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FT REPORT – PROPERTY: Rising trend spreads out from capital

EXTRACT: The strong office market is being felt beyond Warsaw. Regional cities such as Krakow are hosting business process outsourcing operations, like Shell’s finance and accounting office, which will employ 800.

THE ARTICLE

By Jan Cienski in Warsaw, Financial Times
Published: Feb 20, 2007

When James Foley signed a pre-lease agreement three years ago to move Ernst & Young’s Warsaw operation to Rondo I, a new office complex in the heart of the Polish capital, he was afraid that the consulting firm would be alone in the building, which opened last year.

“I negotiated that lease at the bottom of the market,” says Mr Foley, who studies the real estate market for the firm. “There was a lot of overhang space in Warsaw at the time and there was a lot of concern about Rondo 1.”

He need not have worried. Rondo 1, built by Hochtief Project Development with 58,000 sq metres of office space, is more than 70 per cent leased. The building was sold three times last year, with the final sale of about €250m to Britain’s London & Regional Properties.

“We really knew that the office market in Warsaw had turned when that building came on to the market,” says Hadley Dean, managing partner for Poland at Colliers International, a real estate firm. “Everyone expected vacancy rates to rise sharply but they only rose by about half a per cent.”

Just a couple of years ago tenants were able to strike deals with landlords who were desperate to rent out space. Those times have ended, with office vacancy now at about 8.75 per cent, compared with 20 per cent in 2003, according to Knight Frank, a commercial research company.

Poland’s economic growth of 5.8 per cent in 2006, plus foreign investment of $14.7bn, a record, means more businesses are either locating in Poland or are expanding existing operations.

“The market has been buoyed by a lot of newcomers,” says Mr Dean, whose own company has tripled in size over the last three years.

The strong office market is being felt beyond Warsaw. Regional cities such as Krakow are hosting business process outsourcing operations, like Shell’s finance and accounting office, which will employ 800.

The flow of foreign investment and the rising fortunes of Polish businesses are also having an impact on the logistics and warehousing market. With Poland gearing up for a flood of EU funds that are expected to leave the country with a modern highway network by 2013, investors are buying land for warehouses to service the wider European market.

Particularly interesting are areas around Strykow in central Poland, where the future north-south and east-west highways will cross, as well as Wroclaw in south-western Poland, already linked to Germany by a modern highway.

“They are still buying land like crazy if they can get it,” says Mr Foley.

Foreign investors like Dell, building a computer factory in Lodz in central Poland, as well as mostly Asian flat screen television and monitor producers like Funai and LG Electronics, will continue to fuel the need to build warehousing and logistics space.

Last year, for the first time, leasing activity outside Warsaw overtook the action in Polish capital, a sign that the booming economy is beginning to spread beyond Warsaw.

Rising wages are helping fuel continued growth in retail, where modern shopping centres are starting to appear beyond Warsaw and the country’s seven other largest cities.

The biggest event in downtown Warsaw was this month’s opening of Zlote Tarasy, a 63,000 sq metre shopping centre. The flowing glass roof overlooks the capital’s dilapidated main railway station and the Stalinist baroque pile of the Palace of Culture, a “gift from the Soviet people” completed in 1955.

Sceptics worry that Warsaw, with about 600 sq metres of modern shopping space per 1,000 inhabitants, does not have the capacity to absorb more shopping centres. But George Jautze, chief executive of ING Real Estate, which developed Zlote Tarasy, says: “There are just not enough shops in Warsaw. You could easily add the same amount of floor space as Zlote Tarasy.”

With land difficult to find in downtown Warsaw, the trend will be for smaller infill shops, often converting historical retail or industrial space, says Marta Burek of Donaldsons, a property consulatant.

The same trend is being seen in smaller cities, where Parkridge, a British developer, is building shopping centres, often incorporating historical elements, in cities such as Bialystok in eastern Poland, where until now retail development had focused on supermarkets and hypermarkets.

“There is a massive boom in interest outside the big cities,” says Mr Dean.

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