Brexit is working out well for our sector

The source of this article is Link Bulletin Magazine No.62.

Bulletin talked to Jeroen van der Toolen, the Dutch MD in Poland of the Belgian company Ghelamco, which is the biggest office developer in the country. We talked about the current political situation, the company’s developments such as the Warsaw Hub and the award-winning Warsaw Spire, and the situation on the office market.

How do you see the current office market in Poland? Are companies hesitating or is there a big demand on the market?

“The office market is actually very positive in Poland, and especially in Warsaw. Over the last two years, real estate investment funds were a bit hesitant because of the potential oversupply and the VAT return issues. However, 6 months ago this situation changed. In 2017 over 800,000 sqm of office space was leased and the vacancy rate went down from 14-1% to 7-8% for modern office space.

Looking at the future trend for the market, we have found that from 2018 until the middle of 2019 there will be a very limited supply of new offices, but at the end of 2019 and the beginning of 2020 there will again be a lot of new office space coming onto the market. Some of these buildings have already been committed to and I believe that we are lucky that Brexit is working out very well for our sector at the moment and creating opportunities. Both Warsaw in particular and Poland in general have been able to attract financial companies from London.”

Are there many companies coming or just a few?

“I am not sure about the exact number of companies but for sure it’s not just a few. Brexit and cost savings are the two main reasons why companies are leaving London and why, in many cases, they are choosing Warsaw. When I was in London recently, I learned that when they analysed, for example, Prague, Budapest and Warsaw, it was Warsaw that had the biggest pool of talent and that was the decisive argument for them. Poland is a big country, so they can also source people outside the capital and bring them here. We also see that companies are putting their EU headquarters in Frankfurt at the moment, but their back offices are being developed in Poland. And not only the typical back office functions, but they are also moving HR and other departments to Poland. I already see that BNP Securities Services has its trading desks here and I believe that other companies will follow suit with their own trading desks as well.

The largest companies that I know of are BNP Securities Services, Goldman Sachs, JP Morgan, Credit Suisse and Citi International. We have also had other financial companies that have come to the Warsaw Spire which service banks, like Luxoft. There are 3 more financial institutions coming to Warsaw from London that I know of today, but also from other locations like Germany and the USA.

These newcomers on the Warsaw market expand fast. Take Citi International, for example. A couple of years ago, we rented 13,500 sqm to them in the T-Mobile Office Park. They have already taken an extra 4,000 sqm and they recently occupied a further 20,000 sqm from Skanska on Rondo Daszyńskiego. These companies are not just developing gradually but they are putting their R&D centres or entire departments here, and for that they need thousands of square metres. Already in Warsaw around 30,000 new jobs have been created in this sector, which is good for Poland because these people are also being trained for higher-level, better-paid jobs.”

What is the impact on your work of these developments?

“They are changing the way we design our buildings. The young people that work for them want to be in the city centre and they want the buildings to have all the latest facilities, so these companies accordingly decide to take very high-quality buildings. They don’t give company cars to their people as we are living in a shared economy. Their employees want free access to the gym, good medical care and higher salaries where they can decide for themselves what to do with their money. They even prefer a couple of hours less work a week as a bonus, so they can go to the gym and do other things. Some companies don’t adapt, but others are changing their own work policies about working at home, working from co-working centres, and so on. Driven by these needs, we make the buildings more flexible by digitalising the space, for example. This is not only happening in Warsaw but also in Kraków, Wrocław and other cities around Poland.”

What is the impact on the square metre price of all these buildings that are coming onto the market?

“As of now and for the next 1.5 years, square metre prices are going up. We can already see now that there are far fewer incentives given to tenants. Of course, if you want to rent space for 2020 then there is enough choice on the market. And if you have a lot of square metres, you can become the anchor tenant, in which case the right moment to make that deal is now. If you need a couple of thousand square metres in the centre of Warsaw today, you have almost no choice. So I believe that rents over the next 1.5-2 years will go up but when you commit today for space in 2020 it will be at the level of the rents of 2017.

But with all the buildings being constructed, don’t you expect more free space to become available?

“From 2020 there will be more space available, but there is a lot of purchasing coming up and therefore I believe that the vacancy rate will also not go over 8-9% in 2020. Moreover, I believe that some of the developments will not be delivered at the time promised, and therefore there will be fewer square metres delivered to the market than everybody expects.”

You also mentioned the problem of staff availability. With all these companies that are coming, can we expect some issues with staff?

“Yes, that’s right. The thing is that some banks are already seeing that hiring is much more difficult than they expected, but they don’t have any alternative since also in other countries in the region there are a lot of people who have gone to Western Europe. I notice when we talk to new tenants that they are still very happy and satisfied with the quality of people. There are still many students coming from the universities in Poland and these companies are able to attract those people to Warsaw by offering them better conditions.

What do you think about the regions around Poland?

“We finished at the end of last year a 26,000 sqm building for Mbank in Łódź, which is a very nice project and it has already been sold to LCN Capital Partners. We bought all the land between the Central Station and the EC1 building so we’re going to make a big new centre in Łódź. This is a big development with a hotel, some residential space, retail on the ground floor and offices above in 7 different buildings. We are also building in Kraków at the moment. This is a smaller project of 11,000 sqm that will be ready in September this year. Also, we will be starting another project at the end of the year in Katowice, then we have a project in Wrocław and next year we will be starting another project in Kraków.”

In another interview you said that the success of cities in the region depends to a large extent on their connections. Which cities are developing fast at the moment and which ones are lagging?

“Nothing much has changed really, because the most successful city for attracting outsourcing centres is Kraków. Many elements in Kraków score very highly and after that come Wrocław, Gdańsk, and then Łódź. This is because of the improvements in infrastructure with the A1 highway and the high-speed train connection, so when you have business in Warsaw, you can fly to Chopin airport and then go directly from there to Łódź. Plus, the salaries are a little bit lower in a couple of the other cities. However, then you have cities like Poznań, which is developing less quickly, and other cities where they are more specialised, such as Rzeszów which focuses on the airline industry. The cities that are losing out are, for instance, Kielce and Toruń, which is good for tourism, but these are cities that don’t have good connections and they will become less and less popular.”

What are the concerns on the construction market?

“We see that the cost of construction is going up, which also affects the staff on the construction sites. There has been a real boom in construction, not only in Poland but in the whole of Europe, and this increased activity has led to a big increase in the cost of steel, for example. Sometimes steel is not even available. Employees are asking for a 20% higher salary on the construction sites and it’s mainly at the lower levels where the salaries are going up, not at the management level. There are not so many changes at the management level because there are no better opportunities for them in the West, but the people on lower salaries especially are leaving Poland. What we saw, of course, was that we had around 2 million Ukrainians in Poland. But from the time when they were allowed to work in other countries, we noticed on the construction sites that the teams of 40-50 Ukrainians were no longer showing up. For them, going to Poland or Germany is not that different but simply the salaries in Germany are much higher. This trend also puts more pressure on salaries.”

And how about the people in your office, have you noticed a lack of good staff on the market?
“It depends on the department, of course, but we haven’t seen a lot of people leaving. Out of our entire 180-strong staff, only 7 people left us last year.”

With all the projects that Ghelamco is putting on the market, what effect do you have on Polish architects?

“The effect we have is visible, if not significant, because when you look at the total number of square metres we have built over the years we have done much more than any individual architect in Poland.

We have involved architects in the different types of projects and the technical solutions that we requested from them were completely new for some. For a few years now, we have required all designs to be put into the software program Revit, which provides architects and engineers with the tools to build 3D models. We were the first on the market to do so and it has now become standard practice. We have also introduced the Breeam / Green certifications to Poland, the Urban Space concept, like with Plac Europejski, and the Digital building with our new project, the Warsaw Hub. Others are now copying that, which is good, as it increases the quality for the users and inhabitants of the city.”

One of Ghelamco’s most prestigious projects is the Warsaw Spire. Is it the project which helped Ghelamco to make a name for itself in Poland?

“The Warsaw Spire is a special project in many ways and not only because of its design. When designing the Spire, we put a lot of attention on Plac Europejski, which is the area around the building, to make it a public square and part of the city. We wanted the inhabitants of Warsaw to be proud of the project and we wanted to create a vibrant area where people could also spend time at the weekends. So we created Facebook and Instagram pages for the Warsaw Spire to show all the events being organised there.

We have an ice skating rink and, in the summer, an outdoor cinema which allows around 600-800 people to go to the movies. There are car events, Polish pétanque or jeu de boules, and new exhibitions every two to three months. What we wanted to achieve is a kind of community feeling with the tenants so that their employees could be proud of this project.

To be proud of the project, the project itself must be good but also, you feel proud when other people – your friends and family – say, “Wow, that is great” and you feel good that you work there. We put a lot of emphasis overall on the social marketing around it, so we also have tenants who promote the building in their own job advertisements.

The building won us the Best Office & Business Development at the MIPIM Awards last year, which are the Oscars of the real estate business.

And that was the first time that I have been so happy to win an award. It doesn’t happen very often that Poland wins a quality award as the focus here is often on costs savings and so on, so that made it even more special to receive this award. We have won around 25 different awards for the project, for example in the United States, Germany and Italy, for all the various design elements.”

How do you come up with something new that will surpass the success of the Warsaw Spire?

“Digitalisation is currently the big thing in the construction industry. In the Warsaw Spire, it was quite difficult to put in the things we wanted to implement and get the suppliers aligned. There is a lot of technical equipment in the building, such as elevators, security cameras and so on, and each supplier had their own system that needed to ‘talk’ to the other systems in the building. Some of these suppliers didn’t want to open up their systems, which led to discussions on integration and resulted in delays of more than a year and a half.

So now at the Warsaw Hub, our newest and biggest project to date, which consists of 113,000 sqm of multi-functional space, we have signed contracts with the subcontractors to open up their systems. We will therefore have the most digitalised building around, where everything in it will be connected. I am convinced that this new focus on digitalisation will make us the most innovative developer.”

As a chamber, we often get questions about the Polish government. How do you see this from your perspective?

“For the private sector, it is essential to have a government that does not interfere too much in business. However, what I think the government could improve on is their communication and the speed with which they implement legislation because companies want stability above all else. They want security, and changes are ok, but companies need to be able to plan for those changes. Last year, in our sector, we had a huge delay and less inflow of money from the big institutional investment funds because there were issues with returning VAT. It is a small world and all the funds know each other. They read the same newspapers and watch the same television networks.

It’s very important for business that everybody knows that Poland wants to be in the European Union, and that Poland is a dedicated supporter of the European Union, because companies haven’t moved out of London just to find similar problems here in Poland. And don’t forget that the most liquid and the easiest thing to change is money. When a fund is making the decision where to deploy half a billion euros, and they find a small risk issue, they will easily go somewhere else.

Luckily, in the second half of the year, everything cooled down and we saw investments pick up again, though with a 6-month delay. So, at the moment, there needs to be stability and proper communication when things are being changed so that companies have time to adapt to those changes.”