“It’s very bad for Poland,” states Alan Colquhoun, managing director of DTZ’s Warsaw office. His counterpart at Jones Lang LaSalle, Anna Kot, agrees: “It’s definitely something bad and it’s definitely something that should be stopped, and not encouraged.”
The cause of the consternation is the blocking of Poland’s largest and most high-profile development, ING Real Estate’s 220,000m2 mixed-use Zlote Tarasy. The project, on which JLL is letting agent, has been stopped because of legal moves brought by an environmental group.
The €400m development occupies a prominent site in the heart of the Polish capital, next to the central train station. It has been hyped as one of the best current developments in central and eastern Europe.
But that is hard to tell from looking at the site in its present state. Bare concrete pillars and protruding wires greet visitors as they drive into the Polish capital, conjuring up images of Warsaw’s darkest hours after the second world war. And there is an eerie feel of abandonment.
With only five months having passed since Poland entered the European Union, this is the last thing the city needs — especially as it has Europe’s investors, and potential future developers, watching the country with interest.
When the development was launched in 2002, ING’s marketing brochure proudly labelled the project “a unique development undertaking concepts that have not been seen in Poland to date, particularly on this scale”.
It added: “The scheme will be regarded as one of the highest-quality developments available in central and eastern Europe.” The mixed-use scheme, which will have 45,000m2 of offices spread across two towers and will include a glassed-over central retail plaza, is certainly ambitious.
It was scheduled for completion in autumn 2005, and the halting of construction is embarrassing for both developers and the city government.
Work had already started when, in July, environmental activist group Warszawie (Association of Friends of the City of Warsaw) went to court saying it had not received proper notification from the City of Warsaw. A Polish court then declared the building permit for the project invalid.
ING is winding down the construction work; the integral nature of the glass-roofed central plaza, which is at “a very complex stage”, cannot be halted before securing the structure. ING says it will appeal the decision.
Fears of putting off investors
“The verdict is based on a wrong interpretation of the construction law by the court,” says the company’s spokesman. “We feel hit by the system, and that this investment is jeopardised by circumstances exclusively under control by third parties.”
Problems like this can blight any country. But agents are unhappy about the image this presents to western Europe, and more importantly to the seemingly endless pool of individuals and companies prepared to invest.
Poland wants to show investors it can develop the sought-after office stock that is producing yields of 9.1%. With its EU membership so new, it also wants to show there are no blocks to foreign developers that want to give the former communist country a 21st-century facelift.
Many believe the dispute between ING, the City of Warsaw and the environmentalists will eventually be settled. And DTZ’s Colquhoun hopes that the Polish authorities will learn important lessons, so that such a thing will not happen again.
Despite the ING fracas, there are other buildings that have managed to get out of the ground. Work has started on Rondo 1 – the 55,750m2, €200m project by German construction firm Hochtief – and Ernst & Young has already agreed a substantial prelet.
But the city wants more of these developments to meet the needs of investors. As Colquhoun warns: “There are more investors than there is quality product.”
In a way this is good news. The city is just coming through two years of oversupply, which meant high vacancy. According to CBRE it reached a high of 17.4% in 2002, falling to 12.5% in the second quarter of this year. The fall in rents caused by oversupply is likely to stabilise by the end of 2004. City-centre rents are now €20-21 per m² per month.
But since joining the EU on 2 May, enquiries from western European companies and individuals – particularly the Irish, with the Spanish gaining – have risen substantially. Investors are keen to take advantage of a 38m population (the largest of the nine new EU members) as well as a low wage base. It is hoped the same factors will tempt more occupiers.
“EU membership will positively influence the growth in demand for high-quality office premises. Poland, with its low wage base, has already been targeted by major corporate companies and should benefit from business process outsourcing,” CBRE points out, in its 2004 Warsaw office market review. “For this reason, EU membership is perceived as the catalyst to move companies further east into Poland and other neighbouring central European countries.”
EU accession has not yet had a dramatic effect, however. “There wasn’t exactly a big bang effect in May,” admits Mathieu Giguere, head of advisory services at Cushman & Wakefield Healey & Baker; but, he adds, “there have been a lot of new faces here. Entering the EU put us on company lists when they are looking at emerging markets.”
Jason Sharman, managing director of King Sturge’s Warsaw office, says he has seen a 20-30% increase in enquiries for small office space. There are also enquires from global companies, many of which were already in the country before its EU membership, but who now want to expand.
“We see some companies expanding their space – last year it was the reverse as they were looking to offload,” says Alekandra Bacciarelli, head of research at Knight Frank’s Warsaw office.
Appalling infrastructure
But while Poland is regarded as one of the more stable eastern European economies, it still has its problems. “Things are improving in Warsaw, although there’s still a lot of insecurity concerning corruption. This combined with many other factors has dampened the enthusiasm of investors,” says Sharman, adding that the country’s infrastructure is “appalling”. “Companies looking for regional hubs have often chosen Slovakia and the Czech Republic, because of their better roads and networks.”
Add to this the ongoing political upsets and numerous elections. Poland’s parliament is to hold a vote of confidence in prime minister Marek Belka on 15 October. “Political uncertainty, growing budget deficit and continued high unemployment are downsides to the improving economic trend and strong GDP forecast,” states Ben Maudling, central Europe director of Invesco Real Estate.
Still, the Polish remain ever optimistic. As Maudling highlights, the economy is starting to pick up, as is development. And he expects that significant problems will finally be solved with the Zlote Tarasy construction.
As Giguere puts it: “Poland has shown it can play with the western rules and it has a lot to offer. Five years from now we should see Warsaw as a much bigger capital, in terms of square mileage, with all the buildings that are being built.”
