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Poland’s property market continues to establish itself as an investment destination

Poland is continuing to establish itself as an investment destination for property investors. This has been true of the office segment for some time now; the residential segment is still in the early phase of development but shows great potential. There is a shortage in the Polish property market that currently runs to around 3 million apartments. However, the residential market is opening up to both institutional investors and the professional rental market, and investors can expect attractive yields of up to 8.5 per cent. The office market, on the other hand, has been established among international institutional investors for ten years now, but there is still potential for growth. Moreover, Polish office properties still provide good yield prospects in comparison with the rest of Europe, at Western European standards.
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Hansainvest Hanseatische Investment-GmbH
Skanska Group

These were the central results of the online press conference, “Poland’s property market – opportunities and risks for investors”, which took place today. Annika Steiner, Head of Research at Wüest Partner Germany, presented an overview of the Polish office and residential real estate market. The following investors and project developers presented trends and provided insights into investment practice: Martin Eberhardt, Managing Directors of Bouwfonds IM Germany, Adam Swirski, Head of Resi 4 Rent, Griffin Real Estate, Nicholas Brinckmann, Managing Director of Hansainvest Real Assets und Maciej Müldner, Financial Director at Skanska Property Poland.

The residential investment market is gaining in importance
The Polish residential real estate market is very different to the German market. What is striking about it is that, at 77 per cent, a large proportion of apartments is owner occupied. For a long time, the correspondingly very small rental market was run somewhat unprofessionally, with temporary rental contracts as a rule and without any professional property management. But this framework has significantly improved for landlords and tenants in the last few years.

There are now approximately 14 million apartments in the Polish residential real estate market. However: “Over half of these properties are large-panel system buildings from the socialist era and, as a result, no longer meet the needs of potential tenants,” says Adam Swirski, Head of Resi 4 Rent at Griffin Real Estate. Annika Steiner from Wüest Partner Germany adds: “There is high demand for modern housing. In the first three quarters of last year, only 112,000 apartments were completed; of those, almost half have been put up for sale or for rent. The other 55,000 apartments are owned by owner-users.” However, there is currently a shortage of around 3 million apartments. In addition to this, the number of households will continue to increase up until 2030. “An analysis of developments of each of the provinces has clearly shown that, in provinces with large cities like Warsaw, Kraków, Gda?sk and Pozna?, we can expect household numbers to continue to develop positively right up until 2050,” Steiner adds. Swirski continues: “We are using modern property management to develop attractive apartments in these promising locations, in order to meet the demand of potential tenants. The first completions are planned for Q4 2018.”

Martin Eberhardt, Managing Director of Bouwfonds IM remarks: “Although Poland is not a key investment country, its market has been gaining in importance within the scope of our pan-European investment strategy for residential properties. We made our first residential investment in the project development ‘Pereca Street’ in Warsaw’s inner city in summer 2016.”

Positive developments in residential rental and purchase prices
Due to the apartment shortage, there were significant positive developments in rental prices in all size segments and cities last year (March 2015 to March 2016). Warsaw was at the front of the pack by a significant margin in terms of purchase and rental prices. One square metre of property here costs roughly €3,800. Asking rental prices range between €10.20 and €12.30 per square metre, depending on the size of the apartment. Compared with other European cities, large Polish cities have attractive rental yields that range between 5.0 per cent and 8.5 per cent.

An office market with potential for growth
In contrast to the residential investment market, the office investment market is open since ten years and has already reached Western European standards. Besides Warsaw, interesting office locations are large cities such as Krakow, Wroclaw, Gdansk, Katowice, Poznan and Lodz. Maciej Müldner, Financial Director at Skanska Property Poland says: “For ten years, we have seen foreign investors coming from places such as Sweden, Germany, France and the U.S. For two years, investors from Arabic countries and South Africa have been participating in the market as well as, to a lesser extent, a few Chinese investors.” According to Müldner, it is easy for investors to manage foreign exchange risk: “Rental contracts are usually concluded in Euros, which means that the tenants bear the exchange risk. The financing of project developments and the following sales often take place in Euros too.”

As a German investor, Hansainvest Real Assets recently started investing in Poland. Nicholas Brinckmann, Managing Director of Hansainvest Real Assets, explains: “In Germany’s eastern neighbour, properties can be purchased with initial yields that are no longer realistic here. In addition, Brexit will probably have a positive impact on Poland. Some large American banks have already announced that they will be moving jobs to Poland. This means that Poland is establishing itself as a back office location and – if these plans actually go ahead – still has further potential.” Brinckmann continues: “Since our first acquisition in Warsaw, we have been observing the market very attentively and have already secured a second property. Warsaw is the most interesting market for us, where we are focussing primarily on the CBD.”

Backlog at Polish office real estate market
Müldner agrees with Brinckmann about the positive effects of Brexit and remarks: “In spite of rapid development in the office property market, there is still unsatisfied demand.” He sees further potential for growth in the market: “Warsaw, as the largest market for office real estate in Poland, has 5 million square metres of office stock. In terms of population, Stockholm is smaller, but it has 10 million square metres stock.” However, there is a certain risk potential due to vacancies. Annika Steiner says: “Vacancy rates are high – in Warsaw, empty buildings make up 14.5 per cent, although most of them are older office properties.” She explains: “However, in spite of this, construction activity is consistently high; in Warsaw alone, there were around 380,000 square metres of new surface area in the first three quarters of last year.” Prime yields in Warsaw are even higher than in other important European office markets, although investors are seeing yield compression here too. Prime yields have dropped from just below 6.0 per cent to 5.25 per cent. Conversely, purchase prices have remained comparatively low at EUR 5,500 per square metre.

In spite of the good overall economic framework for the property market, there are also some concerns: “The current domestic political situation comes with risks due to the direction being taken by the right-wing nationalist government. Standard & Poor’s and Moody’s have already downgraded their ratings,” says Steiner and adds: “But as a member of the European Union, Poland will also remain an attractive market for German investors in the years to come.”