The unknown market: Poland has what many retail park investors seek
- March 1, 2019: Vol. 13, Number 3

The unknown market: Poland has what many retail park investors seek

by Pepijn Morshuis

Retail parks seldom win any beauty contests. Nevertheless, they have long been in high demand among investors and have established themselves as an independent asset class within the retail property sector.

The run on retail parks does have one drawback, however. Prices are rising and achievable yields are decreasing in all key markets. Savills confirmed this recently, using Germany as an example. It revealed that net initial yields for the country’s retail parks fell below those for shopping centres for the first time in 2018. Retail parks still commanded 4 percent, while shopping centres posted a slight increase of 30 basis points to 4.2 percent.

At the same time, the retail property market is considered saturated in many Western European markets. Hardly any new properties are under construction, leading to a shortage in supply. Many property investors are asking themselves where they can still generate attractive yields within the asset class.

There is no standard definition for a retail park. The term is generally understood to mean single-storey retail properties with eight to 16 tenants. Tenants of retail parks typically include food retailers (self-service stores, supermarkets and discounters), chemists, fashion and shoe retailers in the low- and medium-price segments, and smaller retailers and service providers, such as bakers and hairdressers.

The question of whether retail parks can generate adequate yields is best answered by looking at countries in central and eastern Europe. While the debt crisis continues to prevail in large parts of southern Europe and the retail property markets of western European countries are saturated, retail parks in countries such as Poland, the Czech Republic and Slovakia still offer the potential to generate considerably higher yields.

Poland is the largest and most significant of these three markets by some margin. Based on number of inhabitants alone, its population of around 38 million people far exceeds that of the Czech Republic (10.6 million) and Slovakia (5.4 million).


Rosy outlook
Poland is characterised by very high and robust domestic demand. Consequently, retail sales are also showing robust growth.

Furthermore, Poland’s population does not think much of Swabian thriftiness. The share of nominal GDP attributable to consumer spending is comparatively high in Poland, averaging over 60 percent from 2008 to 2017. Average private consumption in the euro zone amounted to 55 percent over the same period. At the same time, the level of household debt is modest in comparison with western Europe. Government debt is also pleasingly low and below the Maastricht ceiling, at 56 percent. And at the start of 2018, Poland achieved real economic growth of 5.2 percent, the country’s best result since 2011.

The child benefit payments recently introduced by the current Law and Justice (PiS) government are also stimulating consumption and the economy. The Family 500+ social programme that has been in existence since 2016 pays families €150 per month for their second, and any consecutive child, until they reach the age of 18.

This is directly reflected in rising sales for retailers thanks to Polish enthusiasm for consumer spending. However, this effect will primarily be seen in smaller towns, for a very simple reason. Incomes there are lower than in the cities, meaning that the percentage growth in disposable income resulting from the child benefit payments programme is higher.

A further good — though smaller — social deed by the government was to raise the minimum wage by PLN 100 (€23.33) per month. This measure will also have a positive impact on the spending power of families on low incomes.

Poland’s positive results in terms of fundamental parameters such as GDP growth, the unemployment rate, demographics and the national budget, have been reflected in the News & World Report ranking, in which the country was once again listed as the third best investment location on the planet. Standard & Poor’s has also now recognised Poland’s surprisingly good performance by upgrading the country’s credit rating.

Away from the city
Due to Poland’s great economic success over recent years, many international retail property investors are already focusing on the country’s major cities and, above all, on its capital city, Warsaw.

However, it is also worth considering the country’s small and medium-sized towns and cities. The advantage of retail parks is that they need a significantly smaller catchment area on account of their tenant structure, which comprises discounters and businesses catering to shoppers’ daily needs. This means that many more locations are eligible for development than is the case for shopping centres. A town should have a population of over 15,000 to be eligible as an investment location.

The significance of smaller towns becomes particularly clear when one looks at how Poland’s population is distributed. 40 percent of the population lives in rural areas, 49 percent, in small and medium-sized towns and cities, and only 11 percent in large cities. There are 200 towns or cities with over 25,000 inhabitants and there is an undersupply of modern retail properties in these locations, as international investors frequently concentrate on the A-cities due to the higher barriers to market entry. Small Polish towns often do not have any retail parks at all and their inhabitants drive long distances to the closest shopping centre.

A further positive trend in small and medium-sized towns and cities is the rapid rise in spending power. One retail expert recently pointed out that if the fourth-largest city in Poland, Wrocław (with 632,000 inhabitants), experiences a 2 percent climb in spending power, then the district city of Kalisz, which is six times smaller in terms of population (with 101,300 inhabitants), experiences a 12.5 percent rise at the same time.

It is clear, therefore, that investors who veer off the beaten path can generate attractive yields in Poland’s small towns and cities.

Yields of 6 percent to 7.25 percent
According to JLL, prime yields for shopping centres in Warsaw amount to under 5 percent. By contrast, retail parks are yet to become an established asset class in Poland. Market transparency is therefore relatively low and very little market data is available on the sector. According to our observations, gross initial yields average 6 percent to 7.25 percent and are thus substantially higher than those for retail parks in western European markets. What’s more, high tenant demand for retail parks due to undersupply will not change for many years to come.

Demand from investors also remains relatively low. There are two reasons for this. Firstly, many professional investors — particularly those from abroad — concentrate on the A-cities and leave small and medium-sized Polish towns and cities to one side. Secondly, international investors chiefly focus on shopping centres and office properties. The combination of these two factors means that yield compression is not yet very advanced in the case of Polish retail parks.

A further argument in favour of retail parks is that they are less affected by the increase in online retailing than shopping centres. Generally speaking, they sell goods at a lower price level and high turnover rate. There is thus less incentive to buy online. In addition, online retailing is progressing further in the major cities. This trend is significantly slower in more rural areas and small towns, partly because the logistics network is less developed in the countryside.

All in all, Poland offers retail park investors exactly what they are looking for. v


Pepijn Morshuis is CEO of Trei Real Estate.

Forgot your username or password?