Arguments in favor of the law are virtually non-existent, with a number of industry experts calling it outright "illegal." Now developers are scrambling to comply with the murky measures
Having failed to prevent the law's passage through parliament, the industry is now in damage-control mode. The most pressing concern is complying with new regulations in as timely fashion as possible. This is not an easy task given the legislation's lack of clarity regarding the whos, whats and hows of compliance. As Katarzyna Michnikowska, a senior analyst at Cushman & Wakefield put it, "There is no executive order to specify the precise terms of the application or the range of surveyor analysis required in preparation for submitting accurate documentation."
In other words, there are no guidelines as to which businesses must adhere to the regulations - do car dealers, for example, need to apply for a permit to "legalize" their retail activity? The law also fails to provide an exact definition of "sales area," although it does differentiate sales areas from showroom areas. Thus resurfaces the problem of defining a precise sales area in even a basic retail unit, such as a supermarket, let alone a car dealership.
Businesses are now worried about meeting the October 18 deadline, established by the law, by which they must register existing properties. Failure to comply with the new law could result in a fine of up to zł.1 million and closure of the business. Lack of precise wording in the document, however, means entrepreneurs are unsure of which properties must be registered. In the meantime, the Polish Confederation of Private Employers (PKPP) Lewiatan has issued a recommendation for across-the-board compliance by all retailers to register their existing properties "to be on the safe side."
While lawmakers have provided assurances that retroactive permits will be distributed "automatically" with no application fee required, they also stipulate that all future changes made to the established sales area require a new permit. Therefore, even the slightest alteration to the net sales area of a property requires all documentation to be resubmitted and related fees paid. Initial application for a permit costs zł.25 per sqm of declared sales area but no higher than 0.5 percent of the declared value of the investment. Application costs for subsequent permits are 50-percent lower.
Administrative paralysis
Michnikowska predicts an administrative paralysis of sorts in the period, particularly just after the law's enactment. To deepen the confusion, the law focuses on basic retail units, such as supermarkets, which are owned and operated by the same firm. "However, it does not take into account the particulars of the shopping-center market, where a large number of firms act as co-owners of a property or certain parts of a property, along with tenants, sub-tenants, operators and property-managers," noted Maciej Kiełbicki, managing director of Mayland Real Estate.
According to Mariusz Fràckiewicz, associate director for investment acquisition and property finance at Quinlan Private Golub, the law creates "time-consuming procedures that will inevitably slow down the development of retail projects, along with burdening investors with costs related to analagous delays, extraneous interest and administrative expenses." Industry experts all agree that the new measures will inevitably stifle the flow of capital through all levels of the retail market. According to Michnikowska, the potential dangers include a complete flattening of the already-low vacancy rate, leading to skyrocketing lease rates and a tightening of the re-commercialization process by retailers reluctant to tinker with established sales areas. This will effectively discourage the introduction of new brands to the market and the expansion of existing brands.
Risky business
The law also stipulates that once a permit is issued, developments must be completed within 36 months. Any delays in execution risk the forfeiture of the permit and therefore the legality of the retailer's activity on the property. Jan Dębski, president of ECE Projektmanagement Polska, said that while he doesn't expect the law to significantly impact projects already underway, it "will certainly slow down future projects as a direct result of increased risk."
Kiełbicki noted that "developing markets in smaller cities will feel the brunt of such changes more harshly, where there is a greater sensitivity to price fluctuations than in bigger cities." This could put a damper on the activity of small-city investors, cutting off the much-needed flow of capital to areas that are otherwise ripe for development. Both Dębski and Kiełbicki agreed that increased costs will effectively be passed down to the consumer, hitting all the links of the retail chain.
Firms seeking credit financing for their projects could also feel the brunt of wary creditors. "The higher level of risk with regard to new retail projects will cause a spike in both refusal rates and interest rates," Kiełbicki said. The most obvious effect would be a decline in the number of retail properties delivered, which would, in turn, bring an exorbitant hike in the values of existing properties, negatively impacting acquisition deals in the retail property sector - worth an estimated zł.3.5 million in H1 2007.
According to Fràckiewicz, there is already prevalent speculation that the bill will inevitably hit those whom it aimed to protect. "Large retail operators might rapidly increase their budgets for the development of smaller outlets that would not exceed 399 sqm in area," he explained, further contributing to the consolidation of the fragmented market by a select group of firms.
Fast forward
Nonetheless, most analysts remain optimistic about the future of Poland's retail market. Emmerson's Magdalena Stępkowska, a retail specialist, is also confident that the Polish retail market will continue to grow, "however, investors will consider the modernization and recommercialization of older retail centers," she said. Decisions to enter the Polish market will also be made more carefully and a number of investors could shift their interests to other markets, such as Bulgaria and Romania, according to Cushman & Wakefield's Michnicka. Quinlan Private Golub's Frąckiewicz accepted that while the bill could potentially slow down large-scale retail development for the first few months, "the situation is bound to stabilize, given the likelihood of the Constitutional Tribunal declaring the new law in defiance of the Polish Constitution."
Michał Kozłowski, partner and legal counsel heading the property law team at Krawczyk and Partners, suggested, however, that nothing should be taken for granted. "This law is the result of lengthy efforts on the part of a group of Sejm deputies since 2005 - at most, changes could be implemented to address the most controversial and burdensome issues." He concluded, "It appears imperative for the Constitutional Tribunal to evaluate its legality with regard to the Constitution."
