7R's project portfolio totals 3 million sqm
We currently have 3 million sqm of warehouse and production space planned and under construction. With such a portfolio, we are able to respond flexibly to the needs of the market. We will now build selectively, less than we assumed a year ago, because market conditions have changed. The key for us is the high quality of the facilities and strengthening their long-term value - explains Tomasz Lubowiecki, President of the Management Board of 7R.
Grażyna Kuryłło, Property News: Are warehouses immune to inflation?
Tomasz Lubowiecki, CEO of 7R: Yes and no. Construction costs have skyrocketed. As a result, I believe there will be less supply. At the same time, rents have to go up, so the warehouse as a product is in a sense resilient because it produces good returns. The rates are indexed so the owner of the property is secured.
The tenant has to pay, but will these increases not slow down the demand?
It is difficult to predict today, but in my opinion, the demand will fall. However, with the supply reduced, this will not be very noticeable.
Can the war in Ukraine change this trend?
Yes. Companies from Ukraine, Russia or Belarus are thinking about relocation, so they are already asking about our warehouses. So we will experience the nearshoring we already expected in the pandemic, only then it was about shortening the supply chain from Asia, and now we will experience an influx of entities from beyond our eastern border. I believe that we will soon be building BTS facilities for specific companies leaving those markets.
On the other hand, does not our neighbourhood with a war-torn country cause consternation among foreign investors?
European investment funds know that we are a stable member of the EU and NATO and that we have a strong position. Our transactions are proceeding as normal. For example, after the outbreak of the war, we signed a contract for the sale of the Warsaw project with the best profit in the history of our company. Our contract with CTP for several projects was also concluded in the present circumstances. This is the best proof that - despite what is happening in Ukraine - companies see the great potential and want to invest in Poland.
It is also worth mentioning the reconstruction of Ukraine. It's also a big chance, isn't it?
Yes, it will definitely be a big challenge for us. Companies that are involved in this process will rent warehouses from us or run production. So there is great potential for the Polish market. We also intend to participate in this project.
Alone or with a partner? After all, you like to invite your competitors to cooperate. It's a bit unusual.
Indeed, our strategy provides for both the sale of facilities to funds and cooperation with competitors. We have already implemented projects, including with Hillwood, GLP, Segro and now CTP. Our philosophy shows that we like to cooperate with our competitors because we can provide them with good projects. We are a dynamic player and our competitors appreciate it.
Today, not only is inflation plaguing the market, but also a lack of labour and some building materials, such as steel. How are your general contractors dealing with this?
It is a challenge. I believe that, paradoxically, a smaller number of implemented projects will help general contractors, as the demand for employees will slightly decrease. For example, general managers are more selective when choosing projects, because they want to cooperate only with stable developers. We are lucky to belong to this group. So far, we have had no problems choosing a contractor. Admittedly, the market is difficult at the moment.
Probably also due to the lower availability of land?
Yes, because today owners prefer to keep land in their wallets instead of money, of course, due to inflation. So acquiring land is not easy. For this reason, we have decided to keep some of the constructed facilities in our portfolio. We know that their valuation will increase over time. In this way, we will strengthen the company's value. We still intend to sell our warehouses, but we are also opening up more to managing our own facilities. We have plenty of experience - we already manage an area of over 1 million sq m. - both our own and those entrusted to us by the funds cooperating with us. We specialize in technologically advanced and environmentally friendly projects. We strive for climate neutrality and care for the social environment of our facilities. Investors appreciate companies' activities in line with ESG criteria.
You certify warehouses in the BREAM system. Your standard is Very Good. Are you planning on "hopping on" the Excellent?
Of course, this is one of our goals and the Excellent certified warehouses will be more and more what our customers expect. For example, our warehouse for Żabka, which is being built in Radzymin near Warsaw, is currently in the final stage of construction. Already in the initial phase of the project, it was certified with BREEAM Excellent.
7R plans to debut abroad. The first warehouse will be built in the Czech Republic in the fourth quarter of this year. Is the Polish market getting too tight for you?
We made this decision at the beginning of last year because we are following our clients and they are also asking about our facilities abroad. We decided on the Czech Republic because we are in the "basket" of Central Europe and we want to present our competencies there as well. It will be a big box, in a very good location - right next to the motorway, 40 km from Brno. However, Poland is still our main market.
What level of commercialization will you start with your projects, because I understand that speculative building is not an option?
We have never been the king of speculation. We always build on a strong pre-let - 30 per cent. pre-lease contracts are the minimum without which we can not start the project. We will be very careful in completely new locations. However, when it comes to the expansions of existing parks, where we know partners and their expectations, we may be more prone to bold decisions.
Is there a problem with completing pre-lease contracts today?
The dynamics is still considerable. We have a good level of pre-let on so many projects, but there is also some uncertainty in the market. In such circumstances, every decision is made more carefully. In a word: there is no stagnation, but there are signs of cooling. Fortunately, in addition to the risks, the industry as a whole also has a lot of opportunities, and I'm sure they will be put to good use.
How the pace of your realizations will change. Will the planned million square meters per year be maintained?
We have 3 million sqm planned and under construction, of which over half a million is under construction at various levels. Exactly at 570 thousand. sq m we have a building permit and we would like to start their construction this year. Having such a portfolio, we are able to flexibly respond to market needs. We will build selectively, focusing on the high quality of facilities and strengthening their long-term value,
says Tomasz Lubowiecki, CEO of 7R.
The interview was published on Property News on May 18, 2022.