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The Warsaw Voice » Real Estate » March 4, 2009
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As Cheap as it Gets
March 4, 2009   
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People who want to buy homes should act quickly if they want a bargain-developers have cut prices and are offering discounts. But they have stopped building new homes and within a few months or a year, there will be little left to choose from, Robert Chojnacki, chairman of the board of redNet Property Group, tells Magdalena Fabijańczuk

In the fall redNet Property Group held a conference dedicated to the housing market entitled "Is This Rock Bottom?" Have we reached rock bottom, and will housing prices stop dropping now?
We assumed at the conference that prices would decrease in 2008 and then throughout 2009. But it turned out that things are happening much faster than we thought. Since August 2008 prices have dropped by almost 25 percent. The end of 2008 brought an unusually sharp decline in transaction prices. In addition, in December developers had their Christmas promotions, and the average discounts stood at 9.3 percent that month.

It's important, however, to account for the way these prices are quoted and calculated. Developers have completely different marketing policies and strategies. Some are able to offer a discount of up to 20 percent, though their asking price is high. Others don't offer such big discounts, but have substantially reduced their prices.

Where do these differences come from?
Some developers who have built large housing estates, have already sold most of the apartments, but have yet to sign the notarial deeds. If such a developer were to reduce the price by 20 percent now, those people who have already bought the apartments would start defaulting on their contracts or demand that these be renegotiated. That's why a change in the price list would pose a problem for the investor. However, when a new customer comes to the office, they can negotiate quite a sizable discount individually. The situation is completely different with new projects. That's why the true market measure is the real price-the price for which we ultimately buy a home.

What's in store for the next few months?
As far as forecasts are concerned, I think developers will still be inclined to offer discounts. However, I don't expect any more substantial price cuts. Developers' margins have shrunk as much as they could in recent months and prices are close to the limit of profitability. The best indicator of this is the appearance of investors on the market who want to buy whole packages of apartments; we're talking about transactions of over zl.10 million. These clients demand special discounts, while developers-precisely because of the profitability limit I mentioned-cannot offer such discounts. They prefer to take their time selling a project over the next two or three years, which to me is simply a sign that developers are doing well financially.

Does this mean that it's not worth procrastinating any longer if someone wants to buy an apartment?
Prices have dropped, and apartments are about 40 percent cheaper than at the peak of the bull market in 2007. These decreases have balanced out a large part of the previous price growth. Buyers are monitoring the market. They are coming to the office every month to check out what's available, but the real price for which they can buy an apartment isn't falling any further. The buyers keep waiting, which I think is a bad decision. This is the time for good bargains. Now is the time to view, choose and buy. Such bargains won't be available next year. First of all, there won't be much to choose from, as developers are not starting any new projects.

Buyers can still count on hefty discounts. There is the most room for negotiation in the case of completed projects, when a developer has sold 90 percent of the apartments, has to pay rent to the administrator, and won't insist forever on a price at which it's tough to sell the remaining apartments. In projects like that, an apartment valued at zl.600,000 can be bought for as little as zl.400,000.

If people take your advice and decide to buy a home today, there's still a problem. Where are they supposed to get the money?
We have calculated that the deposits placed in banks in the last quarter of 2008 would buy 70,000 apartments for cash. However, in a situation where banks offered interest rates of up to 10 percent and the market waited for more price decreases, many people opened fixed-term deposits. Now the situation is starting to turn around. Housing prices have dropped and deposits are less profitable. Clients are starting to have a choice: keep their money in the bank at lower interest and wait for housing prices to drop further-when they can see prices aren't dropping-or buy an apartment, invest in real estate, and perhaps rent it out. Rents are high now. I think that in the second quarter most people who can afford to buy an apartment for cash won't renew their fixed-term deposits. If they want to buy an apartment and didn't make up their minds before, they will now.

Most prospective buyers count on loans. What will happen to this group?
Banks apply very strict criteria when granting loans, but it's not as if they've completely stopped granting them. If someone has the required deposit and regular income, a bank will want to work with them. That's why I think not a lack of funding but mainly psychological factors are blocking the purchase of housing and consequently new investment projects. A loan is made up of principal and interest. It's worth buying a home when the cost of monthly interest is less than what we would have to pay to rent a place.

Today the real estate market's greatest hit is the government's "Family's Own Home" program for married couples buying their first home. For eight years the state will cover up to 50 percent of the interest on a loan. This is the first program of its kind that really works and in addition has saved many developers. Without it, the market would be in much worse shape.

You mentioned the rental market. Is renting good business today?
With each reduction of interest rates, more people want to buy apartments for rental. During a recession renting is very good business. Big investors build whole portfolios of apartments for rent because the rental market is the exact opposite of the sales market. Unless apartment owners have unrealistic financial expectations, they won't have to wait long for tenants. The luxury market is worse off. Few people want to rent a luxury apartment.

Just last year the luxury apartment market looked very promising. How do you assess it today? Will buyers be found for luxury apartments?
The market is full of ill-judged investment projects and pseudo-luxury apartments. It's hard to believe, but less than 1 percent of the apartments that investors define as luxury homes actually meet the definition of luxury housing. As for the impact of the crisis, the luxury apartment market has felt it too. The worst impact, though, will be on premium housing that developers call luxury apartments. The wheat is being separated from the chaff; buyers are looking very carefully at luxury apartments.

The most important thing is for developers to know who they are building for. A 250-sq-m apartment is a family apartment, and families with children don't want to live on the 10th or 11th floor of a tower in the city center. They are more likely to choose an estate with greenery, a playground, near a park or pond. Planning and a well-defined clientele at the very start of a project will be more and more important.

What is your advice to developers as to how they should promote their housing projects? What's the best and most effective way of getting through to clients?
I always say that the most important thing is a project's clarity and transparency. If they can, developers should quote realistic prices at which they want to sell homes. When buyers compare offers, for instance on the internet, they compare prices at the very first selection stage. They won't necessarily know that an estate's owner would be inclined to offer a 10- or 15-percent discount in individual negotiations, and they reject the offer as being too expensive. Quoting a price, I would, however, leave at least minimum room for negotiation, because today's customer expects discounts.

Marketing budgets are very limited, so the most important thing is to reach not the general public with our message, but primarily prospective buyers. Billboards are a good example. This is a costly advertising medium and if we are selling apartments in Warsaw's Wilanów district, for example, and don't carefully consider which districts our prospective buyers live in, we are spending money blindly.

What kind of information could encourage a client to come to the sales office?
One recent idea is to offer turnkey finishing instead of discounts. The buyer has already assigned cash for the deposit and when they move in, they don't have the money to do the finishing work. Besides, developers buy [materials] in bulk, so they can get the finishing work done about 30 percent cheaper than a retail customer.

Trade fairs are a good place to promote projects. Clients can review what different projects and developers offer all in one place. In this case companies compete with one another in the way their stands look; they want to get people interested in what they offer and lure them to their sales offices.
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