Poland Today Business Review+ No. 045 by Poland Today Business Review+

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No. 045 / 28th July 2014 / www.poland-today.pl / magazine, conferences, portal, newsletter

MANUFACTURING & PROCESSING Industry loses steam in June, production data show page 2 ENERGY & RESOURCES PKN Orlen posts PLN 5.2bn Q2 loss on Lithuania fiasco page 6 EIB lends PLN 300m to Tauron for network improvements and renewable energy investments page 7 Finnish AC drives firm Vacon acquires sales unit in Warsaw page 8 Following the merger, the company will initially focus on building wind farms.

Photo: Eclipse.sx

Kulczyk creates top private energy firm

Strengthened by a generous cash injection for the China-backed fund CEE Equity Partners, Polish billionaire Jan Kulczyk is merging his Polish energy assets PEP and Polenergia into the country's largest privately-owned utility. page 3

BASF launches EUR 90m catalysts plant German industrial giant BASF has launched production at its largest European automotive catalysts plant in Środa Śląska. Once fully operational, the site will create 400 jobs. page 2

3 Legs Resources CEO says breakthrough in Polish shale is around the corner page 8 PROPERTY & CONSTRUCTION Raiffeisen takes 19,500 sq.m of offices at Golub GetHouse's new tower in a record lease deal page 9 Office boom continues in Poland's property sector, JLL reports page 10

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TRANSPORT & LOGISTICS Polish train maker PESA to establish joint venture in Russia page 11 Prologis acquires two logistics centers from Invesco page 12 RETAIL Polish drugstore chain Dayli speeds up expansion eyeing Western Europe page 12 Inter IKEA Centre starts work on Wola Park extension page 14 Rank Progress breaks ground on Krosno retail park page 15 Fabryka Wołomin to open next year with Carrefour as anchor tenant page 15 POLITICS & ECONOMY June sees weak retail sales but good unemployment data pages 16-17 KEY FIGURES Up-to-date macroeconomic figures, currency & stock market data and lots of other hard-to-find info pages 18-20

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MANUFACTURING & PROCESSING

BASF launches EUR 90m catalysts plant in Środa Śląska German chemical giant BASF has opened a new mobile emissions catalysts production plant in Środa Śląska near Wrocław. The 40,000 sq.m facility BASF's largest emissions catalysts plant in Europe – is part of a EUR 150m investment that will create 400 jobs at the site over the coming two years. Work on the plant commenced in late 2012 with an initial investment of EUR 90m and production trials began in April this year. Last month, BASF started two emissions catalysts manufacturing lines with an initial workforce of 100. The company plans to carry out additional expansions, raising the total investment to around EUR 150m. The planned ten light-duty and heavy-duty catalysts production lines at the Środa Ślaska site are expected to reach full capacity by 2016 and employ more than 400 people. "The launch of this new production plant provides a vital addition to our global manufacturing network for innovative automotive emissions control technologies," said Kenneth Lane, President of BASF’s Catalysts division. "Tightening emissions regulations will be a key growth driver for our business. Our investment in Środa Ślaskawill provide the capacity we need to meet increased customer demand in the most efficient way possible." The emissions catalysts produced in Środa Ślaska will be used by manufacturers of light duty gasoline vehicles and light and heavy duty diesel vehicles to meet more stringent Euro 6/VI emissions regulations. The

facility will manufacture selective catalytic reduction (SCR) systems, SCR on filter (SCRoF) solutions and PremAir-branded ozone destruction catalysts for the automotive industry. The plant in Środa Śląska will house a regional sample laboratory. "Due to its attractive location and its positive economic development, Poland is an attractive place for BASF to invest. This new facility strengthens our position as a supplier of innovative solutions to the markets of central Europe," BASF central Europe business centre head Joachim Meyer.

The facility launched in July is part of BASF's EUR 150m investment in Środa Śląska. Image: BASF

"As a supplier for the automotive industry, we want to be close to our customers. Many of them already have their manufacturing sites in Central Europe or plan to settle down there," Wojciech Krzywicki, PR & government relations manager at BASF Polska, told Poland Today. "With our new plant in Poland, our manufacturing capacity in Europe will double. As far as the sample laboratory is concerned, we expect its staff numbers to reach a low double digit figure," said Krzywicki. In addition to its country headquarters in Warsaw and the newly opened catalysts unit in Środa Śląska, BASF

operates two sites in Poland: a concrete additives plant in Myślenice near Kraków and polyurethane systems factory in Śrem, near Poznań, which is also home to the company's Polish logistics and distribution center for construction chemicals. BASF's Polish product range includes chemicals, performance products, plastics, crop protection products as well as care chemicals, construction chemicals and automotive coatings. In 2012 BASF acquired the TDI (toluene diisocyanate) business of Polish chemical firm Ciech for EUR 43m. The transaction included the TDI sales and marketing activities as well as TDI research and development functions of Ciech, but no production assets. TDI is a key component for the polyurethanes industry. To a large extent it is used in the furniture segment (e.g. flexible foams for mattresses, cushions or wood coating) as well as in the automotive industry (e.g. seating cushions and interior applications). Currently, BASF employs approximately 430 in Poland, and its sales in 2013 amounted to EUR 722m. Globally, the Frankfurt, London and Zurich-listed giant turned over EUR 74bn last year with a workforce of more than 112,000 employees.

MANUFACTURING & PROCESSING

Manufacturing sector loses steam in June, production data data show

June's industrial output growth of 1.7% y/y came as an unpleasant surprise to economists, who had been expecting the figure to go up by 4%. The construction sector, one the other hand, maintained a robust momentum with an 8% increase in production against June 2013.

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"Consequently, the average growth of industrial output in last three months was lower by 1 percentage point than in Q1. On the other hand, results of the construction sector improved somewhat in Q2," said analysts at BZ WBK. "It seems that Q2 will show a slightly lower GDP growth, but in our view it will stay above 3%." According to the statistical office GUS, the June slowdown may have been related to weaker exports, and the poor result of the manufacturing industry (+2.1% y/y – the worst outcome in more than a year) provides some evidence to support their view. To some extent the June decline was driven by coke plants and refineries, which reported a 6.9% drop in production, but even without this sector, the growth in manufacturing amounted to a mere 3% y/y.

On the plus side, construction companies stayed busy in Q2, seeing a y/y improvement by nearly 10%, which was slightly better than in the first quarter. In June, just like in the prior month, rapid production growth was recorded in was recorded in entities specializing in civil engineering (+24.7% y/y) and in entities dealing mainly with specialized construction activities (+14.2% y/y), whereas companies whose basic type of activity is construction of buildings suffered a clear decline (-12.1% y/y). Producer prices (PPI) dropped 1.7% y/y in June and remained flat from the previous month. According to BZ WBK, PPI inflation will remain below zero at least until the end of the year.

ENERGY & RESOURCES

Industrial output & producer prices

Jan Kulczyk and CEE Equity Partners create Poland's largest private utility

Industry output, y/y change Producer Price Index, y/y change 8% 4% 0% -4% -8% -12% Oct 12

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The seasonally adjusted industrial production increased by 2.1%, GUS said, which is a bit lower than in the previous month (2.7%). The average growth of production in Q2 was slightly below 4% (with downward tendency month by month), which was around 1pp below the average result in the first three months of the year.

With financial support from a China-backed fund CEE Equity Partners, Polish billionaire Jan Kulczyk will create the country's largest privately-owned utility by combining his energy assets Polish Energy Partners (PEP) and Polenergia, both of which are controlled by Kulczyk Investments. As part of the transaction PEP is to take over Polenergia, with CEE Equity Partners acquiring a 16% stake in the new entity at PLN 240m. The Polenergia deal is the Chinese fund's first investment in Poland, the one we hinted at in the latest issue of BR+. The two transactions value PEP's shares at PLN 33.03 each, putting the future Polenergia's market cap at PLN 1.5bn, or three times the market value of PEP.

PEP will change its name to Polenergia and expand its renewable energy production with energy produced from coal. It will also add a gas-fired unit producing electricity and heat, and gas and electricity distribution. Kulczyk will add his other energy assets to PEP in return for shares, raising his stake from to around 65% of the enlarged Polenergia group from 60%. At the turn of the year, the newly formed Polenergia is targeting a further issue of new shares, without preemptive rights, in order to obtain the remaining capital necessary to realize its growth strategy to achieve long term stable returns and cash flows, the company said.

POLENERGIA'S INVESTMENT PROGRAM FOR YEARS 2014-2022 Stage 1 -2014-2016: • additional 380MW of on shore wind farms to be put into operation, of which 67MW is already under construction, 37MW will commence construction in July 2014, and 147MW has commenced the financing process; and • securing of Grid Connection Agreement (August 2014) as well as the Environmental Decision for 1,200MW of offshore wind farms and full development of the gas transmission pipeline between Germany and Poland for up to 5bcm/annum.

Stage 2 - 2017-2022: • further 500MW of on shore wind farms to be put into operations; • construction of 600MW of off shore wind farms as well as development until a ready-to-build stage of a further 600MW; • construction of the gas transmission pipeline between Poland and Germany for up to 5bcm/annum. Source: Kulczyk Investments

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CEE Equity Partners was founded and capitalized by The Export-Import Bank of China at the beginning of 2014. The fund plans to invest USD 500m in the next 2-3 years in the most attractive energy, telecommunication and infrastructure projects in Central and Eastern Europe. Once it spends 60% of its initial capital, the fund will receive a new tranche of funding to the tune of USD 1.5bn, CEE Equity Partners CEO Rafał Andrzejewski told Poland Today. The fund's remit is to focus on opportunities in infrastructure, energy, telecom and specialized production. It will operate for 10 years, with the option of a two-year extension. It will invest USD 20-70m per project in equity alone. "Polenergia is the only independent Polish power company which is well diversified and active in the most attractive segments of the market. In our analysis of the potential investment opportunities in Poland we targeted exactly this kind of investment profile. The other key parameters of our investment case is the support of Kulczyk Investments as well as the strong and experienced management team. In our opinion this is the best guarantee for us to effectively deploy our capital and secure dynamic growth. If Polenergia continues to deliver on its growth strategy successfully we do not exclude the possibility of increasing our stake in the business," Mr. Andrzejewski says. "The investment by CEE Equity Partners into the Polenergia business project confirms the true value of the company and the exciting potential for value accretion in the next years. Taking into consideration the financial potential of the fund we see concrete possibilities for co-operation in new potential projects in the future," commented PEP CEO.Zbigniew Prokopowicz, "We have a very precise growth plan which will secure stable and foreseeable investment returns. The funds acquired will be chiefly allocated to the construction of wind farms. In total, by 2016 we expect to hold an onshore wind farm portfolio with an installed capacity of 461MW. The next key element of

our strategy is the completion by 2018 of the 5bn cb.m gas pipeline connecting Poland with the European gas transmission system. This project is of strategic importance for Poland in terms of ensuring energy independence," he added.

Poland Today talks to: Rafał Andrzejewski, investment director and member of management board of CEE Equity Partners • PT: Your website says that the China-CEE Fund was established by China Exim Bank "in partnership with other institutional investors from the CEE region." Who are those investors and how much have they contributed? Rafał Andrzejewski: It's mostly an initiative of China Exim Bank, but it has invited other local entities from the region to participate in the fund as well. The Hungarian Export-Import Bank and the Romanian ExportImport Bank have expressed interest, and the Hungarian Exim Bank has invested some money. It is a minute amount compared to what the Chinese have invested. Nevertheless, they wanted to make sure that a chunk of the cash that is flowing out of China will be invested in Hungary. The same with the Romanians. However in Poland we have been directed and redirected to various entities. We received indications that BGK [Bank Gospodarstwa Krajowego, the bank that supports the government’s economic programs] would not be receptive. So we were directed to PIR

[Polskie Inwestycje Rozwojowy, a governmentestablished investment vehicle], with whom we have been negotiating for a year now, with no end in sight. So I don’t know if any Polish entity will join us in the fund, but in any case we are fully funded right now. We don’t have any pressure to invest with Chinese companies, or those using Chinese technology, or anything like that. • PT: What kind of investments are you looking for? RA: We’ve got clear instructions to just invest in the region to the best of our ability in four sectors – energy, infrastructure, telecoms and specialized production. But at the same time, those sectors are not chiseled in stone. If there is a project that’s not in those sectors but it is really interesting, then we have the ability to invest in such a project as well. Nevertheless, the general idea is that we want to invest in things that are solid: not web pages or distribution systems or sales systems. Basically we are interested in things such as waste-to-energy plants, energy windmills, solar power parks and fiber-optic cable companies, just to mention a few examples.. • PT: What’s attractive about the CEE market to the Chinese? Does the fact that they set up a separate CEE-oriented fund mean that they regard the region as clearly different from the rest of Europe? RA: Yes. The Chinese think that the region of Central and Eastern Europe is much more open and friendly to Chinese business than Western Europe. Western European markets are much more geared toward exporting to China and if not, then blocking China from entering. The Chinese have a very cordial relationship with Germany, France, the UK, etc. But they think the best potential is here because there is more to do here in terms of infrastructure: not only road infrastructure,

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but also telecom infrastructure, energy infrastructure. There is a big variety of things that can be done. Poland is still a work in progress as opposed to Western Europe. The Chinese would rather have this fund to show their good will, rather than forcing their companies in here. So you could say that we are a beachhead for potential future development. • PT: Your list of target countries spans Poland and other CEE EU member states but also the likes of Albania and Serbia. That’s a real mixed bag, wouldn’t you say? RA: Yes and no. These countries form a kind of band from north to south. The group excludes Turkey, Belarus, Ukraine and Russia. The Chinese made the decision that countries of the former Yugoslavia should be included because they have done business in Serbia before, and in Croatia, and they were quite pleased with the response they received. They saw that while those countries are not in the European Union, they fit nicely into Central and Eastern Europe, more so than Turkey and more so than Ukraine. • PT: How much of the fund’s total equity has been designated for Poland? RA: Right now we have USD 500m, and most likely we will spend half of that – so USD 250m – on Poland. The rest will go to other countries, with a clear preference for Hungary and Romania, because those countries are participating in the fund. • PT: Other than taking long-term, minority stakes, how do you see the deals being structured? RA: The fund itself has been created for 10 years, with the option of an extension of an additional two years. We cannot re-invest the money, so our goal is to invest for the longer term. Rather than investing for three to five years as the typical private equity funds usually do, we want to invest for seven, eight, nine, even 10 years if possible. That, combined with the low internal rate of return expectation that we have, makes us an

interesting partner for discussion with a lot of potential targets. In terms of equity we can invest in any given project from USD 20m-70m. That combined with debt, which can more than double that amount, gives us quite a bit of flexibility as to what we can invest. • PT: Do you believe there are interesting targets in the sectors you’re focusing on? RA: Definitely. Especially when it comes to Poland we have quite a robust pipeline of projects. We have tens of projects related to wind power, fiber optic infrastructure, the 3G, 4G and GSM infrastructure, the recycling plants, the waste-to-energy plants. The thing is that really if you want to look at larger, diversified entities, most of the big power companies are stateowned. So it is a challenge to find entities that don’t specialize on only in one kind of energy, for example. And it’s difficult not only in Poland, but really across the region. We are flexible though, because we do not have to have a controlling stake, we are open to being a minority shareholder provided that the partner or partners in a consortium are reliable, and people with feasible business plans. So from that standpoint I think that we have a little bit more flexibility than your typical private equity fund that always wants to have either a hundred percent or a definite majority. • PT: What else is different about your approach compared to other players in the private equity market? RA: There are a number of differentiation points, but when target companies come to us, they tell us about several things that attract them. Number one is that we are one of the few funds that deal with infrastructure. Another important point is that we have a relatively simple decision-making environment. Our investment committee meets every week in Warsaw, so

we are constantly making decisions. Other factors include the length of the investments, the reasonable return expectations and the possibility of investing as a minority shareholder. And also, I feel like we are less investment bankers and more like family investors. We don’t shy away from investments in big companies or publicly listed companies. But we also sit down with small business owners and we speak their language. • PT: In the energy sector, there are a number of established players that are snapping up independent projects and paying good money. What’s the role of CEE Equity Partners in the sector? RA: Fortunately there are enough projects to go around. We are already in discussions with a couple of larger entities to become a minority shareholder, at first perhaps really a minority with just 15% or something like that, just to see how that flies, and then perhaps increase our stake. But we don’t shy away from looking at independent operators that fall within the size of our target acquisitions, and we are also not afraid to invest in larger, companies that are not state owned. • PT: Have you explored investing in public-private partnership (PPP) projects? RA: We have had a number of meetings regarding PPP projects, especially from people that come from medium-sized cities who want to revitalize their combined heating and power (CHP) plants. We also talked with the City of Warsaw about the public garages that they want to build around the city. The only thing is that we cannot participate directly. We can be a party that finances the participant, but we cannot participate as an entity that is going to build this stuff, because we don’t build, we only finance. So it will be up to the people who win the bidding to approach us and see if we can help – and we are willing to help.

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• PT: Your focus is mainly on projects that require good cooperation with the public sector. The creation of CEE Equity Partners came about as the result of inter-governmental talks between China and Poland. Does this government connection make your life any easier? RA: When it comes to the Polish government we have no connection whatsoever. The China Exim Bank is a state-owned bank, so you could say that the Chinese government has an influence on what we do. But we don’t feel like that is the case because they have given us a completely free hand when it comes to what and how to invest. When you look at our investment committee, it’s three guys here and a Chinese guy that calls in. It’s not like they decide what we’re going to do, instead we decide what we are going to do, with their blessing, of course. And this model has been working for us. There has been a lot of talk about difficulty that funds have in finding the right investment. We don’t see it that way. We have, I think, an overflow of potential deals. Interview by Andrew Kureth

wrote down PLN 4.2bn from the value of its unprofitable Lithuanian unit Orlen Lietuva and cut the value of its Czech subsidiary Unipetrol by PLN 711m, the Polish state-controlled refiner said in a regulatory statement. The loss and its size came as a huge surprise as analysts interviewed by Bloomberg had been expecting PKN Orlen to post a PLN 368m profit. PKN Orlen said the write down won't affect covenants in its credit deals with banks.

estimates the cost of Lietuva’s shutdown and restart at less than USD 20m, Chief Financial Officer Sławomir Jędrzejczyk said on a conference call with analysts. The company would also incur costs of about USD 5m a month during the shutdown. "If the macroeconomic situation is worsening, the next move will be a full shutdown," Jedrzejczyk said. "It’s very rare that a refinery is completely closed. It’s very often converted to a storage or logistics facility."

PKN Orlen Group's key financials

Despite recent rumors about Orlen engaging in talks with Kazakhstan's KazMunaiGaz as a potential buyer for the Lithunian refinery, CEO Krawiec told reporters the company had had no buyers for Lietuva and will speak to the Lithuanian government about the country buying its refinery.

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ENERGY & RESOURCES

PKN Orlen posts PLN 5.2bn Q2 loss on Lithuania fiasco Poland's top oil refiner PKN Orlen, has posted a record quarterly loss last week after writing down the value of its operations in Lithuania and the Czech Republic. Orlen shares dropped more than 4% on the news, falling the most in six weeks and bringing the company's capitalization down to PLN 17.7bn. Orlen's Q2 2014 net loss widened to PLN 5.2bn from PLN 207m in Q1 2014. The Warsaw-listed company

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Source: PKN Orlen

The Lithuanian unit, which Orlen bought for USD 2.8bn in 2006 from Russia's Yukos, posted losses after refining margins fell to a 10-year low in 2013 and sales to the US its main market, slumped on a shale boom in North America. The Polish state-controlled refiner now values its Lithuanian operations at a mere USD 163m and said it is ready to suspend refining there if global market conditions deteriorate. The Lietuva refinery, also known as Mazeikiu, exports more than 50% of its output by sea. Lietuva faces a temporary shutdown in late 2014 or early 2015 and the length of the shutdown will depend on refining margins, the Polish company said. Orlen

PKN Orlen's Lithuanian operations have never reached their targeted profitability because of the plant's inconvenient location, high costs, and a global narrowing in refining margins. Soon after PKN Orlen bought the refiner, outbidding Russian rivals, it faced problems with the supply of Russian crude as well as transportation issues of finished products, which hurt its profitability.

Facing new global reality

In a separate filing, Orlen said it had cut its forecast for average annual EBIDTA to PLN 5.1bn in 2014-2017 from PLN 6.3bn. "Given the present market situation, we believe the recent developments in our industry are becoming the new reality,” Chief Executive Officer Jacek Krawiec said in the statement. “We have decided to revise our strategic assumptions and bring them in line with market conditions.” According to an early July report by Fitch, European refining margins "are likely to remain weak for at least the next one to two years due to overcapacity, demand

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and supply imbalances and competition from overseas." Recently figures from the International Energy Agency showed that since 2008 oil refineries with total capacity of 1.8m barrels per day have been closed in Europe.

power generation sector with a PLN 1.4bn combined cycle gas turbine plant (463MWe) in Włocławek and plans for a similar project in Płock.

Orlen's investment efforts have been focused in recent months on securing access to crude production and reducing its dependence on Russian oil. The Polish company acquired Canada’s TriOil Resources for CAD 183.7m (PLN 508m) last year and Birchill Exploration for CAD 255.6m (PLN 708m) in 2014.

ENERGY & RESOURCES

EIB lends PLN 300m to Tauron for network network improvements and RES investments

tering pilot program, which should be particularly beneficial to residential, commercial and public authority customers, as the program’s aim is to verify the technology, facilitate data management and provide better information flow between customers and suppliers. The EIB will also support the modernization and refurbishment of several of Tauron Group’s hydropower plants, which will increase their efficiency and generating capacity.

The European Investment Bank has granted a PLN 295m loan to Tauron Polska Energia to help Poland's second largest energy producer develop its distribution network and invest in renewable energy, the EIB said last week. Including the new agreement, Tauron has obtained four loans totaling PLN 1.7bn from the EIB to-date.

Declining margins on global markets have been a serious pain for PKN Orlen's foreign refinery assets. Image: PKN Orlen

PKN Orlen turned over PLN 114bn last year, some 5% less than in 2012. Its EBIDTA dropped 42% y/ to reach PLN 2.5bn, while its net earnings plunged by 96% and topped a mere PLN 90m. A leading producer and retailer of fuel in the CEE region, PKN Orlen operates three refineries (in Poland, Lithuania and Czech Republic) with a combined maximum capacity of 32.4m tons a year. Last year the three sites processed 28.2m tons of oil, 90% of which was Russian Export Blend Crude Oil (REBCO). Besides investments in the upstream segment, PKN Orlen has made inroads into the

"We welcome this agreement with Tauron, as the project will ensure a secure supply to new customers through the expansion of the company’s electricity network and the roll-out of a smart metering pilot program in line with EU requirements to support the development of smart grids. Together with other projects previously financed by the Bank in Poland, this also marks an important step towards increasing energy generation from renewables in Europe," said László Baranyay, EIB Vice-President responsible for lending in Poland. With the support of the EIB, The Polish energy group will expand its electricity distribution networks by adding an estimated 11,000 new connections and upgrade the existing equipment, which will predominantly serve to connect new customers to the distribution grid. The company will also roll out a smart me-

The government of Prime Minister Donald Tusk support's Tauron's investment strategy that includes the development of a PLN 4.4bn coal-fired unit in Jaworzno. Image: Tauron

In recent months Tauron broke ground on a PLN 618m heat & power project in Tychy (see BR+ No. 029 page 4), and signed a long-awaited PLN 4.4bn contract with the consortium of engineering firm Rafako and builder Mostostal Warszawa for the construction of a 910 MW power block at the Jaworzno power plant (see BR+ No. 032-33 page 8). With a total capex of PLN 5.4bn, the new coal-fired unit will replace older, much less efficient facilities at Jaworzno, bringing the site up to date with stricter EU emissions limits.

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Tauron is the second largest energy producer in Poland as well as the largest distributor of electricity. In 2013, the company made several investments including a modern power unit using cogeneration at its plant in Bielsko-Biała and two wind parks in Wicko and Marszewo with a combined power output of 122 MW. A 450 MW power unit is also currently being constructed in Stalowa Wola as well as a 413 MW unit in Łagisza. The latter is a PLN 1.5bn investment, of which up to PLN 750m may be contributed by Polskie Inwestycje Rozwojowe (PIR), a state investment vehicle (see BR+ No. 027 page 6).

Tauron Group's key financials Revenues in PLN bn, left axis N et result in P LNbn, right axis 25

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ENERGY & RESOURCES

Finnish AC drives firm Vacon acquires sales unit in Warsaw Finnish AC drives manufacturer Vacon has taken established its own sales unit in Warsaw by taking over the AC drives unit of its long-term distributor TelkoPoland, the Polish subsidiary of Finland-based Kaukomarkkinat Oy. The business operations and the personnel will be consolidated into the Vacon Group. Vacon and Telko-Poland have been partnering in Poland for approximately twenty years since 1994. "Poland is a strongly developing and stable market, and this acquisition of business operations further strengthens our presence in the country. It also allows us to offer even more comprehensive services to our local and global OEM and brand-label customers," Jari Perkiömäki, Corporate Communications Manager at Vacon tells Poland Today. "Vacon is bringing over nine persons from Telko-Poland's AC drives business, and there will probably be additions later on."

sales, marketing and service operations in Poland for the time being." Vacon is a global manufacturer of variable-speed AC drives for adjustable control of electric motors, and inverters for producing energy from renewable sources. The Helsinki-listed has production and R&D facilities in Europe, Asia and North America, and sales offices in 30 countries. With a global workforce of 1,600 people, Vacon turned over EUR 403m in 2013. The company does not disclose its sales in individual countries.

ENERGY & RESOURCES

3 Legs Resources CEO says breakthrough in Polish shale is around the corner In partnership with Shale Gas Europe (www.shalegas-europe.eu), BR+ brings you a commentary on the Polish shale gas sector by Kamlesh Parmar, CEO of 3Legs Resources

Source: Tauron

Despite its ambitions investment pipeline, Tauron reported an 11% drop in net profit in 2013, with expectations of even weaker results in 2014 due to the statecontrolled utility's struggle with falling energy prices and weak demand caused by the sluggish Polish economy. The group posted a PLN 1.3bn profit on PLN 19.1bn turnover last year.

"The sales trend in Poland has been stable during the recent years, and Vacon's target is to grow significantly faster than the market. At the moment, the most important customer segments for Vacon in Poland are general industry and building automation. However, the biggest opportunities in Poland can be seen in the marine and mining industries. Also, we aim for an increased sales channel coverage," says Jari Perkiömäki. Asked whether Vacon has any plans for production or R&D-related investments in Poland, Mr. Perkiömäki replies: "No, not at the moment. We are focusing on

Rising tensions and recent headlines throughout the Middle East and Europe have presented a perfect case for greater energy security in the region. Having come to Poland seven years ago and witnessed the changes it has undergone since, I see few other examples of a country that could benefit more from reducing dependence on its neighbors and exploiting its shale gas resources. And despite concerns over the changing levels of investment in Poland’s shale gas over the years, we are embarking on what could now be a very real breakthrough after years of hard work.

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Driven by the impetus of developing resources of its own, the Polish government has been broadly supportive of the industry and has gone as far as to call for the creation of a European energy union to strengthen Europe’s negotiating power against the likes of Russia, from which Poland imported 60 per cent of its natural gas in 2013. But as important as a supportive government is to the success of our industry, results from exploring and testing our geology – for 3Legs, that means the northern Baltic Basin – is what will guide our future. Thus far, 3Legs has flowed gas to surface and flared from all 4 test wells on our 3 western concessions and from both formations – a testament to the experience of our US-based technical team and the prospectivity of our acreage. There have been around 60 wells drilled to date across three different basins in Poland. To put that into perspective, it takes approximately that many wells to develop only a single basin in the US thanks primarily to fewer regulatory hurdles and more supplier options than what is found in Eastern Europe. A more amenable regulatory regime made it easier for small operators to take the lead on shale development in the US – quickly acquiring acreage and drilling permits in a manner that would take a significant amount of additional time, money and effort to complete in Poland. That’s why in Poland we saw an influx of larger operators, who are more able to weather the longer timelines, enter the Polish market -- and unfortunately create more interest on exit. But it should be noted that while some international operators chose to forgo their Polish licenses, other majors, like our co-venture partner ConocoPhillips, decided in 2012 to stay – further supporting the idea that our acreage has the potential to be a success. If we are indeed able to generate further positive news

from our acreage, we could very well see many operators return to Poland. 3Legs have drilled a further long lateral well in its core acreage and the beginning of the completion and testing phase is about to commence - the culmination of our 2013/2014 work programme agreed to with ConocoPhillips. We believe we hold some of the best acreage in the Polish Baltic Basin and are confident that greater signs of future commerciality - and opportunity for a more energy stable Poland - could be proven shortly.

"The new bank headquarters will partly be an opening of a new stage in Raiffeisen Group’s history in Poland. Employees so far scattered in a few Warsaw locations will move to an office building perfectly adjusted to our needs, which will allow our organization to generate significant financial savings and at the same time operate more effectively. Naturally, the new headquarters will be suited to our clients’ needs, where model branches will await our individual as well as corporate customers," said Piotr Czarnecki, Chairman of the Board at Raiffeisen Polbank.

Kamlesh Parmar is the CEO of 3Legs Resources, a leading independent exploration and production company focused on Polish unconventional oil and gas resources. He also serves as the president of the OPPPW, the representative body of onshore operators in Poland.

PROPERTY & CONSTRUCTION

Raiffeisen takes 19,500 19,500 sq.m of offices at Golub GetHouse's new tower in a record lease deal Merely three months after the Warsaw-based property company Golub GetHouse had named the general contractor for its flagship development Prime Corporate Center in downtown Warsaw, the company has found a single tenant to occupy more than 90% of the building. In this year's largest office space lease transaction on the Polish market, the Austrian-owned Raiffeisen Polbank has secured 19,500 sq.m of office space with an additional retail-services space in Golub GetHouse's newest scheme. The tenant will move into the building in the first half of 2016.

Prime Corporate Center (lower right hand corner) was designed by Chicago's Solomon Cordwell Buenz architectural studio. Image: Golub GetHouse

Prime Corporate Center is an A class office building developed at 78 Grzybowska Street – in the heart of Warsaw’s rapidly expanding business district of Wola and in close proximity to the 2nd metro line, which is set to launch by the end of this year. A total of 21,000 sq.m of modern office space will be located on 23 floors of the 83-metre tall tower. The investment is being delivered in line with "very good" BREEAM ecological certificate standards.

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Prime Corporate Center was originally a brainchild of Irish developer Irlandzka Grupa Developerska (IGD), which got into financial difficulties and sold the site to the current owner, Golub GetHouse in 2012. Just recently, Golub GetHouse, a joint venture of US Golub & Company and Warsaw-based GetHouse Developer obtained EUR 50m financing for Prime Corporate Center from a consortium of mBank and mBank Hipoteczny, the highly successful Polish units of Germany's Commerzbank. Czarek Jarząbek, management board president at Golub GetHouse, told Poland Today that the total capex on the project would come to EUR 75m. In April the investor awarded a PLN 115m contract for the construction of Prime Corporate Center to Warbud, the Polish arm of France's Vinci Group.

The communist-era office buildings at the site have since been demolished.

Warsaw office market

PROPERTY & CONSTRUCTION

12.2%

E-East (Praga)

172,000

9.4%

LS-Lower South (Puławska)

176,000

10.2%

N-North (Żoliborz & Bemowo)

143,000

13.8%

SE-South East (Wilanów & Sadyba)

193,000

5.0%

SW-South West (Jerozolimskie & Okęcie)

712,000

14.4%

1,152,000

12.4%

315,000

13.2%

4,113,000

11.7%

Total

Source: CBRE Q42013 Warsaw Office MarketView

Golub GetHouse continues to look for land for new office and residential schemes in Warsaw. In December 2013 it signed a joint-venture agreement with Mennica Polska regarding a 1ha site on 21 Pereca Street, on the corner of Żelazna and Prosta Streets.

More than 1.1m sq.m of office space is currently under construction in Poland, with Warsaw, Kraków, Wrocław and Tri-City being the busiest markets, according to a brand new report by the property consultancy JLL. "Construction activity in Warsaw remains high. Currently, approximately 579,000 sq.m is under active construction, and an additional 62,000 sq.m is under refurbishment. Remodeled and renovated buildings account for around 10% of the space under development in Poland’s capital city. We think that the trend of older buildings being refurbished and tailored to market needs and expectations will continue," said Mateusz Polkowski, Associate Director, Research and Consultancy, JLL.

Pipeline H2

Szczecin Łódż 200,000

2,866,000

Completions H1 Lublin

175,000

9.6%

Poznań

150,000

774,000

Tri-City

125,000

CCF-City Centre Fringe

Katowice

100,000

9.9%

Office boom continues in Poland's property sector, JLL reports

75,000

12.2%

W-West (Wola)

Kraków

50,000

sq.m

473000

US-Upper South (Mokotów)

Warsaw

25,000

Vacan-

1,247,000

Non-central locations

Poland's office property market in 2014

Stock

CBD-Central Business District

Central locations

Golub & Company has been present in the region since the early 90s and has completed a number of office schemes including the Warsaw Financial Centre (75,000 sq.m GLA), International Business Center (58,000 sq.m), and Warsaw Corporate Center (10,000 sq.m) as well as some residential projects (Point 48, Platinum Plaza, Oligo Park) in Warsaw and its vicinity.

Wrocław

Key indicators as of end of 2013 Office zones

"We intend to build two class A-office buildings at the site, a 130m-tall tower with a GLA of 51,000 sq.m and a smaller building with 14,000 sq.m of office space," Czarek Jarząbek told Poland Today.

"In 2014, a total of ca 350,000 sq.m of new offices will be completed, including the above- mentioned refurbishments. The Warsaw market will roughly maintain its current pace in 2015 and 2016 with ca 300,000 sq.m of new supply being completed for each of these two years. The volume of new office projects will be reflected in the continued upward pressure on the vacancy rates. We expect that in 2016 the total office stock in Warsaw will hit 5m sq.m."

Source: JLL

In H1, tenant demand in Warsaw stood at 258,900 sq.m, with Mokotów representing 37% (95,900 sq.m) of total take-up during that period. New deals accounted for 50% of all office space leased in 1H, with renewals representing a further 35%, according to JLL. In H1, 190,300 sq.m of office space was commis-

weekly newsletter # 045 / 28th July 2014 / page 11

sioned in Warsaw. In Q2 alone, approximately 106,000 sq m was delivered to the market, with the largest office building completions being Eurocentrum Office Complex I (38,700 sq.m), GreenWings (10,800 sq.m) and Gdański Business Center 1-A (29,600 sq.m). Noncentral stock exceeded 3m sq.m of existing modern office space. The vacancy rate in Warsaw went up slightly comparing to the end of 2013 when it stood at 11,8%. At the moment 13.4% (574,400 sq.m) of Warsaw's modern office stock remains vacant (13.6% in central Warsaw, 13.3% in non-central locations). Prime headline rents in Warsaw City Centre range between EUR 22 and EUR 24/sq.m /month, whereas in the top non-central locations they stand at EUR 14.50 to EUR 14.75/sq.m /month.

"We expect that the vast majority of office markets in Poland will remain favorable to tenants," says Mateusz Polkowski. Associate Director, Research and Consultancy at JLL. In regional cities, the January-June take-up came to 189,000 sq.m, with Łódź showing the most impressive y/y improvement at 14,200 sq.m. As the gross take-up in Łódź over the last two years has hovered around an average of 5,800 sq m per quarter, this means that H1 2014 demand has already hit 85% of 2013's total. In Q2 the most active market in terms of tenant demand was Katowice (22,000 sq.m of leased space).

H1 2014 brought 123,100 sq.m of new office space to the market outside Warsaw. The leading cities were Katowice (which accounted for 24% of all completions), Tri-City and Kraków (each with 20%). In Q2, major new deliveries included Olivia Four in Gdańsk (12,500 sq m), Alma Tower in Kraków (10,400 sq.m) and GPP Business Park II in Katowice (7,500 sq m). Łódź was the only city with no new completions. Currently, 531,400 sq.m of office space is under active construction in Poland’s major regional cities. Kraków, Wrocław and the Tri-City account for 67% of all projects. Kraków is taking a clear lead in this respect, with 136,500 sq.m of office space under construction, 64% of which will be delivered by the end of 2014. Moreover, almost 44% of all space under construction in Kraków is secured by pre-let agreements, outperforming other major cities, where between 18.5% and 25.5% is pre-let (the exception being Szczecin, with 8.5%). Quarterly vacancy rates were stable at the end of H1 2014 in major cities outside Warsaw. The lowest vacancy rate is still found in Kraków (4.5%) and the highest in Szczecin (24.4%). The largest decrease compared to the end of 2013 was recorded in Łódź (from 13.4% to 9.2%). Prime headline rents in the major cities outside Warsaw currently range from EUR 11 to EUR 12/sq.m/month in Lublin to EUR 14 to EUR 15/sq.m/month in Wrocław and Poznań. Average headline rents remain highest in Kraków (EUR 13.7 to EUR 14/sq.m/month) and Katowice (EUR 12.5 to EUR 13.75/ sq.m/month), lowest in Lublin (EUR 10/sq.m/month). "We expect that the vast majority of office markets in Poland will remain favorable to tenants. The situation will be more balanced in markets that are characterized by stable demand for office space and relatively low vacancy rates," concluded Mateusz Polkowski.

TRANSPORT & LOGISTICS

Polish train maker PESA to establish joint venture in Russia Polish train manufacturer PESA and Russian industrial giant UralVagonZavod (UVZ) have inked a letter of intent regarding the creation of a joint venture in Russia. The deal was inked by PESA's CEO Tomasz Żaboklicki and Oleg Sienko, his counterpart at UVZ, at the InnoProm 2014 industrial fair in Yekaterinburg. "The agreement paves the way for the creation of assembly and service centers in the Russian Federation as well as establishment of a joint company producing trams, locomotives, rail cars and other electric vehicles," said PESA's spokesperson Michał Żurowski. In the coming weeks the two partners are to register a company in Russia and begin acquiring orders, in line with an agreed business plan. Founded in mid-1930s, UVZ is a Russian machine building company located in Nizhny Tagil, Russia. It is one of the largest scientific and industrial complexes in Russia and the largest main battle tank manufacturer in the world. The company's main products include railway cars, tanks, road-building vehicles, agricultural vehicles, metallurgical products, tools and consumer goods. In recent years civilian production amounted to some 2/3 of UVZ's total output. The privately-owned PESA has emerged in recent years as one of Poland's most successful exporters of transportation equipment. In June 2013 the company signed a contract with UralTransMash for the delivery of 120 trams to the city of Moscow. The first vehicles from that order were introduced to the Moscow

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municipal transportation system in June. By the end of the year PESA is to deliver a total of 70 and the entire contract is to be fulfilled by March 2015.

Bydgoszcz and Mińsk Mazowiecki, just east of Warsaw. In 2012 PESA turned over PLN 1.55bn and netearned PLN 137m. The company belongs to a number of Polish investors, including its top management.

TRANSPORT & LOGISTICS

Prologis acquires two logistics centers from Invesco PESA's biggest achievement to-date has been the EUR 1.2bn contract for the delivery of up to 470 trains to Germany's Deutsche Bahn. Image: DB

PESA's most prestigious contract so far was the EUR 1.2bn framework deal with Deutsche Bahn for the supply of up to 470 new diesel-multiple units. The trains are to be delivered in batches by the end of 2018. The PESA deal is Deutsche Bahn's first ever order to a non-German manufacturer. A few months ago PESA secured another order in Germany on the delivery of nine new LINK-type DMUs to NEB (Niederbarniemer Eisenbahn). Besides DB and NEB, PESA's German customers include private carrier Netinera. On the domestic market, one of PESA's largest orders in recent months was the PLN 1.3bn contract for the supply of 20 electric multiple units to PKP Intercity. Signed in May, the contract covers the vehicles themselves (approx. PLN 1bn) as well as 15-years of maintenance services (PLN 312m). PESA supplies locomotives for the Italian, Ukrainian and Lithuanian railways as well as trams for municipalities in Poland, Hungary, and Romania. The company employs a work-force of 2,800, at factories in

US industrial property giant Prologis, Inc., has expanded its CEE portfolio with the acquisition of two high-quality logistics facilities in Poland and Hungary from Invesco Real Estate. The transaction, which includes 94,200 sq.m of GLA fully leased to major retailers, was carried out via Prologis European Properties Fund II ("PEPF II"), one of four European coinvestment vehicles managed by Prologis. In Poland, Prologis has purchased a 56,700 sq.m building in Gliwice, in upper Silesia. The facility, renamed Prologis Park Gliwice, is located in the centre of the Silesian agglomeration and one of Poland's core markets – next to the crossroads of two trans-European networks the A1 and A4. Its sole tenant is the Britishowned retailer Tesco. In Hungary, Prologis bought an Auchan-occupied 37,500-sq.m property near Budapest. "These two properties leased to premium customers are exciting additions to the Prologis portfolio in Poland and Hungary. Both are in key locations on major commercial routes that are growing in importance due to an increase in intra-regional trade in Central & Eastern Europe," said Ben Bannatyne, regional head for Prologis Central & Eastern Europe.

PEPF II, which was established in August 2007, owned 253 properties, for a total of 5.9m sq.m with a net market value of EUR 3,595.4m as of March 31, 2014. Globally, Prologis owned or had investments in, properties and development projects expected to total approximately 53.3m sq.m in 21 countries including 3.7 sq.m in Central and Eastern Europe as of end of Q1 2014.The company leases modern distribution facilities to more than 4,700 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises. Last year alone, the company leased 1.15m sq.m of industrial distribution space in Central and Eastern Europe, including 595,000 sq.m in renewals and 363,000 sq.m in new leases. Prologis’ occupancy in the CEE was 89.5% as of December 31, 2013. In recent months Prologis broke ground on two speculative projects (27,000 sq.m and 28,240 sq.m) in the Wrocław area. Other ongoing projects from Prologis in Poland include a 11,200 sq.m BTS scheme for Danish forwarder Prime Cargo in Prologis Park Szczecin as well as a 27,000 sq.m speculative development in Prologis Park Wrocław V.

RETAIL CHAINS

Polish drugstore chain chain Dayli speeds up expansion eyeing Western Europe Polish drugstore & convenience chain Dayli, which currently operates some 170 locations across Poland, seeks to reach the 300 mark by the end of next year, company representatives said in June. The leading

weekly newsletter # 045 / 28th July 2014 / page 13

drugstore chain on the Polish market, Germany's Rossmann, has recently hit the 900 stores mark. Dayli was created on the basis of the bankrupt German chain Schlecker, parts of which were acquired two years ago by Austrian private equity company TAP 09, whose boss Rudolf Haberleitner at the time described the new concept to Poland Today's Lech Kaczanowski as follows:

Dayli outlets are a cross between a drugstore and convenience store. Image: Dayli

"We are moving away from a simple drugstore, which was essentially Schlecker's specialty, towards what we call a 'local supply store.' We believe that retailers have abandoned their customers, expecting them to drive to out of town to huge shopping centers, which is costly, inefficient, and troublesome, for instance for old people. Dayli seeks to bring shopping back to where consumers live." "It will be much more than a simple convenience store, however. The basic bread and butter convenience food products, of which we plan to carry some 400 items, will represent only some 8-10% of turnover,

and only one of five pillars of the business. Besides drugstore products, which will con-tinue to yield the highest margins, Dayli will include also the so-called "brand corners," with basic brand-name fashion products and house-hold items, as well as a selection of services, such as copying, dry cleaning, postal, insurance etc, as well as in-store home shopping," he said. In Poland, TAP 09 teamed up with the listed producer of personal care goods Hygienika, which initially bought a 50% stake in the Polish Schlecker business for EUR 3m. The Polish partner got so involved in the project that it has since bought out the Austrians and announced plans to sell its production plant near Warsaw, which makes diapers and other hygiene products, in order to focus fully on expansion of the retail business in Poland and abroad. A few weeks ago Hygienika's CEO and main shareholder Kamil Kliniewski said he was negotiating acquisition of the former Schlecker business (now Dayli) in Luxembourg with Germany also being a potential target. In November last year Hygienika struck a deal with the private equity fund Innova Capital, regarding joint investments in the drugstore segment. Their joint venture agreement were to be sealed later this year, with Hygienika bringing the Dayli business to the table and Innova contributing another, unnamed Polish drugstore operator. The two partners said their goal is to create a retail business with a PLN 1bn turnover in a few years. When we spoke to Rudolf Haberleitner back in the autumn of 2012, he said the chain could grow to 1,000 locations in Poland in a few years' time and identified the east of the country, due to its relative underdevelopment, as a true land of opportunity for Dayli. Under Hygienika, the chain is to open some 25 new Dayli stores in 2014, reaching 200 locations, before its expansion truly picks up pace next year. In 2011 the

Polish Schlecker business turned over PLN 200m and net-earned PLN 8m. Last year the Hygienika group saw its turnover reach PLN 177m, up from PLN 49.4m in 2012, while its net earnings from continued operations rose from PLN 1.2m in 2012 to PLN 6m in 2013. The surge in turnover was mainly due to the acquisition of the Dayli chain, whose results have been part of Hygienika's consolidated financials since March 2012.

Poland Today talks to: Kamil Kliniewski, CEO of Dayli Polska & Hygienika SA • PT: TAP 09 and Hygienika took over approx. 170 Schlecker outlets in Poland. After 1 ½ years their number remains more or less unchanged. How many outlets have you opened since? Kamil Kliniewski: The Dayli chain is growing rapidly. You need to remember that we first focused on a thorough rebranding of the Schlecker outlets, at the same time opening new stores. In 2013 we launched 13 new locations, also in large cities such as Warsaw, Kraków, or Toruń. A further nine have been opened since the beginning of the year and we are planning more openings in the autumn. • PT: According to initial plans, Dayli were to blend drugstore, convenience store, service outlet, and ecommerce pickup point. What has remained of that initial concept? KK: We have always maintained the core drugstore concept, but looking at market trends and customer preferences, we decided to expand our product range to include also convenience products. We communicate the Dayli concept as 'Drugstore Plus' by which we mean a drugstore that offers also grocery products, postal services, lottery tickets and newspapers. Our convenience component is similar to other chains, but what differentiates Dayli from them is the double

weekly newsletter # 045 / 28th July 2014 / page 14

drugstore-convenience format. As far as online sales are concerned, we are currently in the process of building an e-commerce platform, so it's just a matter of time before we implement it in our drugstores. • PT: What share of your inventory are drugstore products and what – convenience items and the rest? KK: We are first and foremost a drugstore chain and this is how we advertise the business. As a principle, we expect that customers will visit Dayli in search of drugstore products of which we have the widest variety. Additionally, they can find an extended selection of convenience products, such as drinks, snacks, other foodstuffs as well as ready-made meals. By introducing the convenience format we are opening up the chain to a broader target group that includes also men and young people. We hope our broad inventory will encourage customers to visit the Dayli stores more frequently. • PT: What are your preferences with respect to store locations? KK: We are looking for retail units in large towns and cities, located by main streets and in residential neighborhoods. Our focus is on street level units, 3m high and ranging from 180 to 250 sq.m in size. • PT: Last year there was some talk about a joint project with Innova Capital. What's become of that initiative? KK: The idea behind that project for Innova Capital to find and subsequently acquire a retail chain in Poland that it would later contribute to Dayli as a new asset via an equity boost. This, in effect, were to boost Dayli's sales revenues and store numbers and support long-term growth of the entire business, which would operate under the Dayli brand, as stipulated in the Letter of Intent. However, so far we have not been able to find a suitable candidate in Poland and that's why we are looking at Western European markets where we see better prospects for growth.

RETAIL PROPERTIES

Inter IKEA Centre starts work on Wola Park extension

owns eight shopping centers, which are situated in Gdańsk, Łódź, Poznań, Wrocław, Katowice and Warsaw (three centers: Janki, Targówek and Wola Park). Their biggest investment last year was the expansion of the Franowo retail park in Poznań, which opened in September 2013. The company added 14,000 sq.m of retail space to the park, expanding its total area to 80,000 sq.m.

Inter IKEA Centre Polska (IICG), the retail property development arm of Sweden's Inter IKEA Group, has launched preparatory work on the 17,500 sq. extension of Warsaw's Wola Park retail centre, which the company acquired last year. The project will boost the center's GLA to 77,500 sq.m, making it the city's second largest shopping mall, following its completion scheduled for the autumn of 2015. The new extension will be added to the eastern wing of the centre, with the existing food court that is currently located in this area to be relocated one floor up and expanded. As the new section will occupy what is now a parking lot, an additional 454 parking spaces will be built in the back of the centre, in order to maintain their total number at the current level of 3,000. Wola Park is IICG first acquisition in Poland and also the only IICG project in the country that is not anchored by an IKEA store. The key tenant in the new section of Wola Park will be the British home improvement retailer Castorama, with a 10,000 sq.m store. Besides the DIY outlet, Wola Park will get 20 new fashion units, expanding its total store numbers in excess of 200. As part of the project, the existing part of Wola Park is to receive a makeover, Mikael Andersson, Managing Director of Inter IKEA Centre Polska told Poland Today. As part of the IKEA group, IICG Poland is responsible for preparation, implementation and management of commercial property projects. In Poland, the group

The planned extension will make Wola Park Warsaw's 2nd largest shopping centre. Image: IICG

In recent weeks, IICG has acquired has acquired a 25.7ha site in Zabrze, where the company plans to build an enclosed shopping centre with an integrated IKEA store. It also owns development sites in Opole and Bydgoszcz. This year the company is hoping to break ground on a two-story retail cluster in Lublin with some 80,000 sq.m of GLA, that will encompass an IKEA store, shopping gallery (49,000 sq.m), hypermarket (11,000 sq.m), food court, and 3,000 parking spaces. The project is yet to get underway due to delaying bureaucratic procedures. "We have just started construction works of the extension of Bielany Shopping Park in Wroclaw," Mikael Andersson tells Poland Today. "After completion, the building will accommodate around 200 tenants and its GLA will amount to 145,000 sq.m, up from the current

weekly newsletter # 045 / 28th July 2014 / page 15

80,000 sq.m. Thanks to cooperation with the Helios multiplex operator, the first up-to-date cinema with eight projection rooms will be launched in the southern part of Wroclaw."

agreed to acquire the property and cover all costs associated with its development until the opening. With a GLA of 23,800 sq.m the Piła project is to reach completion in Q4 2014.

Last year, tenants at Inter IKEA Centre's eight Polish retail parks reported a 4% y/y increase in sales, while footfall grew by 3%. As for the IKEA Retail unit, which operates eight furniture and home goods stores in Poland, it achieved sales revenues of PLN 2bn in fiscal year 2013 [September 2012 – August 2013; ed.], marking a 9% increase y/y.

"The preparations in Mielec are quite advanced. We have obtained permission to redevelop the road network in the area as well as other infrastructure that collides with the project," Łukasz Gruszczyński told Poland Today back in May.

RETAIL PROPERTIES

Rank Progress breaks ground on Krosno retail park Construction work is underway on a new retail park in Krosno by Warsaw-listed property developer Rank Progress. Located next to an existing OBI home improvement store in the Krosno suburb of Miejsce Piastowe, the project is to reach completion by the end of the year with a GLA of 4,700 sq.m and 240 parking places. The general contractor is AMB Group Polska. "We are seeking tenants for the few remaining retail units at the centre, which will house, among others, a Biedronka grocery, Media Expert electronics store and Martes Sport sports goods outlet," says Łukasz Gruszczyński, marketing director at Rank Progress. In mid-May the developer launched a 7,700 sq.m shopping centre Centrum Pogodne in OIeśnica and it is currently working on a much larger project in Piła, in cooperation with Austria's Immofinanz, which

Back in mid-2011 Rank Progress has announced plans to build 16 new retail centers at the cost of PLN 2.2bn over the 2011-14 period. In addition to the Krosno and Piła projects, its future pipe-line includes also schemes in Mielec, Olsztyn, Kołobrzeg, Kielce, Duchnów near Warsaw, Kielce and Wejherowo.

The Krosno retail park is one of several projects in Rank Progress' short-term pipeline. Image: Rank Progress

Based in Legnica, Rank Progress had long specialized in development of shopping centers for international retail chains, such as Tesco, Carrefour, Castorama, Leroy Merlin, or Jeronimo Martins. The company also carried out a number of highly-profitable short-term projects that typically encompassed site acquisition, permitting, and design, and eventually sale to renowned domestic and foreign buyers. However, in the past couple of years their key focus have been large shopping centers and retail parks in medium-sized cities. Since 2001 Rank Progress has completed 25 proprietary investments, including nine shopping centers, located in Legnica, Jelenia Góra, Świdnica, Zgorzelec, Kłodzko, Zamość, Kalisz (the latter three were sold to Blackstone Real Estate), as well as Grudziądz (Pasaż Wiślany) and Chojnice (Brama Pomorza), which opened last year. Unlike most of its other projects, Brama Pomorza is a regional shopping center with a 34,000 sq.m GLA and 50 retail units.

Rank Progress posted a PLN 11m net loss on continued operations last year against a PLN 23.7m profit in 2012. As of end of December its total assets were worth close to PLN 1.02bn, up from PLN 859m a year earlier.

RETAIL PROPERTIES

Fabryka Wołomin to open next year with Carrefour as anchor tenant Fabryka Wołomin, a large new shopping center that is scheduled to open next year in Warsaw's satellite town of Wołomin, has just signed its key tenant France's Carrefour. The retailer has booked 5,500 sq.m at Galeria Wołomin where it will launch a new hypermarket with a sales area of some 4,000 sq.m. With a catchment area of 250,000 people, Fabryka Wołomin will be the first modern retail and leisure complex in Wołomin, a town located some 20km north east of Warsaw. The scheme will be comprised

weekly newsletter # 045 / 28th July 2014 / page 16

of a shopping center (23,500 sq.m GLA) and retail park (6,500 sq.m) separated by a parking lot with 830 spaces. Fabryka Wołomin is to launch in Q2 2015 with approximately 80 retail units. Besides Carrefour, other tenants at the project will include drugstore Hebe and footwear store CCC. The investor behind Fabryka Wołomin, a special purpose entry Park Handlowy Wołomin, has obtained all the necessary permits required to launch the project. The construction of Fabryka Wołomin is to begin in September, and property consultancy CBRE is the exclusive leasing agent for the project.

In total, an estimated 650 stores throughout Poland operate under the Carrefour logo at the moment, including hypermarkets, supermarkets and neighborhood stores. The latter category, which Carrefour is being expanded on a franchise basis, has been growing the fastest in recent years. Carrefour's Polish stores occupy more than 300,000 sq.m of rented space, but the company manages a further 220,000 sq.m at its 20 proprietary centers in the country.

CONSUMER GOODS & RETAIL

June retail sales data weakest since May '13 Polish retail sales increased by a mere 1.2% y/y in June, vs. May figure of 3.8% and consensus projections for a 4% growth, marking the weakest result since May 2013, said Poland statistical office GUS. In real terms, Polish retail sales were up by 1.8% y/y in June after a 4.3% y/y increase in May, GUS added.

Fabryka Wołomin will be comprised of a shoppiung centre and retail park with a combined GLA of 30,000 sq.m.. Image: CBRE

As for France's Carrefour, it has nearly halted its expansion in the hypermarket segment, in which it currently operates 97 outlets. Besides Wołomin, the company plans to launch new hypermarkets in Poznań (at Posnania shopping center in 2016) and Piła (Galeria Piła; Q4 2014). Other major players in Poland's hypermarket segment include Germany's Kaufland (177 outlets), France's Auchan (78 locations including 49 Real stores) and E.Leclerc (43) and Britain's Tesco (85 hypermarkets).

In monthly terms, retail sales declined across all categories except motor vehicles (+0.6%), with the strongest fall (by 3.3%) recorded in household appliances. As regards y/y terms, the most significant fall was recorded in car sales. In the whole of Q2 increased by 5.1% in real terms, down from 5.5% y/y in Q1. The slowdown in Q2 would have been even more pronounced had it not been for good results in April, caused mainly by the one-off effect of the Easter holidays. "The downward tendency of sales in Q2, visible every month, is more worrying. Especially since the same trend could be seen in industrial and construction output," BZ WBK analysts said in their commentary to the GUS figures. "June data on retail sales was below expectations, just like industrial output and wages

in corporate sector. Despite these disappointing releases, it is worth noticing that consumer confidence index is at a relatively high level and – what is more important – the situation in the labor market is improving with strong growth in real disposable income," they commented. "The data on retail sales and industrial output suggest the growth in Q2 is likely to be weaker than 3.4% in Q1, which is generally in line with our view. However, what strikes us is the continued strong performance of the labor market that seems inconsistent with a scenario of more serious slowdown," Citibank analysts added.

Retail sales in Poland (y/y) 15%

10%

-5% Dec 11

Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Source: GUS

GUS will release its flash Q2 GDP growth estimate on August 14, and the detailed breakdown of its components are to be made public some two weeks later. According to BZ WBK, the first monthly figures from Q3 will be more important for outlook assessment and monetary policy decisions than historical data from Q2. Although the Central Bank has so far refrained from offering hope for policy easing, the recent string

weekly newsletter # 045 / 28th July 2014 / page 17

of disappointing macroeconomic readings may prompt the policy makers to cut the cost of borrowing in the second half of the year. "With weaker than expected data the Monetary Policy Council will be under pressure to consider a possibility of rate cuts. However, since we look for at least 3% growth in Q2 and we expect the GDP data breakdown to show strong contribution of domestic demand we believe the MPC will prefer to postpone discussion about rate cuts until October or November, when new inflation projection is available. By then the signs of growth rebound should be more visible and therefore we expect the MPC to keep rates on hold in 2014. A potential trigger for cuts could be deeper than expected slowdown in GDP and domestic demand or significant zloty appreciation," said Piotr Kalisz, Head of CEE Economics at Citi Research.

Employers posted 85,300 new job offers for the month, down from 95,900 in May and up from 76,100 in June 2013, with the end-month -offer at 72,700. At the same time, 256 enterprises declared plans to lay off 21,400 staff in the near future.

Registered unemployment in Poland 15%

13%

12%

Apr 13

June jobless rate reduction beats earlier projections Poland's registered unemployment rate decreased to 12.0% in June from the prior-month level of 12.5%, according to Central Statistical Office (GUS) figures released last week. The figure, which marked a y/y improvement by 1.2 percentage points, was slightly better than earlier projections of officials and economists. The number of registered jobless at end-June measured 1.913 million, down by 9.3% y/y. June brought 159,700 new registrations, down from 166,700 in the prior month and down from 177,700 in the prior-year period. At the same time, 233,800 people were removed from the register.

Polish consumer price inflation edged up to 0.3% y/y in June from 0.2% y/y from the previous month, a notch above the consensus forecast for a 0.2% annual gain, according to a report from the Central Statistics Office (GUS). Consumer prices were flat month on month. The annual CPI reading was mainly affected by growth of dwelling costs by 1.6% as well as hikes of prices of alcoholic beverages and tobacco products by 4%, GUS said. Polish government's debt dropped to 49.5% of GDP at end-Q1 from 57.1% of GDP at end-2013, according to the ESA'95 methodology, Eurostat said in a report last week. Nominally, the figure stood at PLN 819bn.The debt reduction resulted from the recent overhaul of the country's pension system reform, which saw pension funds transferring over PLN 150bn in assets to the state.

14%

11%

POLITICS & ECONOMY

IN BRIEF:

Jun 13 Aug 13 Oct 13

Dec 13 Feb 14 Apr 14

Jun 14

Source: GUS

"Although the unemployment data was a positive surprise, June's numbers confirmed the tendency observed in the previous months, i.e. that the pace of improvement is slowing," commented BZ WBK bank analysts. "While the number of newly registered unemployed declined at a two-digit rate (-10.1% y/y vs. 5.4% in May), the numbers of unemployed removed from rolls due to taking up job is deteriorating (-4.5% y/y versus +1.4% y/y in May). This means that enterprises reduce the pace of creating new vacancies but they do not shed existing jobs. We expect further decline of unemployment rate in seasonally adjusted terms but in the nearest future it should stabilize near 12%," they added.

Poland's average corporate gross wage measured PLN 3,943,01 in June, an increase of 3.5% y/y or 1,7% m/m, the Central Statistical Office (GUS) said. Poland's corporate employment measured 5.5261m persons in June, as it rose 0.7% y/y and rose by 0.2% m/m.

weekly newsletter # 045 / 28th July 2014 / page 18

KEY STATISTICS Consumer Prices Prices

Inflation

-0.3

Alcohol, tobacco +3.7

+0.7 +3.9 +0.3 +3.9 +0.2 +4.0

+0.1

Clothing, shoes

-4.3

+0.8

Housing

+1.8

Transport

-4.4 +2.8

-4.6

-0.1

-4.7

-0.8

-0.1

+1.7

0.0

+1.6

0.0

+1.6

-0.1

-0.1 -0.4

-0.6

-0.2

-2.7

+0.1

-2.1

-0.1

Communications -0.3

+0.6

-1.7

-1.5

Gross CPI

+0.1 +0.3 0.0

+0.7

-1.1

-0.1

+0.2 -0.1

+1.3 +2.4 +0.3

Feb '14 -0.6

+12.5

+2.3

-2.7

-1.1

y/y (%)

+7.0

+3.1

+8.4

+3.8

+1.2 2013

Year

2009

2010

2011

2012

Turnover in PLNbn

582.8

593.0

646.1

676.0

n/a

+4.3

+5.5

+11.6

+5.6

+2.3

Residential Construction Dwellings

0.0

Mar '14 Apr '14 May '14 Jun '14

m/m (%)

y/y (%) Jun 14

-0.9

Apr 14

-0.8 -0.4

Feb 14

-0.5

m/m

Dec 13

-0.3 +0.3

Oct 13

+1.2

y/y

Aug 13

Food & bev

Month

5% 4% 3% 2% 1% 0% -1% Jun 13

y/y m/m y/y m/m y/y m/m y/y m/m

Apr 13

Sector

Retail Turnover

Feb 13

Jun '14

Dec 12

May '14

Oct 12

Apr '14

Jun 12

Mar '14

Aug 12

Data in (%)

2009 2010

2011

2012

2013 Jan-Jun y/y 2014

(%)

178.8

174.9

184.1

165.1

138.7

76.5

+12.8

158.1

162.2

141.8

127.4

72.3

+22.5

(in '000 units)

Producer Prices Prices

Industrial Output

Permits Commenced

142.9

m/m (%)

-0.1

0.0

-0.1

-0.2

0.0

m/m (%)

-9.7

+2.9

-1.8

+9.4

-2.3

-1.7

-0.1

U. construction

670.3 692.7 723.0

713.1 694.0 700.9

-0.4

y/y (%)

-1.0

-1.4

-1.3

-0.7

-1.0

-1.7

y/y (%)

+6.6

+4.1

+5.3

+5.4

+4.4

+1.7

Completed

160.0 135.7

152.5

-2.4

Year

2007

2008

2009

2010

2011

2012

2013

Year

2007

2008

2009

2010

2011

2012

2013

Source: Central Statistical Office (GUS)

y/y (%)

+2.0

+2.2

+3.4

+2.1

+7.6

+3.3

-1.3

y/y (%)

+10.7

+3.6

-3.5

+9.8

+7.7

+1.0

+2.2

Gross Domestic Product

Dec'13 Jan'14 Feb'14 Mar'14 Apr'14 May'14 Jun'14

-0.2

-0.1

0.0

-1.7

-1.6

-1.5

-1.4

-1.3

2007

2008

2009

2010

2011

2012

2013

+7.4

+4.8

+0.2

-0.1

+1.0

+0.2

-1.8

A: avg monthly wages in PLN B: indexed avg wages, 100=2005 Q3 2013

Q4 2013

Q1 2014

138

8,615

397,429

-1.1%

455,528

-1.3%

Q3 2013

+2.0%

405,554

-1.9%

Q2 2013

+0.8%

296,314

-2.3%

2013

+1.6%

1,635,746

-1.3%

2012

+1.9%

1,596,379

-3.7%

Sentiment Indicators

2011

+4.5%

1,528,127

-5.0%

Economic sentiment and consumer confidence indicators

2010

+3.9%

1,416,585

-5.1%

+24.2

+3.2

+14.0

+16.9

y/y (%)

+5.8

-3.9

+14.4

+17.4

+12.2

+10.0

+8.0

Year

2007

2008

2009

2010

2011

2012

2013

y/y (%)

+15.5

+12.1

+5.1

+4.6

+11.8

-0.6

-12.0

196 6,333 144

Manufacturing

3,560

155 3,625

158 3,690

161 3,663 160

Energy

5,828

177 6,021

183 6,736 205 6,358 193

-20

157 3,766 160 3,895 145 3,456 3,913

166 3,706 158 147 3,544

151

Transportation

3,547

125 3,589

127

IT, telecoms

6,707

174 6,654

173 6,695

174 6,986

Financial sector 6,702

151 6,109

137 6,602

148 6,749 152

National average 3,613 144 3,652

145 3,823

152 3,895 155

Source: Central Statistical Office (GUS)

100

138 3,666 130 181

-40

60 J un 14

3,421 146 3,408

120

Mar 14

3,693

Retail & repairs

Sep 1 1

Construction

Co nsumer conf id ence (lef t axis) Economic sentiment (right axis)

Dec 13

143 6,061

Sep 13

6,290

Current account def. in % of GDP

+2.7%

+18.7

J un 13

Coal mining

Q2 2013

GDP in PLN bn current prices

66.3

+3.4%

-64.0

M ar 13

Sector

146.1

Q4 2013

+21.5

Source: The Central Statistical Office of Poland, GUS

Gross Gross Wages

Growth y/y unadjusted

131.7

Q1 2014

m/m (%)

Dec 12

y/y (%)

-0.2

Period

Dec '13 Jan '14 Feb '14 Mar '14 Apr '14 May '14 Jun '14

Sep 1 2

Year

-0.1

Month

J un 12

y/y (%)

Dec'13 Jan'14 Feb'14 Mar'14 Apr'14 May'14 Jun'14

M ar 12

m/m (%)

Dec '13 Jan '14 Feb '14 Mar '14 Apr '14 May '14 Jun '14

Construction Output

Construction Prices Price s Month

Month

Dec 11

Month

The economic sentiment (1990-2010 average = 100) is a composite made up of 5 sectoral confidence indicators, which are arithmetic means of seasonally adjusted balances of answers to a selection of questions closely related to the reference variable. Source: Eurostat

Key Economic Data & Projections Indicator

2010

GDP change

+3.9% +4.5%

+1.9%

+1.6%

+3.5%

Consumer inflation

+2.6% +4.3%

+3.7%

+0.9%

+0.3%

Producer inflation

+2.1% +7.6%

+3.4%

-1.3%

-1.4%

CA balance, % of GDP

-5.1%

-5.0%

-3.7%

-1.3%

-0.6%

Nominal gross wage

+3.9%

+5.2%

+3.7%

+3.4%

+4.3%

Unemployment**

12.4%

12.5%

13.4%

12.2%

3.99

4.12

4.19

4.20

4.12

EUR/PLN

2011

2012

2013

*2014

Sources: NBP, BZ WBK, PKO BP, GUS *) projections **) year-end

weekly newsletter # 045 / 28th July 2014 / page 19

55.60 ↑

100 SEK

45.24 ↑

100 NOK

49.72 ↑

10,000 JPY

USD EUR 350

300

15.09 →

100 CZK 10,000 HUF

400

302.53 ↑

as of 25 July 2014

WIG-20 stocks Price Change Change in alphabetical 25 July 11 July end of order '14 '14 '13

WIG Total index

134.45 ↑

Money Supply

PLN (up to 1 year)

4.3%

4.2%

4.5%

4.4%

PLN (up to 5 y )

4.9%

4.8%

4.9%

4.8%

PLN (over 5 y)

4.7%

4.8%

4.7%

→ Asseco Pol.

PLN (total)

4.7%

4.8%

4.7%

↑ Bogdanka

EUR (up to 1m EUR) 1.9%

2.0%

1.9%

2.0%

↑ BZ WBK

359

+3%

-7%

EUR (over 1m EUR) 2.9%

3.6%

3.4%

3.3%

3.0%

2.7%

↑ Eurocash

+6%

-12%

WIG-20 blue chip index

→ Grupa Lotos

+4%

43.3

-19%

2,406 2,406. 406.32

Overnight

1 week

1 month

3 months

6 months

2.60%%

2.60%

2.67%

2.69%

→ JSW

Central Bank (NBP) Base Rates

in PLN m

Mar '14

Apr '14

May '14

Jun '14

Monetary base

173,213

168,511

162,246

173,096

2.59%

- Currency outside banks

↑ Alior Bank

Warsaw Inter Bank Offered Rate (WIBOR) as of 25 July 2014

Reference

Dec '13 Jan '14 Feb '14 Mar '14 Apr '14 May '14

558,954 116,657

548,394

557,651

119,261

119,649

572,376 120,828

964,624

969,754

- Time deposits

422,990

439,137

435,386

975,001 980,090 426,351

980,377

986,142

991,120

996,171

- Net foreign assets 132,849 126,943 142,260 144,033 Monetary base: Polish currency emitted by the central bank and money on accounts held with it. M1= currency outside banks + demand deposits M2= M1+ time deposits (inc in foreign currencies) M3= the broad measure of money supply Source: NBP

Lombard

NBP deposit

Rediscount

4.00%

1.00%

2.75%

80.79

+2%

-1%

40.41

-12%

114

+1%

-9%

51,608. 608.79 Change 1 week

+1% ↑

Change end of '13

+1% ↑

↓ Kernel

29.9

-4%

-21%

Change 1 week

+1% ↑

↑ KGHM

130.9

+3%

+11%

Change end of '13

0% →

↑ LPP

8080

+1%

-10%

488.85

-2%

WIG Total closing index

9.91

+3%

+1%

last three months

→ mBank ↑ Orange Pol.

Credit

↑ Pekao

177

+1%

-1%

54,000

The financial sector's net lending in PLN bn,

↑ PGE

21.1

+3%

+30%

53,000

loan stock at the end of period

↑ PGNiG

5.23

+2%

38.88

-7%

-5%

38.3

-3%

51,000

+1%

50,000

Type of loan

Mar' 14

Apr' 14

May' 14

Jun' 14

↓ PKN Orlen

Loans to customers

923,709

928,450

930,652

940,703

- to private companies

267,553

270,886

273,360

276,709

↑ PZU

451.9

+5%

- to households

569,334

573,332

574,800

578,639

↑ Synthos

4.59

+2%

-16%

Total assets of banks

1,628,519 1,639,359 1,660,583 1,667,783

↓ Tauron

5.05

-1%

+16%

→ PKO BP

Source: Central Bank NBP

52,000

25 Jul 14

100 DKK

Warsaw Stock Exchange, rates in PLN

on loans to non-financial corporations

3 Jul 14

341.14 ↑

25 Jul 14

523.27 ↑

100 CHF

19 May 14

100 GBP

10 Mar 14

414.59 ↑

30 Dec 13

100 EUR

Key indices

Term / currency

450

17 Oct 13

308.31 ↑

9 Aug 13

100 USD

Stock Exchange

Average weighted annual interest rates

10 Jun 14

as of 25 July 2014

Interest rates

19 May 14

100 USD/EUR against PLN

Central Bank average rates

9 Apr 14

Currency

Source: Warsaw Stock Exchange

T rade Poland's ten largest trading partners, ranked according to 2013

Poland exports and imports according to commodity groups, according to SITC classification EXPORTS in PLN bn Jan-May 2014

y/y (%)

share (%)

2013

EXPORTS in PLNbn

IMPORTS in PLN bn share (%)

Jan-May 2014

y/y (%)

share (%)

2013

share (%)

No Country

Jan-May share 2014

IMPORTS in PLN bn *2013

share No

Country

Jan-May share 2014

*2013

30,403

+10.6

10.9

69,304

10.9

20,794

+5.7

7.5

47,906

7.4

1 Germany

60,238 21.6% 139,334 21.5%

Beverages and tobacco

3,667

+10.9

1.3

8,624

1.4

1,612

+1.0

0.6

4,150

0.6

2 UK

17,615

6.3%

41,503

6.5%

2 Russia

32,634 11.7%

Crude materials except fuels

7,057

+3.4

2.5

15,744

2.5

9,065

-1.0

3.3

21,585

3.3

3 Czech Rep.

16,771

6.0%

39,421

6.2%

3 China

27,284 9.8% 60,914 9.4%

Fuels etc

11,896

-2.0

4.3

30,013

4.7

31,333

+6.0

11.2

75,539

11.7

4 France

16,100

5.8%

35,745

5.6%

4 Italy

14,420

811

+33.7

0.3

1,864

0.2

1,071

+1.0

0.4

2,646

0.4

5 Russia

12,068

4.3% 34,058

5.3%

5 Netherlands

10,418 3.7% 25,005 3.9%

Chemical products

25,517

+5.5

9.1

59,103

9.3

41,641

+8.2

15.1

92,917

14.3

6 Italy

12,888

4.6%

4.3%

6 France

11,021 4.0% 24,533 3.8%

Manufactured goods by material

55,193

+3.5

19.8

129,915

20.3

49,473

+8.4

17.7

112,392

17.3

7 Netherlands

7 Czech Rep.

9,420 3.4% 23,778 3.7%

Machinery, transport equip.

107,483

+10.9

38.5

239,434

37.5

91,562

+5.1

32.8

216,608

33.4

8 Ukraine

n/a

18,037

2.8%

8 USA

6,645 2.4%

17,350