Waldemar Wasiluk, Vice-President of the Management Board and CFO of Victoria Dom, one of the largest residential developers in Poland, talked to Property Forum about the current difficult situation in the market, the interest of the PRS investment funds and the cautious approach of financing entities.
The turn of the year is the usual time for summaries and plans. What was 2022 like for your company? According to equal estimates, demand for residential property in Poland shrank by up to 40-50% during this time...
2022 was an extremely difficult period in the market. The combination of the effects of the war in Ukraine, the exodus of workers from the East, exploding inflation in the prices of building materials and energy and very rising interest rates collapsed demand across the entire development market in Q2 and Q3 and significantly increased the cost of development projects. In view of such circumstances, we are satisfied with the results achieved. We sold a total of 1208 flats in the Polish market, which is only about 25% less than in the previous year, and this is a much lower rate of decline than that of our peers in other development companies. At the same time, we see potential to rebuild demand. The stabilisation of sales in the last quarter of last year may suggest that the period of decline is behind us. Customer traffic in our offices is slowly increasing. In the second half of this year, we expect demand to recover as inflationary pressures gradually disappear. An additional demand stimulus should come from the planned introduction of the government support programme for first-time home purchases.
Vice-President of the Management Board & CFO
Apart from limited access to mortgage finance, what is the biggest challenge for developers in the current market conditions?
The availability of external financing is one of the key factors for our buyers. This is because, as a developer, we specialise in the construction of estates targeting people who are generally buying their first flat. In the current market conditions, the rising prices of construction materials, the shortage of employees at our subcontractors and the lack of financing for development activities are currently major challenges.
Many developers see salvation in foreign funds investing in PRS flats, which are buying up entire investments in Poland, albeit on a small scale for the time being. Do you think such expectations are justified?
At the beginning of last year, we finalised the first contract for the sale of flats to a fund investing in real estate for institutional rental. In Q3, we signed another contract. With cooling sentiment in the primary market, servicing the PRS sector is a potential alternative for us to maintain our targeted sales levels. From a current perspective, however, we can see that the nascent PRS market in Poland is currently in a very difficult situation and the number of transactions is not high. The exorbitant prices and contractual terms of purchase offered by many funds, with current high-interest rates and production costs, are not acceptable to many developers. Looking ahead to the next periods, developers may at the same time feel less and less pressure to sell whole packages of flats to PRS companies in a situation of resurgent demand from individual customers.
Victoria Dom is one of the very few Polish developers to carry out its investments in Germany. Why this direction?
The primary purpose of starting operations there was to diversify risk. Germany is one of the largest economies and Berlin is one of the most important capital cities in the world. After seven years of development in the Berlin and Leipzig markets, we can confidently say that we feel comfortable there. In addition, the German market also offers decent margins and allows us to understand the evolution and the system of operations that will certainly eventually take hold in Poland. At the same time, Germany offers a lower level of developer risk.
From a developer's point of view - what are the biggest and most important differences between the two markets?
They are very similar markets. Customers behind our western border, on the other hand, are mainly looking for finished and slightly larger flats with extensive infrastructure within the common areas. The development in Germany allows us to expand our competence, which also helps the Group as a whole. We are also implementing many of the functionalities and solutions used in German projects in developments on the domestic market. As a result, our offer is very well received by Polish customers.
What is the current situation regarding the availability of financing for new projects?
The availability of financing is currently very limited. Both banks and financial institutions, which invested in bonds and made the development segment possible, are either very cautious and do not finance developers' working capital as in the case of banks or, having no new inflows into debt funds, do not include new series of bonds. The cost of financing property development projects has increased by 100-120% in the last 12 months. It is hoped that over the course of 2023 the situation will normalise and various forms of financing for development activities by financial institutions will become available. Victoria Dom has a strong capital base and an adequate debt financing structure and is successfully introducing new projects to its portfolio every 1-2 months.
What plans does Victoria Dom have for 2023? Are you increasing supply or waiting for safer times?
We assume further expansion. In addition to launching new projects on the serviced Warsaw and Kraków markets, we intend to enter the Tricity market with our residential offer this year. It is difficult to estimate the volume of possible sales today. However, we are assuming that contracting to both individual customers and the PRS segment will reach a level of at least 1,500 flats or more this year, which would be a result of approximately 20-30% better than that achieved last year.
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