The economical environment for PRS investments in Poland has never been so favourable. However, foreign investors cannot spread their wings because of the general uncertainty, planning difficulties and high debt costs – these are just some of the topics that were covered in a panel discussion with international investors during Living Investment Forum 2022, organised by Property Forum yesterday in Warsaw.
Residential investors are operating on the Polish market in two models – by buying large apartment portfolios from developers and by building them on their own or via JV companies. Both have their enthusiasts. „We've been investing in Polish living assets for three and a half years, mainly through the Student Depot platform. We like to joint venture with local parties who obviously understand the dynamics of the market much better than we do. And we're a capital partner. So we would look to invest 90% or so the equity, and then rely on the local JV partner to acquire, develop and manage”, said Stephen Young, Senior Investment Manager at Kajima Europe. This stance is shared by Jan-Hendrik Walloch, Managing Partner of ECE Living. „Frankly speaking, we've never been a big fan of platform transactions, because we like to own what we think is the right asset. We don't want to just own a portfolio for the sake of it. And usually, developers have kind of a legacy pipeline and want to actually offload everything. In the end, we don't want to invest in, let's say, two great assets, and then take a chunk of mediocre ones that we don't believe in. It's in our history, which is 55 years long. As soon as you start building bricks, you can't move them any longer. And if it's the wrong location, it's going to fail dramatically. We currently have an absolute undersupply of institutional products. So even in fringy locations, you can still rent things pretty well. But if the market is going to grow and to offer ample opportunities for renters, they can actually choose and product with a bad location will actually be faring substantially worse”.
What are the main challenges that residential investors in the Polish market have to currently face? Stanislav Kubáček, Managing Director and Head of Investment, Eastern Europe at Heimstaden claims that the biggest problem is general economical uncertainty. "You need to have confidence in the future, the currency, the financial market, valuations, the taxation system, investment rates and stability - which I think we don't have, at least at the moment. We're trying to be creative at Heimstaden and keep investing even though it's not as easy as it could have been a year or even two years ago. We have a committed pipeline with four developers of close to 4000 apartments that we're currently delivering. There is a fundamental demand for the housing and institutional rental housing that we are we're producing, but we're lacking confidence. And I think we see it in the statistics of investments as well. The volumes are down - people are talking and getting ready but then comes another sort of bad news that extends the prospect of normalization by another quarter. We are in an uncertain world, but I think it is our social duty to continue building. Because a lot of things just came to a halt while people still need to live somewhere. We're trying our ways. we are delivering units from our committed pipeline, and we're constantly looking for new opportunities. But it may take until next before we get some clarity.”
Jan-Hendrik Walloch of ECE pointed also out the lengthy planning procedures. „I think one of the big problems deterring us from high-velocity investments is that planning takes pretty long. We`re used to it from Germany, obviously, but having now taken more than 18 months extra to get to a stage where we get consent, it's just too much”.
One of the latest issues is the government's plans to put some tax on portfolio acquisitions. But is this threat real? „I don't believe that will happen. As many of you know, in Poland there is an electoral campaign right now. And this sector that we are talking about today is politically the most vulnerable. It used to be the case for shopping centres about 10-15 years ago. Many inconsistent proposals are coming from different directions - to put some limits on portfolio acquisitions, the outright ban or some sort of taxation, etc. I think this is misconceived because we all know that the PRS sector is not at all responsible for high prices of apartments, it is rather the fundamental supply-demand economical game”, said Piotr Szafarz, Partner, Head of Real Estate in Poland and CEE at law firm Dentons.
Another issue that was pointed out by the panel moderator, Kamil Kowa, Head of Corporate Finance & Valuation at Savills Poland, is the high cost of leverage. This, coupled with rising energy and construction costs may result in surging rents. „I think we need to see an improvement in the viability of the model, that is through levelling off inflation of construction cost, and also a softening of land prices. And I think that could happen. I also think it's it favours the equity investors among us, those who don't need to pay an all-in interest cost, which is approaching 10% and can afford to invest on an all-equity basis. Those cash-on-cash returns are still really good. And therefore, that means that you don't need to be pushing your rents to the hilt”, claimed Steven Young of Kajima. Also, Jan-Hendrik Walloch of ECE was of the opinion that this situation favours equity investors. „I think Warsaw is one of the most effective markets. We've changed strategy and we`re doing every single development on a full equity basis. Taking the leverage costs out of the picture provides some pretty attractive returns. I don't see any economy of the size of Poland which delivers 5% cash-on-cash returns on day one on a residential project, safe for maybe the UK a couple of years ago. I think one of the big factors that will now actually fuel the institutional living sector is obviously the unaffordability of buying. And this is what we've seen in many other countries. Eventually, there's a tipping point when people acknowledge the unaffordability of owning a home in combination with the high investment that an individual needs to take. That loss and flexibility are making people wander over to the renting market rather than keep living the dream of owning”.
