For example, an analysis by the real estate service provider Catella revealed that 21.5 per cent of all investors regard residential properties as the most attractive investment class at present. This was the most frequently stated response, ahead of health real estate and the logistics and industry segments, which are also enjoying strong growth. When probed about the most popular niche segments, it became clear that student living is the most popular sub-asset class, leaving other specialised residential forms such as retirement homes in its wake.
Modern student housing concepts which set store by jointly-used areas are favoured by institutional investors
Yields are declining in the DACH region
There is a problem for investors, however: the competition in the German-speaking prime locations is so great in the meantime that there are hardly any properties available at affordable conditions. According to media reports, the specialists at CBRE Residential Investment put the prime yield for micro-apartments at 3.3 per cent. For conventional residential forms CBRE states a yield as low as about 2.3 per cent. For those investors who attach significance to value retention, German-speaking towns and cities may still be the first choice of location. Those actors seeking value appreciation despite inflationary tendencies have to consider an alternative strategy, however.
Poland – uncharted terrain for institutional investors
Against this background it is worth taking a look at the investment region Central and Eastern Europe (CEE), and above all at the largest property market there. The Polish market for multi-family houses has been able to post a solid result of 260 million euros despite the pandemic, as JLL reported. At the same time it is still a niche market for institutional investors: whereas in Germany, for instance, twelve per cent of all residential properties are owned by institutional investors, the figure in Poland is merely one per cent. Why is this so?
One reason for this starting position is the fact that the rental market in Poland is still relatively “young” and was hampered for a long time by political decisions. After the fall of the Communist regime in Poland the majority of residential real estate was owned by the respective inhabitants. While this is still the case with a significant proportion of the properties, in particular younger Poles with higher incomes aspire to modern rental solutions, however. According to figures from Eurostat there was a total of approx. 839,000 tenants in Poland in 2009 with an overall population of more than 38 million people at that time; in the meantime the number of tenants has doubled. This development goes hand in hand with continuous economic growth of about four per cent per annum in the period between the country’s accession to the EU (2004) and the year before the outbreak of the coronavirus (2019).
Despite these developments, excess demand for high-quality rented apartments is just as great as is it in the DACH region, however. In the case of the niche segments this disparity is even clearer, as may be seen from the student apartment segment. On the one hand, Polish universities rank among the best in an international comparison – and in particular in the fields of medicine and technology. Accordingly, Warsaw, Wrocław and Krakow are among the largest university cities in Europe. On the other hand, there are only 500 freely financed private micro-apartments for the some 25,000 international exchange students. And thus there is scarcely any alternative to state-run student halls of residence.
Poland’s academic tradition stretches back centuries – but its teaching is state of the art, with leading research facilities
At the end of 2020 the yield outlook for student apartments in Warsaw was 5.75 per cent. In smaller Polish cities such as Krakow and Wrocław this figure was around six per cent. For conventional forms of apartments the figures were only slightly lower, at 5.25 and 5.5 per cent, respectively.
The currency risk can be limited
Investments in Polish real estate pose challenges, however. Among other things, for investors from the euro-zone there is a theoretical currency risk because rents from private individuals – in contrast to commercial tenants – are usually paid in the national currency, the zloty. In reality, however, the exchange rates have remained more or less stable since 2010, something that is also true of the period since the outbreak of the coronavirus pandemic. Security-conscious investors can limit the currency risk with a number of different instruments, for instance by hedging swaps. Although this is associated with certain costs, such costs depend on the difference in interest rates between the euro-zone and Poland. This is currently lower than the difference in yields between the differing real estate markets. Thus hedging can be an efficient instrument to counter currency risks with the Polish zloty, yet has to be assessed in each individual case.
Of much greater significance is the fact that in a direct comparison the degree of professionalisation in the Polish real estate sector is much lower than in the DACH region. As a result of there being less activity on the part of institutional actors, occasionally there is a lack of understanding for the needs of foreign investors. The most relevant building plots and properties for conversion are often marketed and sold by these actors, however.
Revitalisation of existing properties that are past their prime is sometimes also the preferred choice in Poland
In addition, the authorities are not always particularly cooperative. While political reforms have been initiated in recent years so as to reduce bureaucracy, these have only been successful to a limited extent. As a consequence, building permit approval processes can sometimes drag on interminably. Likewise, tax issues require not only specialist knowledge, but in some cases also involve major time investments.
Timing and local knowledge are important
These imponderables can be specifically reduced to a minimum, however. Among other things, the point in time for entry into a project should be selected such that there is already a building permit for a project development or a revitalisation. This is a safeguard for the realisation of the property within the envisaged timeframe. The construction work should not be too advanced, however, so that many important aspects of the real estate concept can still be adjusted in line with the high demands on the part of young Polish tenants when it comes to the fit-out, for instance. With the right timing it is possible to ensure that the property can be completed before its marketability begins to decline.
Furthermore, key parameters in the ESG field can be utilised, for instance with regard to the deployed building insulation and building technology. This not only ensures a long life-cycle, but also guarantees the ESG-compliance of the property so as to meet the ever more complex sustainability criteria of investors.
With the timely entry into a project investors can make adjustments so as to meet important environmental protection criteria and thus guarantee ESG compliance
The successful implementation of all these elements, however, requires comprehensive local expertise with native speakers as specialists who look after the interests of the investor vis-à-vis local market players and the local authorities. A keen sense for the assessment of a location is also extremely important, as although the Polish real estate markets are generally regarded as being transparent according to the “JLL Transparency Index 2020”, they still rank lower than the German markets, for instance.
Co-investors retain control
Whereas, given the hurdles listed above, a direct investment is merely recommended for experienced investors with their own extensive real estate competence, there are only limited possibilities for indirect investment in Polish residential real estate. Real estate special AIFs are either spread across the entire CEE region or invest in differing usage types. While this approach makes sense, it is not an alternative for investors who specifically want to increase their residential real estate quota.
Instead of which there is the possibility to participate as a co-investor in a new-build project in the framework of a joint venture or a similar structure together with the project developer. In turn, for the developer this offers the benefit of being able to avail of a high equity capital quota, and thus only be dependent on classical capital lenders to a limited extent.