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Market commentary from Preliminary Report dated 31 March 2024
Continued elevated interest rates, coupled with, inter alia, the cost of capital improvements in order to meet net zero emissions targets, and reduced tenant demand for regional offices and regional retail units, continue to exert sustained pressure on the commercial property market. As a result total transaction levels in 2023 reduced to £44bn (2022: £62bn), 27% below the 10-year average of £60bn. Office transactions in particular were weak, suffering their second weakest quarter in Q1 2024 since 2009, the weakest being Q2 2020 during covid. Capital values have generally reduced across the board, in many cases by more than 50% since the onset of lockdowns during the covid pandemic.
Tenant demand for offices is focused on class A city centre space. Vacancy rates for such space is low at some 2.3%, even though the average tenant requirement is some 25% smaller than prior to covid. In contrast, demand for offices in outer or non-prime locations is minimal. Vacancy levels for regional offices stands at 10.5% versus a long term average of 6.6%, though take-up is improving. The value of many regional offices has declined to little more than land value.
Market commentary from Interim Report dated 30 September 2023
GDP growth contracted by 0.8% per annum in the first half of 2023, resulting in forecasters downgrading their full year GDP growth estimates to 0.2% per annum, the lowest it has been in our entire time investing in that country. GDP growth is expected to rebound in 2024, to 2.8% per annum (previous forecasts were at 2.2% per annum).
Unemployment was at a historic low of 5.0% in August, which, in combination with strong nominal wage increases, is expected to drive economic activity in 2024.
The National Bank of Poland’s key policy interest rate was cut in September by 75bp and in October by 25bp and now stands at 5.75% per annum. Inflation has fallen from some 17% year on year to around 4%.
Investment demand for commercial property remains weak but occupational demand remains steady. The development of new property is at a cyclical low.
Rental values in Poland are contractually mostly linked to inflation, which offers some protection from inflation as long as the economy remains buoyant, and tenants can afford to pay their contractual increases.