Slowdown on Residential Market
November 29, 2012
After a period of revival, the Polish residential market has started to feel the impact of the general economic slowdown. However, the downturn could well turn out be a time for some good deals on the property market.
A report by real estate services company REAS, which specializes in the residential market, shows that the number of new projects brought by developers onto the market in the third quarter of 2012 was much smaller than in the previous quarter, while the number of transactions stayed at a similar level. After 10 quarters of uninterrupted growth, the number of homes offered by developers dropped.
“An exceptionally high supply had the biggest influence on the situation on the residential market, with a record number of homes brought onto the market in January-April 2012, that is before new regulations related to developers came into force,” says Katarzyna Kuniewicz, director of the market research department at REAS. “According to the findings of the latest REAS research, the number of homes newly offered for sale by developers in the third quarter was half that in the preceding quarter. Consequently, the number of homes offered reached a medium-term high in the second quarter of 2012 and should gradually decrease in the following quarters. However, as the number of planned home completions is large, the number of completed but unsold homes will increase significantly in the coming months.” REAS expects that the fourth quarter will see a slight rise in quarter-on-quarter terms in the number of deals, which will be mainly due to an increased interest in a government program for supporting home ownership before its planned expiry.
REAS studies show that in the third quarter of 2012 under 6,400 homes were newly offered for sale in six urban centers with the highest turnover on the primary market: Warsaw, Cracow, Wrocław, Poznań, ŁódĽ, and the coastal Tri-City of Gdańsk, Gdynia and Sopot. The figure was two times smaller than in the previous quarter and the smallest since the third quarter of 2009. As expected, after a record level of supply in the second quarter, developers significantly slowed the process of bringing new projects onto the market.
Still, more than 36,000 homes were newly offered for sale in these cities in the period from the fourth quarter of 2011 to the third quarter of 2012—6.5 percent less than in the previous four quarters. Despite a marked drop in the number of homes put on the market in the third quarter, the total number of homes offered for sale on the six markets decreased relatively slightly to just over 55,700 units at the end of the quarter, or 2 percent less than three months earlier. The total number of homes offered for sale dropped by around 2 percent in Warsaw, 5 percent in Poznań, 5.5 percent in Tri-City, and 8 percent in ŁódĽ. It remained almost unchanged in Wrocław and rose by over 3 percent in Cracow.
The REAS statistics on the number of homes newly offered for sale in the first three quarters of 2012 are consistent with data released by the Central Statistical Office (GUS). Throughout Poland, developers started the construction of 46,100 homes, the same number as a year earlier, and received building permits for just over 54,800 homes, roughly 9 percent less than a year earlier. In the same period, housing associations started building 1,800 homes, 11 percent more than a year earlier, and received building permits for a further 1,450 homes, 37 percent less than in the first three quarters of 2011.
The data shows that the rise in the number of homes newly offered for sale triggered by the new regulations governing the operations of developers only partly translated into new housing starts.
Prices going down
The number of completed but unsold homes went up by 1 percent quarter on quarter and over 34 percent year on year. At the end of September, there were over 4,700 such homes in Warsaw, slightly more than at the end of the previous quarter. The combined number of such homes on the six largest markets exceeded 12,700. Given the large number of units scheduled for completion in the fourth quarter of 2012, the number of completed but unsold homes is likely to grow significantly.
REAS statistics show that in the third quarter of 2012 the combined number of transactions on the six largest markets dropped compared with the second quarter by around 7 percent to under 7,100 homes. The figure was weaker than in the previous three quarters, but stronger than a year earlier. Notably, sales in the third quarter usually subside because of the summer vacation season. If this is taken into account, the performance of the market may be assessed as good, experts say, with sales helped by a large number and wide range of homes on offer and price flexibility on the part of sellers.
The average prices of homes offered by developers continued to fall slightly as did the prices of homes that were actually sold. Meanwhile, the drop in the prices of units newly offered for sale in the third quarter was sharper. They were almost 16 percent lower than in the first quarter of 2009. Apart from the high supply, one extraordinary factor contributed to this price policy—an adjustment of prices in cheaper projects to make the homes eligible for allowances under the government home ownership support program.
In the past 12 months, developers sold just over 29,600 homes on the six largest markets, 1 percent less than a year earlier (i.e. from the fourth quarter of 2010 to the third quarter of 2011).
But these relatively strong sales came at a price. With the growing supply and stable sales, developers had to make greater effort and incur higher costs to attract buyers, while sales per project went down markedly. To compare, at the end of 2010 developers had around 39,000 units on offer. The average margins are also going down. They have already fallen to single-digit territory for some developers.
Compared with the end of the previous quarter, the time needed to sell off all homes a developer has on offer has shortened. The situation of Tri-City developers is still the best in this respect. If the pace of sales recorded in the past four quarters continued they would need 6.5 quarters on average to sell their last home. Cracow developers are the worst off: in their case the period is seven months longer.
Big developers, high sales
Large market players have so far suffered the least as a result of the slowdown. Dom Development SA, a leading developer on the Polish market, sold 361 homes in the third quarter despite the downturn, compared with 454 a year earlier. In the three quarters to the end of September, Dom Development sold a total of 1,102 homes, compared with 1,280 a year earlier. In the third quarter, the developer completed a record 736 homes, compared with 466 a year earlier. The combined number of homes completed since the beginning of 2012 was 1,421 versus 832 in the same period last year and 1,282 in the full year 2011.
“The third quarter of the year was another period of slowdown on the Polish residential market,” said Jarosław Szanajca, CEO of Dom Development. “The high supply of homes on the primary market results in a downward pressure on home prices. The situation is not helped by the still-restricted access to mortgage loans and lower limits in the government subsidy program, which is expiring. Despite these unfavorable factors, we have been able to maintain stable sales at a level of over 100 homes a month, as planned, while keeping margins at a satisfactory level.”
Meanwhile, Robyg Group in the third quarter signed agreements for the sale of 264 apartments to be developed in Warsaw and Gdańsk. This represented an increase from 249 apartments in the third quarter of 2011. The group’s target for the full year 2012 is 1,000 apartments, as in 2011. “Robyg has a stable level of agreements signed for the development of new homes because of their good locations and attractiveness,” said Zbigniew Wojciech Okoński, CEO of Robyg SA. “Many people decide to buy the apartments we offer at a time when a project is still at a very early stage. This is the best proof for us that our company enjoys the confidence of customers and has a good reputation on the market.”
Another large developer, Skanska Residential Development Poland, recently started building the Park Ostrobramska housing estate in the eastern part of Warsaw. This will be a complex of multi-family buildings with a total of 1,600 apartments. The first tenants will be able to move in at the end of 2013. Two buildings with a total of 298 apartments will be constructed in the first stage of the project.
“We want to bring to the Polish market a new standard of customer service and the idea of green living,” says Michał Melaniuk, CEO of Skanska Residential Development Poland. “We have started our latest project, Park Ostrobramska, at the right moment. At present, the market favors developers with extensive experience and their own financial resources.”
The housing estate has been designed in keeping with Skanska’s green building program. The buildings are expected to provide comfort to the occupants and ensure energy efficiency. An enhanced thermal insulation system makes it possible to reduce heat losses while high ceilings and large windows make the rooms brighter and more spacious than usual. Park Ostrobramska will be one of the first estates in Warsaw provided with facilities for recharging electric cars.
Crisis: time to invest
An overwhelming majority of the homes on the Polish market are bought to meet the buyer’s housing needs. But the residential market also creates attractive prospects for investors. What makes the market attractive is that the supply of high quality homes is high while the prices are at a low level.
Marek Oberda, sales and marketing director at Layetana Developments Poland, says that investment decisions based on a sound instinct for what’s happening on the market make it possible to invest safely and generate satisfactory yields.
Homes in completed projects are a safe investment on the real estate market. Their future value is only to a limited extent dependent on changes on global financial markets. Studies of this market indicate that the value of such properties grows in the long run, ensuring a return on investment. This is particularly true of projects with attractive urban locations. As the supply of land for development shrinks and the cities expand, properties will be rising in value.
Additionally, those buying a completed home avoid the risk of delays or of work never being completed should the developer go bankrupt. Also, banks are far more eager to lend money for the purchase of completed homes and borrowing costs are lower in such cases. The borrower is not required to take an insurance on such loans, in contrast to loans for homes that have not yet been completed.
Although the economic crisis has hit developers hard, it seems the situation may turn out to be beneficial for investors interested in the property market.
Good Prospects for Developers with Attractive Products
Arik Koren, CEO Okam Capital:
Despite the widespread concern over what the coming year holds in store, 2013 will be a good year for those developers who have attractive products to offer to their customers.
The biggest problem for developers building average-standard apartments will be the expiration of the government program supporting home ownership. Plans by the construction ministry to launch another subsidy program no earlier than mid-2013 or the beginning of 2014, with the latter date being more likely, mean that many prospective buyers may postpone the decision to purchase a new home. This may be the biggest challenge in 2013 for developers with limited resources.
However, attractive products combined with high quality, a good location and a reasonable price will show which projects are the most popular with buyers. The winding-up of the government program will reveal the real value of projects, a value that has so far been obscured by the official price index.
As regards the high-standard housing segment, 2013 will not bring any major change. Demand for high-end products has remained at the same level for years. Okam Capital’s projects in Warsaw and Katowice show that high-standard apartments in the best locations are selling well despite the crisis. This is proven by two projects started by Okam in 2012—InCity in Warsaw and Dom in the Dolina Trzech Stawów neighborhood in Katowice. Apartments developed in the first stage of InCity sold instantly, leading to the need to launch a second stage of the project in November.