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The Warsaw Voice » Real Estate » May 14, 2008
The Real Estate Voice
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Real Estate Still in Demand
May 14, 2008 By Michal Jeziorski   
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After an unprecedented boom lasting several years, prices on the residential real estate market have stabilized. Apartment prices are no longer rising, yet they are not dropping enough to suggest a downward trend. The market offers a wide range of apartments, from the least expensive large units in old buildings to comfortable-and costly-ones for wealthy clients.

The situation is in sharp contrast to the recent trend when prices changed day by day and apartments were often sold the day they were advertised. Last year, Polish residential estate prices grew an average of 21 percent, the fastest rate in Europe. According to a report by the London-based organization of global property professionals RICS, prices of new apartments in Warsaw grew by 230 percent between 2004 and 2007. Just three years ago, the difference in prices between the cheapest and the most expensive apartments in Warsaw was about 50 percent, with the lowest price at zl.2,000 per square meter and the highest at zl.3,000. Now, that difference has reached 600 percent. The cheapest apartments are zl.6,000 per sq m, and the most expensive ones can reach zl.40,000. This gap is going to widen.

Despite the healthy economy, the market is experiencing a correction at present resulting from higher interest rates and the banks' tighter mortgage loan-granting criteria. Apartments have become so expensive that the pool of clients who can afford them has decreased substantially. The activities of foreign investors also have a major impact on the situation. They have realized that prices have reached a temporary peak and most of them have given up buying. Those who already own empty or unfinished apartments are trying to sell them, boosting the supply.

There is also the psychological factor. News of stabilization and possible falls in prices encourages investors to wait with buying, which reduces demand. Investors are also being influenced by unfavorable developments in the United States and the crisis on the U.S. mortgage market. However, this factor seems of less importance.

A deep correction is rather unlikely and prices should keep growing, although at a slower pace. Despite a significant growth of the number of developer projects in major Polish cities, there are still too few apartments. This is caused by demographic trends-specifically, the appearance on the market of a large cohort of persons born in the late 1970s and early '80s. Clients aged 25-32 are the most active on the residential market.

This year, prices in the biggest and most expensive Polish cities-Warsaw, Cracow, Wrocław, Poznań and the Gdańsk-Sopot-Gdynia Tricity-should not change much compared with late 2007. Average prices in Warsaw should stay at around zl.9,000, plus or minus 5 percent. On the other hand, rents are going up-by 2-13 percent in the biggest cities. In Warsaw, rents for three-room apartments have gone up the most, partly because many people are delaying a decision to buy their own apartment.

Buyer market
There are more apartments for sale in Poland than a year ago, and many of those offered in 2007 are still waiting for buyers. The Reas and redNet real estate consultancy companies report that in Warsaw, Cracow, Wrocław, Poznań, Łódź and Tricity, developers are looking for buyers for 25,000-30,000 new apartments-some completed, others in the construction or design phase. What's more, developers say that this year, more than 42,000 apartments will be completed in these six cities. An analysis by the Wrocław-based WGN Real Estate showed that in December 2006 there were on average 12 clients interested in each apartment offered on the secondary market, and 13.5 clients on the primary market. By contrast, in December 2007, there was on average one potential buyer per 12.5 apartments offered for sale. So in order to sell, developers had to be flexible and reduce prices.

The average time needed to sell an apartment on the primary market has extended from 69 days in early 2007 to 107 at the end of the year. Such a high supply, combined with the growing prices of mortgage loans, may lead to price drops, at least in some cities.

The slower growth of prices and the signals that business has taken a downturn on key international real estate markets have strangled speculative purchases. This means that for the next few months, the apartment market will belong to buyers. However, leading developers in major cities are not likely to be considering a price war. Although the times may be over when people were willing to buy apartments at the design stage, developers are not cutting prices. The reason is simple: this would not boost sales anyway, since clients are waiting for further price reductions.

It is a good sign that ongoing construction projects account for just 67 percent of construction permits granted this and last year in the multi-family building sector and 88 percent in the case of single-family housing. That means that 37,000 apartments in the multi-family sector and 11,000 projects in single-family sector are not started yet; otherwise these would add to the market glut.

These plans are threatened by the decreasing financing available, both for individual investors (wages growing slower than apartment prices, the rising price of mortgage loans) and for developers who are having trouble finding land for new projects due to the substantial growth of construction land prices.

Client hunting
The growing competition on the residential market has prompted developers to apply new marketing strategies. In its February 2008 study of marketing on the residential market, CEE Property Group found that apartments are subject to the same marketing rules as other products; in order to maintain high sales, developers have to apply profiled marketing strategies. To attract clients, it is no longer enough to post a large board with the developer's contact data on the construction site. Well-known companies used to sell apartments fast this way; today, it is not so simple. The residential property market is increasingly demanding, and developers are seeking new methods of reaching clients. When asked about the most important sources of information on properties for sale, Poles mention primarily the Internet and the print press. Also, in the construction industry, good references are of particular value. Satisfied customers are the best way to enhance a developer's good market image. In order to maintain sales at target prices, developers offer numerous bonuses, such as free parking space, storage, balconies, terraces, fireplaces and air conditioning. Clients who sign a contract and pay a reservation fee before the end of this year get a 7-percent VAT discount on the apartment price.

Developers are also striving to attract Polish emigrants. Last December, the first Poland Property Show was held in London, an event that targeted Poles working in Britain. An increasing number of them, particularly those who have stayed abroad for a long time, are thinking about investing in real estate. One study of the London market suggests 57 percent of Poles living in Britain are considering the purchase of an apartment in their homeland.

However, it is not only about emigrants. Many wealthy Brits or Irish are willing to invest in properties, particularly since many reports put Poland high on the list of attractive investor markets. This interest by foreign investors has not escaped the attention of Polish developers. For example, foreigners make up some 30 percent of clients interested in apartments in the Angel Wings project in Wrocław.

More expensive loans
The financial advisory firm Open Finance has found that since interest rates started to rise, an average installment on a 30-year loan has grown by zl.120 per each zl.100,000 borrowed. By the end of the year, that figure may rise to zl.150. Only those borrowers whose wages have increased might say that their financial situation has not deteriorated. On the other hand, clients who took loans in Swiss francs are better off because in their case, interest rates remain low. Three-month LIBOR for Swiss francs is a little below 2.84 percent, and loans in Swiss francs, with an average bank fee of 1.3 percent, carry an average interest of 4.15 percent. Even with unfavorable currency-rate fluctuations-in February, the Swiss franc rose by 2.3 percent against the zloty, from zl.2.20 to zl.2.25-these loans are much cheaper than loans in zlotys, and that difference is growing. To close the gap, the Swiss franc exchange rate would have to grow to zl.2.95. So this year offers better prospects for clients who have loans in Swiss francs than in zlotys. Interest rate hikes in Switzerland may occur, but they will most likely be lower than in Poland. In addition, higher installments caused by increased interest rates are being offset by the strengthening zloty.

There are an increasing number of high-standard apartments on the market, and developers are working on new projects that often only foreign investors can afford. So many buyers are leaning towards small one- or two-room apartments, which are most often offered on the secondary market. Their moderate prices are within the reach of people with average earnings. Also, apartments of lower standard and attics should become more popular.

Tax incentive
The construction industry in Poland will certainly be stimulated by the preferential 7-percent VAT rate for construction, assembly and renovation of residential facilities that was secured by the government in Poland's European Union accession treaty. Initially, the tax rate was to grow to 22 percent as of 2008, but Polish authorities managed to get this delayed until Jan. 1, 2011. The preferential VAT rate applies to construction and renovation services for residential buildings, apartments located in non-residential buildings, and health care facilities that provide accommodation and medical services, particularly for the elderly and disabled.

Client preferences
Experts agree that small apartments with one, two or three rooms are the most popular and sell the fastest. Even though prices of one sq m of a studio are relatively high, their small size makes the apartments more affordable. At present one-room apartments of 25-34 sq m and two- or three-room flats of 38-65 sq m are most in demand. Clients prefer relatively new apartments, less than 10 years old, located in city centers and close to green areas, in low buildings of up to four or five stories. Buyers also appreciate elevators and parking space. Neglected apartments in old tenement houses or in pre-fab blocks, particularly on top or ground floors, are the least popular.

Growing apartment prices have encouraged a shift of some buyers' interest to single-family housing. Nowy Adres and Millward Brown SMG/KRC studies indicate that two-thirds of Poles planning to buy or build a property would like to live in a single-family house. This market segment began developing in 2006 with the realization that the price of construction of one square meter of a single-family house was often just one-third of the price of one sq m of a new apartment. Analysts from WGN Real Estate expect price growth of houses of up to 20 percent during the next three years. Last year, depending on standard and location, prices of houses increased by up to 40 percent as, finding apartment and house prices comparable, many buyers chose a house. At the same time, price hikes affected land, construction materials and labor.

At the end of 2007 the price of a 230-300 sq m house in Warsaw was 42 percent higher (by zl.520,000) than at the beginning of the year. That means buying a large and luxury house in a major Polish city will set you back zl.1 million or more. New houses (up to 10 years old) of 100-180 sq m are popular, on plots of 900-1,500 sq, ranch style (single floor) with residential space in the attic, in nice and safe locations. Demand for luxury houses in prestigious locations remains high, but on this market, supply is limited.

Changing fashion
An increasing number of developers offer apartments in turnkey standard. Some, like Orco Property Development, no longer sell apartments at all in "developer" standard, that is, without floors, inside doors, fixtures and so on. However, a CB Richard Ellis study shows that more than 40 percent of Poles prefer to finish their apartments in a way that suits their needs.

As the market situation changes, so do client tastes. For example, clients increasingly are looking for apartments with separate kitchens. However, the majority of apartments will have no separate kitchen, since during the past 10-15 years kitchen annexes have become quite popular. This trend had a practical explanation: in a small apartment, a kitchen annex provides for additional space. This solution is also increasingly often used in large apartments, since people's lifestyles are changing and they often eat out. However, clients now seem to prefer separate kitchens again.

Rural boom
High apartment prices have encouraged Poles to seek locations in city outskirts and villages. The Central Statistical Office (GUS) reports that last year, more than 45,000 single-family houses and apartments were completed in villages, 30 percent more than in 2006. In the cities, the number of newly completed apartments grew by just 10.2 percent.

The construction boom appeared in the countryside later than in cities, but it is more intense, due mainly to the high prices of urban apartments. More people are deciding to buy land outside the city and build a house. Rural locations are also becoming more attractive due to the development of agritourism in Poland. However, rural construction growth will depend on the development of road infrastructure. Easier access to the city center will encourage more people to move out to the countryside.

For the time being, the rural market is little influenced by the construction of fenced estates outside major cities and vacation home estates. Last year, developers completed just over 2,800 houses and apartments. Projects by private individuals make up 92 percent of the primary residential market outside the cities.

It takes on average 70.3 months to build an apartment in a rural location, compared with 51.2 months in the city. Developer projects are completed faster. In the future, developers will gradually take over the rural market, building single-family house estates outside the cities. The reasons are clear: people have less time to build their own residences, the technologies are increasingly complex and differences in prices are falling.

Developers already hold a majority of the construction market. As recently as 2004, the market saw 2.5 times more projects from private individuals than developers. Last year, that difference narrowed down to 14 percent. Individuals started construction on nearly 78,700 apartments, while developers launched construction on 91,600 apartments for sale or rent. Three years earlier, individual investors prevailed in every Polish province; last year they led only in four. In Mazovia and Pomerania, developers dominated individual investors, launching 1.5 times more construction projects.

Barriers to development
Among factors hampering construction are a lack of land development plans, an increasing shortage of qualified staff and contractors, and the growing prices of construction materials and services. The lack of a land development plan increases investment risk. Local communes usually have only "studies of conditions" that are very general and are not sufficient for obtaining a construction permit. The commune may suspend the decision-making process for a year, or it may issue a decision on the conditions of development at the cost of the investor, who has to present a land development concept commissioned from an architect. Another problem is that officials are given great latitude in approving or rejecting the concept submitted. And although they theoretically have two months to issue the decision, the procedure usually lasts much longer.

Due to the lack of local land development plans, investors have to buy extremely expensive land in areas that do have such plans, use untypical locations, fill the gaps between already existing buildings, or build within existing residential estates. All of these factors mean higher costs.

The construction sector is also feeling the effects of the unfavorable situation on the job market. After Poland joined the EU and foreign job markets opened up, many construction workers left the country to work abroad. In many Polish cities, developers face shortages of roofers, bricklayers, carpenters and finishing work technicians. Consequently, wages in some jobs have grown by up to 100 percent over the past several months.

At the same time, the number of graduates from construction schools is dropping. Some schools will take from 90 to 120 students a year, but don't have nearly that many applicants. The Construction Ministry believes that one remedy could be to shorten the program from the present three to two years. A stipend system for construction school candidates is also being considered. Many large companies are willing to fund such stipends in order to secure themselves staff in the future. Schools might also hold training workshops and organize internships at companies.
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