companies may not be outperforming at present, because fewer apartments are being sold, mainly due to the high cost of mortgages. However, they have had periods of prosperity and were probably smart enough to set aside funds for more difficult times. Once the hard times have passed, they will be back in business. It is worth noting that new players are also entering the market which may change the situation in some industries. We have noted an increase in the number of clothing companies, which gives us some hope for the future.
There is also the issue of companies whose concepts have failed to meet expectations and which are disappearing from the market. Generally, it is safe to say, however, that while the situation may be difficult, the system as a whole still works. Letting new developments may take longer than it used to, but the good ones still have a chance to sign successful leases.
And what can you tell us about rents? Are these going up or are they holding steady?
This is a complex issue. Here we have to keep in mind both our challenges and costs as well as the other side, the tenants.
The high cost of human resources, electricity, lighting and heating can definitely influence decisions about rents and service fees. However, we noted a certain appreciation of verifiable reasons for potential increases and a willingness to accept higher service charges. At Trei Real Estate, we are integrating various types of solutions into our projects that can help reduce energy costs for tenants.
It is worth emphasizing that finding a consensus between property owners and tenants on the issue of rents and service charges is key to maintaining a healthy relationship and ensuring sustainable profitability for both parties. Striving for fair cost sharing and working together on solutions that benefit both owners and tenants is important for the stability and development of the retail real estate market.