In terms of real estate America is taking a bath and Western Europę is in the shower. But Poland, it is only drizzling.

Sure the party's over, the speculators have moved on to the next property casino in South Eastern Europe to see what happens when they place their bets but have they broken the bank here? No. The problem with real estate is that the layman thinks it's easy money. "Buy land" they cry "they can't make more of it". Though I think the Dutch would have something to say on that.

But like any other asset type, real estate is subject to two fundamental rules. First, something is only worth what someone else will, or more importantly now, can pay for it. Secondly, price is subject to the laws of supply and demand. If there are more buyers than sellers the price goes up, if more sellers than buyers then it goes down. And like the well crafted rules of most games if you break one you have a small problem, break two or more and then you are looking at trouble.

In Poland it isn't nearly as dangerous. The relatively young commercial real estate (CRE) industry has not accumulated sufficient inventory for sudden changes in demand to be an issue. In addition the funds and other institutions who are now risk averse in mature markets, because of the risk of diminution in value, are harbouring cash that they need to allocate.

So, how is Poland doing with the rules?

Rule 1. The ability to pay...

The current banking liquidity crisis while triggered by the collapse of real estate backed monetary instruments is really about the collapse in confidence among bankers themselves as they have watched the balance sheet strength of their peers literally evaporate as subprime based collateralised debt obligations (CDO's) collapsed. They are not so much worried about their clients ability to repay but of their peers within the banking industry. This in turn has meant that when they get cash from their existing operations then they are holding onto it to protect their own liquidity ratios. "As the credit, or more precisely, the liquidity crunch becomes a bite, it will affect all players," says Markus J. Leininger Head of Corporate Banking CEE Eurohypo AG. "Virtually everyone on the lending side is being subject to constraints, in some cases players are dropping out until they understand the new rules. For those staying they will certainly become more selective."

In the premiership of real estate it's all down to relationships and at MIPIM later this month these relationships will probably be strengthened as the premier play­er close ranks. As one agency director put it a few months a go, "there's going to be a flight to quality."

This flight is also evidencing itself in the world of real estate finance. A senior European banker said last week that he had been instructed by his board not to look for new clients just to develop the ones he has, those who he trusts. Brian Burgess, Managing Director for Savills in Poland says: "Successful developers have long established relationships with their bankers and their histories and reputations will carry them through this period of uncertainty. Banks still need to do business but now they will be more selective as to who they do it with."

But it is not only the client who is important now, it is also what they are selling. Says Maciej Tuszyński from Westdeutsche Immobilien Bank: "Financing will be available for 'landmark' developments. Projects considered to be strong investment grade assets based on location, tenant and therefore cash flow quality will always be supported irrespective of their category, office, retail, logistics and leisure."

The benefit of having cash also means that buyers can get a better deal, they now are starting to recognise value, a quality denied them in the recent period of leveraged speculation. Ben Bannatyne International Director at Jones Lang LaSalle adds "CEE was getting too expensive and we will see correction. Still, for the right product investors will pay top prices.

Rule 2: Supply and demand...

Poland's GDP is projected to grow at a more sustainable 5.5 percent next year and will hang around that level for the medium term. Wage inflation is a concern but its labour costs still offer a discount to those suffered in the rest of Europe, sufflcient to justify investments in Poland.

But while labour rates support the decision to invest in the country, it is labour quality and availability which is now driving tenants and therefore developers to invest in the provincial cities as much as in Warsaw. 'Developers are moving to the provinces because that's where tenants are going," says Brian Burgess. "In Wrocław they see as good if not better qualified staff and in Kraków generał availability also makes it more attractive."

Chris Zeuner, Head of Business Development at GE Real Estate, adds: "Developers are looking outside Warsaw as tenants see better business opportunities in the provinces driven mainly by labour availability."

But the sudden interest in the provinces has brought some transitional issues. Land availability is tailing off and land prices are also increasing making development costs more in line with those in Warsaw, which despite that hamonization of rents across Poland means, yields are not that much higher in the provinces.

Besides, as labour costs equalize with those in Western Europe the spending power released will drive GDP from a domestic base rather than an FDI one giving extra impetus to Polish companies for they too are a big driver behind office demand. Once limited to pre-1990 property because of their fledgling budgets as they have grown stronger they have gathered the confidence to move into quality office space along side the big multinationals. Alan Coląuhoun, Managing Director CEE, DTZ said "The level of investment that is pouring into cities such as Łódź and Wrocław, also from manufacturing and retail sectors, is now fuelling new service sector demand."

The lack of modern commercial real estate, including logistics and industrial, means that for the foreseeable future demand will exceed supply and with concerns being raised about Poland's ability to deliver the infrastructure for Euro 2012 due to a lack of capacity in the construction sector, the supply and demand sup­port will be in place at least for the next four years.

Says Burgess: "Investors still have cash and are looking for quality product. Yields have compressed as far as they can reasonably go in the region but rental growth is now supporting the transaction market. Warsaw's central business district saw a 30 percent increase in rent last year on the back of the excess of demand over supply. Obviously this can't continue that this pace but there's still a lot of momentum out there."

Zeuner adds that there is no significant risk in Poland for the foreseeable future. "The demand dynamics mean rental growth will drive investment. There'll be no bargains but solid returns can be made if assets are developed or bought at the right price."

                                                                                ■ Neil Crook