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The Warsaw Voice » Real Estate » September 30, 2009
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Hole in Housing Supply
September 30, 2009   
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New housing projects by developers will come to a standstill next year in a break likely to last 12 months. The slump in supply will hit Warsaw residents the hardest because they are in a better position than others to buy new apartments, Mikołaj Martynuska, director for development consultancy and corporate recovery at CB Richard Ellis Polska, tells Magdalena Fabijańczuk.

Housing markets in regional cities were at different stages of development when the crisis hit. Meanwhile, housing developers in ŁódĽ, Cracow and Warsaw had different pricing policies. What is the state of play today in these cities in terms of housing construction?
A reliable analysis of the market is only possible in terms of several big cities. In addition to Warsaw, these are Cracow, Poznań, Wrocław, Gdańsk and ŁódĽ. There are certainly differences here, resulting from several factors. First of all from the makeup of what's on offer.

Gdańsk stands out among regional cities. Supply is dominated here by big local players who, having better local market intuition, responded to changes faster and better. That is why they did not suffer spectacular losses, unlike international firms in other cities. The Tricity conurbation of Gdańsk, Sopot and Gdynia responded very quickly with a price drop to a serious market slump last autumn. Supply is beginning to rebound in Gdańsk now, with developers saying that sales are growing.

The difference between offer and transaction prices should also be mentioned. In Warsaw, for example, offer prices have not declined significantly but developers were offering individual negotiations instead.

Big differences between the offer and transaction prices caused turmoil on the market. At a certain moment it was completely unclear what was available and for how much. What is your opinion about such pricing policies?
From the point of view of the developer this is a very effective policy. This way investors give themselves a lot of freedom. They can change apartment prices flexibly day by day. It is much more complicated and risky to make changes in the listed price, especially when the investor has already sold some of the apartments in a given estate. Customers who bought apartments earlier want to renegotiate agreements or threaten to terminate them when it turns out they have paid too much.

Today listed prices are more realistic and it is not possible to negotiate the kind of discounts possible several months ago. I also have the impression that many developers have made their pricing policy tougher recently. Construction is well under way and in many cases developers do not need such big pre-sales in order to obtain a loan. That is why they prefer to boost margins by keeping higher prices. These obviously are not the same margins as two-three years ago. No one has detailed data on this but developer companies rarely have margins of over 20 percent. Of course, a lot depends on land prices in a given housing estate under construction.

Will the pause in completing new projects caused by the crisis lead to a slump in supply?
Developers have been putting most new projects on hold since last October. This is the situation in the whole country since it resulted not so much from decisions by developers themselves but from banks' policy. What will it lead to? The coming six months will see the completion of apartments on which construction started before the crisis. But in 2010 we can expect a one-year pause in terms of new projects being launched. The number of housing completions will decline considerably. The lack of new apartments will be felt by everyone but everyone will feel it in a different way. It will be most visible in Warsaw, which has the highest purchasing power with the highest demand potential. Demand will be affected both by the inflow of people to the capital and the increase in the purchasing power of its residents, which will make Warsaw residents more willing to move out of old buildings into new ones.

What's your advice to people who are postponing a decision to buy an apartment? Should they buy or not?
I think they should buy. It is clearly visible that what's on offer is gradually shrinking and prices have stopped falling. It is not that nothing is being built, of course, but only individual projects are being launched. In Warsaw, not much is being built, apart from in the districts of Wilanów and Białołęka.

According to my observations, areas outside the city center are selling best in Warsaw. In the ¦rodmie¶cie district and in good locations in the Mokotów and Żoliborz districts as well as in some parts of the Wola district the problem of a price barrier has appeared. Land prices were so high there that today's apartment prices will not make up for them. That is why this part of the market is blocked now and projects are simply not being launched.

What's happening to prices in this situation?
Apartment prices have been stabilizing for some time now. I would not expect miracles in terms of a spectacular fall in prices. Perhaps apartment prices still need to adjust to the market in some cities but we are not facing a steep decline by another 15 percent. It is true that construction costs have fallen and companies building new estates would probably be able to offer apartment prices competitive compared to those we have on the market now. Nonetheless land price is a significant barrier. There are basically two scenarios in this respect: developers either paid high prices for building plots at the height of the market 2006-2007 or bought them earlier and because of the cumulating capital cost, namely the expected return on investment, the plot price is also high. In the present market conditions most developers are ready to accept a lower margin than not long ago, but few are ready to accept no profit at all.

When analyzing the market I have the impression that apartment prices will stabilize at the level at the start of 2006.

You said that prices in some cities will rebound slightly. In which cities?
Cracow, Wrocław and later Poznań saw steep price rises during the housing boom. Prices per square meter in those cities were beginning to become similar to those in Warsaw, which was caused by the high level of speculation on those markets.

Today apartments in Cracow are selling slowly because the purchasing power of Cracow residents is much lower than in Warsaw. Both Cracow and Wrocław need to wait a while-either a rise in purchasing power will bring prices to market levels or prices will fall.

ŁódĽ turned out not to be a very attractive market for housing developers. Many players began to plan projects here in recent years but it turned out that local market absorption capacity is low. On the one hand, ŁódĽ has a relatively big existing stock of housing, on the other a very competitive secondary market as regards prices. At the same time, with current construction costs, local purchasing power is so low that room for margins attractive to developers is really small. The situation is similar in the Upper Silesia region in southern Poland.

The crisis prevented many young people from buying their first apartment. Instead they are continuing to rent. Can you make a tidy profit on renting an apartment?
Apartment renting seemed to become a real alternative to buying when the first symptoms of the crisis appeared on the real estate market. Some analysts predicted that the rental market will keep developing at a time of crisis. From the second half of 2008 rents began to grow but in mid-2009 rental prices became more rational. Some developers, who could not sell apartments at satisfactory prices, were thinking of finishing them and renting them out, with an option to sell them after a certain time. But neither market traditions nor Polish regulations regulate apartment renting in such a way so as to appropriately secure the interests of the two sides. The situation is different in European countries such as Germany, where renting tradition and legislation are much more stable, allowing for instance cheap funding to flow into the housing real estate market. In Poland, however, developers fear that apartment renting on a large scale may be risky because of the weaker protection of the tenant.

When do you think the crisis will subside and new investment projects will start?
This depends on the global situation on financial markets since our banks largely depend on decisions made at foreign headquarters. It is true that banks are slowly beginning to announce that they will be financing developer investments but for now these are two or three banks. Just two years ago nearly all banks financed developer operations.

Are developers ready for the green light from banks?
Projects will be started by those who know the market and came out of the crisis in a relatively good condition. Everybody who wants to start developer activity at present is thinking twice, and is asking for advice more frequently. The appeal of fast and easy profits to be made by building apartments has disappeared. The Irish and Spaniards, who had been coming in large numbers to Poland to build apartments, also began to withdraw. I think that the best players, best prepared for this business, will stay on the market.
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