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The Warsaw Voice » Real Estate » March 5, 2008
Residential Properties
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Still in Demand?
March 5, 2008   
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Last year's changes on Poland's residential market, where corrections and stability followed a boom that had lasted longer than three years, reflected global and domestic real estate trends. Nearly 135,000 apartments became available last year, an increase of 15 percent over 2006 with developers snapping up 35 percent.

Residential construction is looking up for 2008. Poland offers investors high-rises with commercial functionality, luxury apartments, tenements, redevelopments and loft apartments in addition to standard residential facilities. If anything, these developments will grab a larger market share given that demand for less expensive apartments remains satisfactory.

Residential demand might have cooled off a little but it is still reasonable. Investors have adopted a wait-and-see approach. The drop in demand for apartments reported for the second half of 2007 will most likely continue in the mid-term. The market is now taking longer to absorb new projects. The uncertainties in the Polish residential sector during the latter half of 2007 benefited purchasers, who were given a wider choice and could bargain for better conditions. Meanwhile, developer competition heated up, especially once apartments previously bought on spec started to come onto the secondary market.

Prices were held in check by the situation on the global and domestic financial markets during the latter half of the year. The market entered a period of corrections and wide-scale promotional strategies after the abrupt drop in the rate of price increases during the third quarter of 2007. The gap between real and nominal real estate prices widened. Poland's residential real estate market is becoming increasingly diversified. Differences between the established markets of Warsaw, Cracow and Wrocław, and the emerging markets of Gdańsk-Gdynia-Sopot Tricity, Katowice, Łódź and Poznań became apparent during 2007. Smaller cities like Lublin, Bydgoszcz and Szczecin are expected to sprint ahead this year.

Warsaw, Cracow and Wrocław accounted for around 20 percent of all real estate projects completed in Poland last year, with developers taking an up to 70-percent share. This will probably not change in the mid-term. Supply for 2007 stood at over 16,000 apartments in Warsaw, about 6,200 in Cracow and about 4,600 in Wrocław. This is expected to increase by 10-13 percent this year, given the number of building permits issued so far. A lot of the apartments purchased between 2005 and 2007 will come onto the market, giving competition another fillip. Demand remains high in Warsaw, Cracow and Wrocław but the worldwide stagnation and credit tightening brought about by the U.S. credit crisis saw real demand fall in the second half of 2007. Buyers in these cities are likely to be more cautious and selective than they have been, at least in the mid-term, and developments will not be selling out immediately as was the case a year ago. Luxury facilities in prime locations and cheaper real estate will be attracting most interest.

Size, quality and finishing preferences are not expected to change this year. Small and medium low-rise facilities have traditionally been popular with developers and purchasers alike. The new trend of building residential high-rises with commercial functionality is going to prove challenging in Warsaw and Wrocław. Cracow is more conservative when it comes to new trends in residential construction.

Redevelopment projects are becoming more popular among developers and purchasers. Warsaw, Cracow and Wrocław saw 2007's first price corrections. The rate of price increases plummeted to 10-15 percent in Warsaw and Wrocław, and 5 percent in Cracow although those cities still have the highest prices in the country. Average apartment prices there are expected to hover around their current levels this year. Much will depend on the financial and credit markets.

The Tricity, Łódź, Poznań and Katowice were considered promising in terms of supply, demand and price increases during the second half of 2006. These markets grew rapidly last year in terms of quantity and quality, and supply is still increasing. Katowice reported the largest increase last year with Poznań coming in second. Łódź has been tipped as this year's winner. New residential projects will increase by 10-25 percent in Katowice and Poznań and 10 percent in the Tricity. Regional centers like Łódź and the Tricity are also going to see the primary and secondary markets pitted one against the other with apartments previously purchased on spec entering the fray as well.

Standards of new residential facilities have increased in the Tricity, Łódź, Poznań and Katowice. The upper and medium segments are expected to be best catered for in the mid-term. These cities arouse considerable interest among niche investors looking for holiday investments (especially the Tricity), loft apartments, high-rise apartments and redevelopments. Demand exceeds supply in the Tricity, Łódź, Poznań and Katowice. However, due to unfavorable demographic trends, the apartment shortfall is not as high as it is in other major cities. Demand is mainly determined by local residents and people working abroad. The Tricity's seaside location attracts a more diverse category of customer. Demand prospects for regional centers are looking up in the mid-term although economic conditions will obviously shape future trends.

Customer preferences in the Tricity, Łódź, Poznań and Katowice, as for the rest of Poland, are for smaller developer-standard apartments located in residential estates with small and medium-sized three- to five-story buildings.

Regional centers saw real estate prices increase considerably last year. Poznań's increase was of 60 percent, and in Katowice-about 55 percent. Real estate prices observed a nationwide slowdown with the rates of increase falling to about 18 percent in the Tricity and 35 percent in Łódź. This trend is expected to continue this year.

Apartments to let

The Polish residential market has clearly relaxed over the past six months but it continues to attract private investors interested in long-term capital investment. Buying to let is therefore an attractive option. Demand for rental apartments is growing in tandem with residential real estate prices. Limited supply, especially in new buildings, has forced rents up.

The country's residential rental market is growing rapidly, especially in the country's larger cities where universities and businesses generate demand for temporary accommodation.

Gdańsk reported record year-on-year growth in 2007. The cost of renting one-room and two-room apartments increased more than 40 percent. Average rentals in Poznań shot up by as much as 30 percent, depending on apartment size.

Leasing remains a secure investment option despite the huge price increases over the last few years and, with rents on the rise, is becoming increasingly profitable. Rents in Poland are still considerably lower than those in countries like Britain, Ireland and Spain. The cost of renting in Poland's larger cities will gradually come up to the European average as salaries increase.

CEE Property Group has simulated rental investment in Poland, assuming 100 percent mortgage finance. The rent will fully cover the monthly capital installment provided the loan is denominated in Swiss francs. It will also cover maintenance and taxes in cities like Wrocław, Katowice and Łódź. The monthly interest payment is treated as the investor's sole contribution. Once the mortgage is paid off, the investor will own the apartment after paying only zl.200-400 per month.

Katowice and Wrocław are the most promising cities in which to purchase rental apartments according to CEE Property Group.

Rental apartments are expected to become an even better investment over the next few years. Steadily increasing apartment prices, accompanied by rapidly increasing rentals, will see payback periods shortened. The only dark cloud is the possibility of a rise in interest rates and/or bank margins.
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