Kamil Kowa, Member of the Board and Head of the Corporate Finance & Valuation Department at Savills Poland, talked to Property Forum about the current slowdown in the Polish residential market, PRS funds' expansion and the forecast for private student accommodation in that country.
Kamil Kowa will be moderating a panel discussion on investment trends at tomorrow's Living Investment Forum 2022 in Warsaw.
After years of market prosperity, anti-inflationary interest rate rises have taken more than 50% of buyers out of the housing market. Is our residential industry facing a total collapse? Not everyone can suddenly switch to building flats for funds investing in the PRS...
Indeed, we had several years of a booming residential market. This was fueled by a low-interest rate environment, enabling cheap credit and pushing out money from deposits to the residential market. There are still cash buyers, many of them trying to preserve their equity in the face of record inflation, but they cannot replace evaporating mortgage buyers. Consequently, the sales collapsed and will fall further in the coming quarters forcing many developers to look for alternative sales channels, such as PRS.
Most of the funds present in the Polish market operate in the build-to-rent/forward purchase model. It clearly shows that the offer of Polish developers for large investors does not exist yet. Do you think this will change in the near future?
Generally, presales levels in the standing or nearly-finished built-to-sell projects are high enough, so there is no existing product for the funds, especially for those looking for bargains. Moreover, construction costs and land prices do not allow developers to discount the new projects significantly. Adding the increased cost of finance creates a deadlock with many projects unable to meet funds' return criteria.
Construction costs would need to stabilize, which is likely in the coming months, and the developers would need to lower their expected margins for the large deals to happen next year.
Funds buying entire portfolios of flats for institutional rental have bad press in Poland: first, they were accused of stimulating price increases, and now the government is preparing new taxes aimed at this group. Why do you think this is happening?
Our lawmakers are overestimating cross-border funds' impact on our residential market. Most of the multifamily stock in major cities has been delivered by private developers, many foreign-owned or controlled anyway. Public institutions were not particularly active in providing affordable supply and now found a scapegoat even though foreign PRS investors account for a fraction of the entire market.
I would instead think about how to enhance domestic investors to set up or invest in rental platforms, which are more efficient than buying flats for rent individually. Long-discussed REITs would offer a good alternative.
The institutional rental model is here to stay; if not interrupted, it will grow and lift the rental market's quality to the tenants' benefit.
What kind of product are funds investing in PRS looking for? What requirements do they place on Polish developers?
The units must be optimized, meaning they are typically smaller than in build-to-sell projects. On the other hand, this often means more parking units which lowers the profitability of PRS projects being expensive to build and not needed by tenants. In addition, energy efficiency is playing an increasingly important role – some investors will even seek self-sufficient buildings. Luckily the developers can stay in their 'comfort zone' and do not necessarily need to deliver fitted-out units, as many investors will be able to contract such works independently and according to their specifications.
And how do you assess the current willingness of banks to finance large portfolio investments?
There are still banks willing to finance PRS projects, but it isn't easy to make a lot of them work with the current cost of leverage in local currency – which is now double-digit. Financing in the euro might help, but this is still uncharted territory, with pioneer investors now testing it.
After all, the rental market in Poland, fueled by people who have been refused mortgage financing by banks and refugees from Ukraine, seems to have good years ahead of it. Would you agree with this statement?
Fully agree. The residential market has strong fundaments among all property sectors, which proves our counter-cyclical thesis. The only fly in the ointment is the question of affordability. With spiking rents, record inflation of operating costs and economic slowdown, it will be more and more challenging for many tenants to serve their obligations. Consequently, the rents will grow slower in the years to come.
Private student accommodation in Poland - what prospects does this segment of the property market have?
With 1.2 million students, Poland has the fifth largest student population in the EU and offers less than 1% of them private dormitories. Despite lockdowns, full or nearly full occupancy of many schemes is the best testimony of the market strength. It is a more niche and specialized market than PRS, so it will lag behind its bigger brother, but will definitely grow in the coming years. Furthermore, the fact that many students in private dormitories are foreign allows for natural hedging via denominating rents in euros, which in turn enables lower borrowing costs.
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