The Polish Real Estate Guide Edition 2012 Poland The real state of real estate Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information, please visit: www.ey.com/pl Linklaters specializes in advising the world’s leading companies, financial institutions and governments on their most challenging transactions and assignments. With 26 offices in major business and financial centres, we deliver an outstanding service to our clients anywhere in the word. We are one of the leading international law firms in Poland, with an unparalleled ability to carry out complex cross-border deals involving, or originating from, Poland. Our on-the-ground experience and local insight, combined with the firm’s global footprint, legal and sector expertise and world class client service, ensures we deliver outstanding result for our client in this dynamic market, and beyond. For more information, please visit: www.linklaters.com Photo Courtesy of MGPA Preface Ernst & Young, a global leader in assurance, tax, transaction and advisory services has joined forces with Linklaters, a market-leading global law firm, to prepare this guide to the Polish real estate market. This guide aims to provide its readers with a broad view of the market and the current investment climate, as well as legal and tax information, in a practical format to help you make informed investment decisions. Our combined expertise in this market has enabled us to produce what we hope will become an indispensable reference tool on the state of the Polish real estate market. In conjunction with the views contained in this guide, it is important to seek current and detailed information on the commercial climate at the time of considering your investment, as this can change at any time. This guide reflects information current as of 1 January 2012 unless stated otherwise. Poland. The real state of real estate 1 Contents Preface ....................................................................................................1 1. Polish Real Estate Market ...................................................................3 1.1. Office market .........................................................................................3 1.2. Retail market .......................................................................................10 1.3. Warehouse market ...............................................................................14 1.4. Residential market................................................................................18 1.5. Investment market ...............................................................................20 1.6. Key cities in Poland ...............................................................................28 2. Legal and tax aspects of investing in real estate ...............................37 2.1. Legal background .................................................................................38 2.2. Investment vehicles and structures ........................................................45 2.3. Real estate financing ............................................................................54 2.4. Acquisition of real estate ......................................................................67 2.5. Development and construction ..............................................................80 2.6. Operation and exploitation ....................................................................90 2.7. Exiting the investment ..........................................................................98 2.8. Sale and lease back ..............................................................................98 2.9. Due diligence as part of the acquisition process ................................... 100 3. Accounting aspects of investing in the Real Estate market .............113 3.1. Polish accounting regulations ............................................................. 113 3.2. Selected Aspects of Accounting for Real Estate under International Financial Reporting Standards............................................................ 126 3.3. Principal differences between Polish and International Financial Reporting Standards applicable for real estate entities ........................ 138 3.4. Selected accounting issues ................................................................ 142 4. Contacts ........................................................................................149 4.1. Ernst & Young .................................................................................. 149 4.2. Linklaters .......................................................................................... 154 Appendix .............................................................................................157 2 Poland. The real state of real estate 1. Polish Real Estate Market 1.1. Office market Poland – general Following major reforms in 1992, Poland experienced a boom in economic activity in the 1990’s. Like other markets, the modern office market began to emerge with an initial wave of new office construction starting in the financial and political capital – Warsaw. Until 1996, annual supply remained below 50,000 m2, which was substantially less than the rapidly increasing demand. Because of the difficult local development and financing conditions, supply was initially slow to respond. The second half of the decade showed a rapid increase in supply, as Poland demonstrated its political stability and sound economic fundamentals. The rapid increases continued into the first part of this decade, initially addressing pent-up demand from decades of low supply, but later resulting in an office oversupply in many major cities and towns in Poland. Generally, rents were in steady decline from the 1990s until 2005. The years run up to 2009 showed a reversal of this trend, with indications of a maturing office market where new buildings come to market in a more timely response to demand and thus stabilizing rents and vacancies. Although the financial crisis temporarily affected the situation, Warsaw remains by far the largest office market in Poland and still attracts major development activity. On the other hand, other regional business centers have entered the path of strong economic growth, increasing interest in modern office accommodation even in smaller cities and towns. As far as new projects under construction and proposed are concerned, in 2011 the most important activity was observed in Krakow, Wrocław and Tri–City. On the majority of Polish office markets year 2011 was one of the weakest in terms of new supply. The strict lending criteria implemented by banks after 2008 verified most of the investment processes. Currently construction activity recovers all across Poland, after a sharp decrease in number of completions, developers have revived their previous plans. Poland. The real state of real estate 3 Focus on Warsaw The modern office market in Warsaw started to develop rapidly at the beginning of the 1990s in response to the Polish political transition and economic reforms, followed by a growth period during recent years, in which the Warsaw area played a major role. Because of its central functions and convenient location, the Polish capital city has received a significant share of the inflow of foreign capital. Large foreign companies, including various financial institutions, consulting companies, as well as international firms, usually choose Warsaw as a location of their headquarters in Poland. In addition, Warsaw has traditionally been the most important administrative and business center for domestic companies. This led to rapid growth of demand for modern office space in the city, which in the period from 1990 until the first half of 1998 resulted in 98% to 100% occupancy rates as well as one of the highest rental levels for office space among European cities. Supply The end of 1998 marked the first dramatic date for modern office space, where over the course of one year the modern office supply doubled from the 300,000 m2 completed between 1989 and 1997, to 680,000 m2. Two years later, stock rose to approximately 1,360,000 m2 and although 54% of this was in the city center, 2001 marked the end of the central location’s dominance in new annual supply. With the exception of 2003, annual delivery of modern office space in non-central locations exceeded central, and the trend continued through 2011. At the end of 2011, the total modern office space reached approximately 3,6 million m2, with non-central locations accounting for around 65%. Annual delivery of modern office space (m2) 250 000 18% 16% 200 000 14% 12% 2 e 150 000 t a m r 10% n y i c y l n l a p 8% c u 100 000 a S V 6% 4% 50 000 2% - 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Non-central City center Vacancy Source: Ernst & Young 4 Poland. The real state of real estate As the supply of new space reached and surpassed demand, the market saw vacancy rates rise to very high levels. Starting from between 4 and 6% in 1998, the building boom from 2000