AMZN Amazon.com Inc

By Isobel Lee 

The industrial real-estate market is booming in Central and Eastern Europe, thanks to the region's geography and cheap labor along with the benefits of Europe's unified currency and lack of trade restrictions.

Developers are adding new warehouses and distribution facilities at a record pace. The math is simple: the facilities can be built and operated at low cost in countries like Poland or the Czech Republic and still serve affluent markets of high-cost countries such as Germany, Switzerland and France.

Rents for modern industrial space in Poznan, Poland, are about EUR3.50 euros ($4.09) a square meter compared with EUR5 a square meter in Berlin, 170 miles to the west, according to JLL data.

This disparity has attracted some of the world's largest retailers. Amazon.com Inc. operates five high-tech fulfillment centers along Poland's border with Germany, in Poznań, Szczecin and Sosnowiec, plus two in Wroc aw, and it plans further expansion.

By contrast, the e-commerce giant has four fulfillment centers in Italy, a country with a population of more than 60 million, compared with less than 40 million in Poland.

Domestic and foreign investors have also paid attention to the trend. About 3.7 million square meters (40 million square feet) of new space was added in 2017, a 68% increase over 2016 and 55% more than the record amount, which dates to 2007, according to broker Cushman & Wakefield Inc.

"This is the right place for us to be," said Robert Dobrzycki, chief executive of Europe for Newport, California-based Panattoni Development Company Inc., which built about 38% of the new supply in Central and Easteern Europe last year. Other players include Prologis Inc. (based in San Francisco in the U.S. and in Amsterdam in Europe) and P3 Logistics Parks, owned by Singapore's sovereign-wealth fund GIC Pvt. Ltd.

Not surprisingly, the mushrooming supply has stoked concerns of a glut in the market. Developers and investors have expressed frustration about rents in most Central and Eastern European countries, which have stayed flat for over a decade.

"Six to 12 months ago, we were seeing rents below EUR2 per square meter per month in Poland. said Ben Bannatyne, president of Prologis Europe. "In terms of our global portfolio, that's the lowest we've seen anywhere in the world."

Still the vacancy rate has stayed low in the region despite the new construction: 614,000 square meters was delivered in the last three months of 2017 in Poland compared with 144,000 square meters in the last three months of 2016, according to CBRE Inc.

Industrial real-estate values continue to rise, with total deals reaching EUR2.2 billion ($2.57 billion) for 2017. The sector now represents 20% of the region's commercial real-estate market, compared with around 4% just a decade ago.

At the same time, analysts are pointing to the industrial market in Central and Eastern Europe as an argument in favor of regional economies and currencies. These arguments have taken on new urgency as concerns about Italy's commitment to the euro and the European Community have shaken global financial markets.

Proponents of the euro point out that Slovakia's adoption of the currency in 2009 triggered the arrival of European automotive giants such as Volkswagen AG and Peugeot SA, as well as several South Korean car-tech manufacturers. "Slovakia now produces more cars per capita than any other country in the world," said Ian Worboys, CEO of P3 Logistics Parks, a pan-European industrial specialist. The presence of those companies helped to drive demand for the big industrial spaces.

The region's industrial-property market looked a lot different in 2004 when Panattoni first opened operations in Europe, just a few years after the euro was introduced on the continent. By the end of 2004, there was 1.6 million square meters of industrial stock in Poland, compared with 13.7 million square meters in March 2018, according to JLL.

The market started to gain momentum especially as thousands of miles of new roads were added to the region, partly with funding from the European Union. "You can get from Poland to all of Germany or even to parts of France in one 9 hour drive shift," said Eric Jansen, managing director of Eastdil Secured Europe.

Domestic growth also fueled the industrial-property sector. While other economies contracted during the global financial crisis, Poland's GDP kept rising. CBRE forecasts further increases of 3.25% to 4.5% across Central and Eastern Europe for the coming years.

In the current recovery, growth in the industrial sector has been fueled by Europe's love affair with e-commerce, which has driven the expansion of logistics and courier operators, such as DHL Worldwide Express and Kuehne + Nagel, Mr. Dobrzycki said. "Investors which historically invested in retail are using logistics to hedge against the loss of momentum on the retail side," said Mr. Dobrzycki.

Of course, growth could be dampened by a wide range of forces including rising interest rates or the trade tensions between Europe and the U.S.

But the party doesn't appear to be over yet. In first three months of 2018, tenants in Poland leased a record 1.1 million square meters. Panattoni has just started a EUR1.2 billion pan-European investment program in last-mile logistics assets, anticipating a potential e-commerce boom in Poland.

Mr. Bannatyne, of Prologis, predicts rent increases will follow. "Land is becoming more constrained, construction costs are increasing," he said. "We're seeing proper, sustainable rent levels which set things up for sustainable growth in the coming years."

(END) Dow Jones Newswires

June 05, 2018 07:14 ET (11:14 GMT)

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