After a period of rapid development in the years 2021-22, the Polish PRS market is experiencing a setback in terms of the number of both new projects and concluded deals. The participants of the investment panel during Property Forum’s Living Investment Forum 2023 conference in Warsaw tried to discover the reason for such a state of affairs.
Major investment funds acknowledge the potential of the Polish PRS market, but what puts them on hold are high hedging costs and the lack of proper regulations. „We are ready to invest in Poland. We see the structural demand and all the fundamentals - the residential market here is very prospective. But Poland is still one of the few countries, where we don't have any regulations on the PRS market. Those regulations will eventually come, I suspect it will happen in three to five years. But it is still a very attractive proposition. We have more operating projects, which are proof to the institutional investors that this market actually works, there are operators, and the rent is collected, so all the boxes for the institutional investors are met. But at the moment, it is quite difficult to bring institutional investors with core money into this market. We see quite a lot of value and opportunistic investors eager to take up the development risk. I suspect within the next couple of years, this will completely change - we'll have institutional money, and we'll have core investors interested in lower, but long-term returns. This is a very prospective market and at the moment as we speak, we are looking at a couple of opportunities. Our biggest challenge is that we need to somehow hedge. The cost of hedging today is enormous”, said Anna Duchnowska, Managing Director – Investment Management, Europe at Invesco Real Estate.
Her words were confirmed by Piotr Trzciński, Head of Poland at Savills Investment Management: „To us, Poland is and always has been a country of interest. It is on our watch list. However, the biggest challenge for us in Poland, is the unpredictability of regulation, as our investors are usually core ones, not opportunistic. And secondly, the relative size of the market - we usually invest in markets where a PRS segment accounts for 5% plus of the total housing stock. Obviously, we're not there yet. And according to the estimates, I think even if all the announced developments were to be delivered, we will total about 50,000 units in the next five years or so, which is still zero-point-five of the total housing stock.”
The panel’s moderator, Kamil Kowa, Head of Corporate Finance & Valuation, at Savills Poland was also questioning PRS operators about their biggest challenges at the moment. Stanislav Kubáček, Managing Director and Head of Investment, Eastern Europe at Heimstaden pointed out the difficult situation in the financing market. „We are much wiser today than a couple of months ago. There are more assets that have come live in the PRS and co-living sector in Warsaw in other Polish cities, and they are all performing very well. So I think there's more optimism on the operating side and the long-term business planning. I think life goes on, and we are more confident than ever about our businesses. However, on the financing side, the cost of equity, and cost of debt remains high - it's still tough to make things work. What helps is to now really have assets, so the banks can now see more data. It's an education process - it's slow and painful. but as long as there will be assets, data, track records and credit history, I think there's no reason that this will not be a more liquid financing market”, said Kubáček.
Marek Obuchowicz, Partner at Griffin Capital Partners claims, that also high land prices for new developments remain a major problem. „Despite the crumbling demand, the land still tends to stick to their original assumptions around the value of their plots. And there's limited room for negotiations of these prices. That's what we are seeing too often - we would expect to see substantial discounts, but they don't seem to be there just yet”, said Obuchowicz.
Will the Polish PRS market be back on track in the foreseeable future? Not likely, taking into account that developers may quickly return to the build-to-sell approach. „The main reason why we haven't developed a successful PRS market was simply that until the year 2022, the developers had Eldorado with the ‘ready-to-sell’ market; everything was resolved practically before starting the construction. For now, the developers are sitting on the banks of lands, because the financing from the individual prospective buyers has been reduced by 50-60%. So they are looking for alternative sources to kick off, start the construction and secure the exit. If we are back into the situation where the developers can pre-sell the products to the individual market players again, and the mortgage market will reboot, then I suspect we'll have a massive slowdown in the development of the PRS market because simply the development itself will be more attractive”, predicts Anna Duchnowska.
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