One of the fastest growing residential real estate markets in Europe is slowing down, a slowdown we have not seen in over a decade. Until recently, Poland was a European leader. Annually, we built almost six apartments per 1,000 inhabitants. We are currently recording a strong decline in sales. Until mid-year, the development market remained in equilibrium, but we will soon enter a period of oversupply. So in what direction is the housing sector heading?
The Polish Chamber of Commercial Real Estate invited experts to discuss the future of the housing market, which has remained at a record level since 2016. Meanwhile, according to data from the consulting company JLL, year-on-year sales fell in the second quarter of 2022 from around 20,000. up to 9,000 transactions on the six largest markets, and the premises are purchased mainly by cash buyers.
The decline in demand is dynamic and in the coming months we can expect a further decline due to interest rate increases. Rising inflation and NBP rates, and consequently very high interest rates on mortgage loans, contribute to lower sales, and the medium-term slowdown in investment is now of key importance to maintain the balance of demand and sales. Unfortunately, the entry into force of the amendment to the developer act, unfortunately scheduled for June, resulted in developers launching a large number of new investments for sale. Unfortunately, we expect a further significant drop in demand in Q3, and thus we will enter a period of a marked oversupply of apartments, as Paweł Sztejter, Director of the Housing Market Team at JLL, argues.
Average housing prices in Poland have been growing steadily since 2014, and in the last twelve months this increase has ranged from 22% in Łódź to even 55% in Kraków. Meanwhile, in the face of lower demand, prices are currently stabilizing, experts forecast their decline at the end of the year, and customers are counting on discounts. Despite the difficult situation on the market, there is still a shortage of housing. According to JLL estimates, only in the six largest cities in Poland the housing deficit exceeds half a million flats, not counting an additional nearly 200 thousand. housing needed for long-term post-war migrants from Ukraine. In view of the decline in purchasing capacity and the unavailability of mortgage loans, developers have to look for other ways to sell flats, and the obvious direction for them is PRS (Private Rented Sector), i.e. institutional leasing.
Do such apartments are needed in Poland?
The share of apartments for rent in Poland is currently 4-4.5 percent. the entire resource. The average for the European Union is 20 percent, sometimes even 50 percent. like in Germany or Austria. There is no chance that Poland will reach the European average, but if it increases the share of rented resources by even one percent, it will mean an increase in the number of apartments available for rent by about 150,000. premises, explains Paweł Sztejter, JLL.
According to JLL data in Warsaw, the total stock of flats for rent, estimated at approx. 150 thousand. dwellings, in recent months there is an average of approx. 3 thousand. apartments, and relatively small and new (up to 60 m2 and built after 2015) we offer less than 500, including only about 70 studios. These figures show the catastrophically low availability of housing for rent, and the demand for it grows the more unrealistic the purchase of housing in conditions of high inflation becomes. As a consequence, rents are rising sharply and there is no room to lower them until the supply increases.
What’s holding developers back?
Building new PRS projects is extremely capital intensive. Investors are now faced with rising construction costs as a result of rising energy and raw material prices and unsteady supply chains. Financing costs are also rising. Another challenge is the uncertainty of the economic environment and the future rules of the sector’s functioning. All this means that some investors suspend new forward transactions, i.e. those made at the stage of planning or early construction works. In return, they are more involved in the construction and commissioning of already existing PRS projects, comments Marcin Jański, Director of the Housing Investments Department at CBRE Poland.
According to the Savills report, in recent years, the inflation of construction costs in Europe averaged 1-2.5 percent. annually. Currently, prices are higher than 10 to 16 percent. So how can PRS pay off if the interest rate on financing a new investment is around 9%, and the return is at the level of 6-7%?
The problem in Poland is that we expect PRS to be at least as profitable as in hotel, office and warehouse projects. Meanwhile, Western European countries have long ago come to terms with the fact that rates of return in institutional rental are lower, and they are investing in housing, because it is still the safest segment on the commercial real estate market. In addition, in many cases we build too expensive, because customers do not always need premium premises. Despite this, the financiers emphasize that this sector is future-proof and there is no doubt that attention and capital should be involved here and that we are going in the right direction, points out Robert Sztemberg, Managing Director of Property and Finance at ARC Capital Markets.
PRS is still a market at an early stage of development, there are individual projects in many cities – greater diversity of this product does not exist in Poland yet. We all learn what is sold and rented and what is not. Are air-conditioned rooms a standard in every apartment? In some cases, is it better not to invest in a high-quality finish in order to increase the return on investment? Institutional lease in Poland will grow in strength, but the changes will take many quarters, if not years, notes Gabriela Gryger, Partner of GGR Group.
Who will build the PRS?
According to experts, the PRS sector in Poland has strong foundations, and developers are willing to offer projects to investment funds. However, the high cost of financing, the uncertain return on investment and the macroeconomic environment keep investors from purchasing entire buildings.
In large cities, institutional leasing will function and will always defend itself, foreign investors simply will not enter smaller centers. Additionally, funds usually want to be the sole owner of the entire property. In the warehouse and office sectors, the main source of capital comes from abroad. The same is going to happen in a residential building, so it is good to create tools that will allow you to accumulate Polish capital and support long-term savings,
convinces Maciej Drozd, Vice President for Finance, Member of the Management Board at Echo Investment.
According to the latest RCA data, cross-border investors are the most active in the multi-family housing market in Europe and account for 40% of the total. capital invested so far in 2022. Even if the profitability of such projects is currently declining, there is still a significant amount of capital that wants to enter the PRS sector also in Poland. Increased activity by institutional investors is likely to be noticeable as they will aim to increase exposure to residential real estate as a hedge against inflation.
PRS will only be stronger.
Marcin Jański from CBRE emphasizes that we will have a period of adjustment, but in the long term this market will only be stronger.
We have come fundamentally far from the first PRS projects and it turns out that all the investments that are open today are thriving,” adds Jański from CBRE.
“Five years ago, when the state Housing Fund for Rent was established, PRS did not exist in Poland yet. This segment is the youngest, but the most dynamic, despite the difficult development conditions. The fact that some investors temporarily withdrew from the market, waiting for interest rates to change, in which direction inflation will go and what will happen to the construction costs in the next few months, will not change the future of institutional leasing in Poland. This sector will develop over the years and is one of the answers to solving the problems of investors and developers in the residential segment,” sums up Artur Kaźmierczak, Partner, Syrena Real Estate.
