During its annual European investor roadshow in February, members of Cushman & Wakefield’s Poland capital markets team soon discovered that those keen to put cash into central and eastern Europe’s property market tended to talk on a common theme.
“Every meeting we had started with a discussion about Polish politics,” says James Chapman, head of central European capital markets at the property services company. “There are lots of questions,” he adds. “It is a slight cloud on what was previously a clear blue sky.”
Since coming to power in October, Poland’s new ruling party has startled investors and shocked political analysts who had become used to stability in the EU’s sixth-largest economy. The party’s pronouncements have prompted international concern about the direction of this pivotal member of the central and eastern European group of countries.
Ultra-conservative, populist, broadly Eurosceptic and nationalist, the Law and Justice party has wasted little time in using the first parliamentary majority in Polish democratic history to push through a range of political, economic and social reforms. Overseas investors have been left to worry and work out what this means for them.
“One of the great advantages of doing business in Poland had been that you could rely on a stable and predictable political landscape that was pro-business,” says Ben Habib, managing director of First Property Poland, a fund manager with more than €300m in the Polish property market. “It is interesting that throughout the credit crunch, Poland maintained its A-minus [credit] rating and within two months the new government managed to get downgraded.”
That one-notch downgrade, by Standard & Poor’s in January to BBB+, was the most serious shift in sentiment towards Poland since the election. Investors are concerned about two policies. Firstly, the government’s steps to impose control on state-run media and to change the way the judicial system works have led to accusations of undermining democracy and the rule of law. Today, investors must price political risk into their plans more carefully than before.
Secondly, moves by the government to raise taxes on the banking and retail industries — both majority foreign-owned — have had a direct effect on property, driving up the cost of finance and raising questions over the future of investing in Polish retail.
“Although international funds are not interested in politics, they are interested in its influence on the country’s economy and investment attractiveness,” says Tomasz Trzoslo, Poland managing director at property services company Jones Lang LaSalle. “Foreign investors will not withdraw from Poland, although a more cautious attitude and some changes in investment strategies cannot be ruled out.”
Those concerns echo worries elsewhere in the region. In Hungary, prime minister Viktor Orban’s controversial interpretation of democracy and moves to squeeze foreign capital make some overseas investors wary. Ukraine suffers from long-running concerns over political stability and rule of law, while Slovakia raised fears over its political direction in March, when it elected fascists to its parliament.
“Within two months, the new government managed to get Poland’s A-minus credit rating downgraded”
– Ben Habib, managing director of First Property Poland
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Developers, fund managers and estate agents in Poland point to examples of banks increasing the cost of capital or tearing up funding agreements as a result of Warsaw’s tax on bank assets, which came into force on March 1 and has been earmarked to help pay for a €5bn rise in child benefits.
“Where we have seen deals wobble is with the banking tax,” says Mr Chapman. Such deals may not have fallen through but have been renegotiated “because banks have changed their terms”.
Although the new tax, and a levy on supermarkets that could dampen demand for large-scale retail projects, have raised investor concern, the majority of developers say they have no plans to withdraw from Poland.
Indeed, some have cheered the government’s moves to increase social benefits and reduce taxes on the poorest members of society, suggesting that these policies will increase consumption of goods and services across the wider economy.
At the same time, the government’s stance towards overseas capital has raised eyebrows and comparisons with Mr Orban’s programme of targeting foreign investors. Some Polish government ministers have called for overseas investors to lose “privileges” and for local funds to be given more encouragement instead.
Foreign investors provided the overwhelming majority of capital that led investment in Poland’s property market to hit €4.1bn in 2015, according to JLL.
This was the highest volume since 2006, with commercial and industrial markets hitting record levels.
Poland’s market accounted for almost half the total invested in property across central and eastern Europe last year, underscoring its importance to the region.
“It seems to be lost on the government that there are knock-on effects to their programme,” says Mr Habib.
“I am rather hoping that there are sane voices inside the government that would advise against more actions that would upset the international financial community.”