The first six months were pretty slow in manufacturing around Europe. Have you felt that?
We saw it first in the demand levels. Companies aren’t relocating, they’re postponing their growth plans instead because they feel demand from their customers is slowing down. We’re one part of this chain. In hot markets, companies located in the capital cities will usually grow by following their customers to the regions. When things cool off again, it usually starts in the regions and then it comes to Prague or Bratislava. That’s been happening.
We don’t believe that it will be a long-term slowdown or something similar or comparable with the crisis from the past. However, it’s been accelerated by global events like war in the Ukraine and the huge increase in energy costs that brought about. Bank financing became more difficult to access for some investors. So all these factors basically led to a market cooldown.
On the other hand, logistics real estate has been pretty stable, even during COVID. Anything that’s bought online or in the shopping malls has to go through a warehouse first. This gives us a bit of confidence because logistics real estate is one of the most stable segments in commercial real estate. The problems you’re seeing now in the office sector aren’t the same in logistics. We’re just waiting for consumer confidence to return and for people to start spending money again. Then we’ll see growth again in our sector.
The pandemic is over, rates are coming down and energy costs appear to have peaked. Do you expect things to return to normality as a result? This slowdown has people worried there might be another hit coming.
It depends. I think some of the overheated segments will be hit. Certainly, we’ll never get back to the pre-COVID or pre-war times and I don’t think we’ll see the sort of bank financing we had 2-3 years ago. With refinancing requirements, some of the investors who were a little more aggressive in the past could be hit. But there could also be appetite from other investors who are ready to invest. I think we will see a lot of capital recycling. Some market newcomers and possibly some smaller, local developers who depend on bank financing may be be forced to sell assets. The bigger players will be more stable because they are not so impacted by global events.
With our strong shareholders, I think P3 will always have an appetite for growth. We’ll see where the growth comes from, whether we invest in yielding assets or if it will be opportunities to buy land that we can then develop. It’s really difficult to predict.
Interest rates have been coming down slowly, but that’s only part of a larger picture. How do you figure out a strategy based on what you’re seeing?
We learned lesson from past crises, so today our strategy is to diversify to make sure we’re not dependent on any one segment. We also try to always offer a standardized product that allows us to take advantage of whatever the current situation on the market is. When we saw e-commerce booming during COVID, it was easy to adapt to that because as long-term owners, our products are usually standardized. For us it’s important to have a product which will work in 10-15 years’ time.
But we’re also watching what’s happening with nearshoring. With the EU law on Chinese electric cars, more and more Chinese and Asian companies will be pushed to move their operations closer to their customers in Western Europe and the US. Already we’re seeing the first deals with Chinese companies in Slovakia for opening production plants for batteries. We see Taiwanese companies moving their operations to Europe because of the threat to the global situation. We see the slowdown in the automotive sector in Germany, but it’s replaced by some other segments.
The main thing as a developer is not to have too much speculative space built at the wrong time.
I think like a lot of developers, we learned that lesson back in 2008-2009. I don’t think any of us have such big exposure into speculative development. We still build spec when it makes sense. Sometimes the slowdown keeps the premises empty for longer than we expected. But I don’t think that there’s enough exposure to cause us trouble — at least not the bigger players. We try to offer product which is as close to ready as possible. We usually try to get buildings to the stage where the halls are dry, closed, and they only need modifications of the offices or the racking system. We like to have the premises at a stage where we can react within two to three months maximum.
What would you say is the greatest barrier for growth?
The biggest concern is availability of the land. It’s about the willingness of local authorities or the politicians to allow more greenfield projects, especially in the Czech Republic. The permitting still takes incredibly long compared to the surrounding markets. If you see Hungary or Poland, it’s much easier to get permitted land there than in Czech Republic or Slovakia where it’s unpredictable and difficult. And it’s also not transparent. This is the biggest concern we have, because we’re losing competitiveness compared to the surrounding markets. In some cases, they offer cheaper solutions, they have more available labor and they’re just faster, transparent and flexible with greenfield projects. We’re being pushed to do brownfield projects, but this is not always a magic key for success.
Are industrial rents coming down after such crazy growth?
I don’t think they will go down. But I also don’t think we’ll face such rental growth as in the last couple of years. Maybe regionally, where you have the bigger exposure to the speculative development and you’re facing a steeper slowdown you might see a slight decrease in rents or additional incentives. I wouldn’t call it a rental decrease, though. I would say developers could be more flexible towards some tenant improvements, or other incentives.
Peter Jánoši is P3’s Managing Director Czech Republic & Slovakia
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