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Interview with Robert Dobrzycki

Did the economic slump have a big impact on Poland’s warehousing market?
The crisis strongly affected the demand for warehouse space in the Polish market. In 2009, 530 thousand square metres of warehouse space were leased out, that is three times less than in 2008, with approx. 1.5 million square metres of space. If you compare those two years, the drop seems gigantic, yet it must be remembered that 2008 was a record-breaking year.

The beginning of this year, however, is showing that the demand for new space is slowly growing. In 2010, the number of transactions will certainly not reach the figures from two years ago, but it is bound to be better than last year.

What is the strongest growth determinant in Poland’s warehousing market in the last few months?
The factor which had the greatest impact on the warehousing market last year, not just in Poland, was insecurity.

Even if there was need for new space, the uncertain situation in the market made companies shirk undertaking risk and long-term commitments. In my opinion, this is the single most important factor reducing the number of transactions, and consequently, bringing about the market downturn.

When the crisis came, all companies in international markets withdrew from entering into new commitments.

Significantly, all the biggest warehouse developers in the Polish market are subsidiaries of international corporations. As a result, the decisions to pull the plug on investments were not made in Poland, but abroad, in corporate headquarters. Even if the Polish market reported some demand for new investments, headquarters suspended projects due to high uncertainty in the economic situation.

It seems, however, that the worst is behind us, companies have relaunched production, they are looking for warehouse space to store their products. Thus, commitments are being made to lease new warehouse space.

Did the crisis cause developers and tenants to withdraw from warehouse projects?
Last year such situations were quite common. In our case, some customers simply did not sign contracts, even though the transaction had previously been approved.

It would be difficult for me to name a figure or percentage of transactions or investments that fell through. In our portfolio, there were 10-15 customers who withdrew from signing the contract at the last minute. The unrealised transactions involved spaces ranging from 2.5 to 20 thousand square metres.

How has the crisis changed the structure of tenants in warehouse facilities? Did pharmaceutical companies, retail and food production fare best during the crisis?
Yes, pharmaceutical companies and food traders took the lead in the warehouse lease market. These sectors blossomed during the crisis.

In the past year, companies from these sectors prevailed in our portfolio. Over the last 12 months, we signed 7-8 contracts with pharmaceutical companies, as well as a number of enterprises from the food and retail sectors.

There occurred, however, a certain problem concerning mainly Polish clothes retailers, who generated revenues in Polish zlotys, and incurred costs in euro. The main cost was rent in a foreign currency for leased retail space in shopping centres, as well as warehouse space. International companies fared slightly better, for although in Poland they sold in zlotys and leased in euro, abroad they earned and leased in the same currency.

Did a lot of warehouse space become vacant due to business bankruptcies?
Such situations did happen. With regard to our warehouses, one company going under vacated its space, I am also aware of a similar case with a competitor. In both cases, the space involved was approximately 10 thousand square metres.

Will there be more vacant spaces?
I do not think so, the worst is already behind us. Most companies’ problems were caused by two issues. Firstly, dwindling demand. Secondly, the strong fluctuations in the zloty to euro currency rate. Problems occurred at 4.8 PLN to 1 EUR. At the moment, the exchange rate has stabilised at 4 PLN to 1 EUR.

Where did warehouse developers look for savings when implementing investment projects during the crisis?
Some self-regulation took place here. With no access to financing, many investments were put on hold. This reduced the demand for construction services, and in turn pushed down the prices of such services.

If a developer had acquired financing for a project, it could build it for much less during the crisis or execute successive stages of an investment in progress for less than the previous stages.

That is what happened in our case, when it turned out that we were able to build further stages of a warehouse park for much less than the buildings which were erected in stage one.

It is important to add that while the construction costs dropped significantly, the costs of raising capital increased. But it was still worth it for the investors to keep building.

How did the crisis affect the issue of acquiring land for investments? Is it possible to do it more cheaply?
Certainly, property prices have dropped. Yet it is difficult to say by how much. For a start, there are many vacancies in the market, and there is no free speculation capital which could be invested in property seeking long-term return. This has practically brought the market to a halt. Naturally, it is climbing up now, but it is still at a very low level of activity. To sum up: the prices have certainly dropped. To what level? It is very difficult to answer this question, as there are no transactions in the market. Large development plots are not being sold at the moment. It is much easier to buy or sell smaller plots, e.g. for industrial investments, for individual customers. And such transactions are taking place. In this case, it can be said that land prices for such investments have dropped by 20-30 percent.

When can the number of transactions be expected to rise?
Transactions will rise when the investment market in commercial properties awakes, and this will happen when credit facilities become available for speculation property. That is when banks decide to finance developments which are not 100% occupied. This will generate readiness to buy land and build vacant space.

How did the crisis affect the performance of property developers specialising in warehouse development?
The biggest players, with the strongest foothold in the Polish market, have survived the crisis more or less successfully. It was a completely different story for companies, even large international corporations, which were planning to or had just entered the Polish market. As it turned out, they had picked the worst possible moment. Some have already withdrawn, and a few other companies are seriously considering pulling out of Poland. This is because right now it is extremely difficult to launch first-time investments and gain any kind of critical mass making the business viable and in any way profitable.

But not only newcomers to Poland are experiencing trouble. It affects the biggest developers, too, those who overinvested in the boom time. Our company, too, invested very strongly, but it was cautious enough not to leave too much unoccupied space in our developments. And when the slump came, we were able to keep the vacancy rate down.

Many developers are struggling today with large vacant spaces in warehouses built in inferior locations. They were built on the false assumption dating back to the boom years that whatever you build is bound to be leased out. Unfortunately, the market came to a halt very quickly and they were left with unoccupied vacant space.

What is the outlook for the current year?
According to analysts, the warehouse sector hit the bottom in 2009. Our industry is a barometer of sorts which shows the condition of the entire economy. If the demand for warehouse space grows, it means that companies and the economy as a whole are improving.

It seems to me that just as the outlook for the Polish economy in the coming years is good, so is the development forecast for the Polish warehouse market.

Would you venture any figures for the coming year?
If 530 thousand square metres of warehouse space were commissioned in 2009, then in 2010 we should improve this figure by 20-30 percent.

Panattoni’s investment plans for this year?
Our warehouse parks are situated in key locations across the country, such as e.g. Pruszków near Warsaw, Łódź, Stryków, Poznań, Wrocław, Mysłowice, Gliwice, Czeladź, Cracow (Skawina), or Gdańsk. In the vicinity of the existing distribution facilities we have secured sites for future investments. It can be expected that even as early as this year we will start building in some of those locations, partly for speculation purposes and partly for specific customers.

What space can your company deliver to the market this year?
If we can build approx. 200 thousand square metres of warehouse space, it will be a success.

What are the forecasts regarding leases?
We closed 2009 with 250 thousand square metres of occupied warehouse space, it seems that in 2010 leasing out approx. 300 thousand square metres will be a big success.