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The advantages of investment in Polish real estate

International investors’ interest in Poland keeps growing

International investors’ interest in Poland keeps growing

The polish property market is reviving

The Polish property market is reviving in part due to its robust economic health

An optimistic mood prevails in the Polish market, and there are several reasons for it, including economic growth, increases in investments causing price increases, relatively high yield rates and real estate market stability. This Tranio.com report highlights the various features of Poland’s promising economic trends and their implications for real estate investment.

A robust economy: stable growth expected through 2020

Poland is one of the few European countries that passed through the 2008 financial crisis unscathed, undergoing no recession. Its economy is the eighth largest (in PPP terms) in the EU. Its GDP has been increasing since 2013; according to some forecasts, the average annual growth through 2020 will total no less than 3.2%. Moreover, Poland’s public debt amounts to about 54% of GDP, whereas the rest of the EU averages at around 87% of GDP. Industrial production, trade turnover and domestic demand for goods show growth. Economic development has occurred via increases in purchasing power and investments, meaning a promising outlook for the real estate market.

GDP growth rate

Another important indicator – unemployment – has lately shown a tendency to decrease in Poland; however, unemployment is expected to stabilise at about 6.3% through 2020. For investors, first, this means relatively low risks for leasing property. Second, the Polish labour market is attractive to businesses due to its significant quantity of highly qualified personnel with higher education degrees and knowledge of foreign languages, along with low salaries compared to Western European countries.

Unemployment rate, Poland

Another positive trend is the reduction of the reference rate, which in March 2015 was lowered to 1.5%, the lowest in the country’s history. Due to this, a mortgage rate reduction has also been noticed; such reductions usually cause increases in demand and costs for residential real estate.

Growth in investments: volume may reach a 10-year maximum in 2017

Investors who have detected positive trends in the Polish economy have already begun actively investing in the country’s real estate. A total of about €4.5 bln was invested into Poland’s commercial objects in 2016, the highest volume since 2006.

There are two main reasons for this performance. Firstly, investors who have not closed deals but are already negotiating purchases show extra activity. Secondly, investors consider developing markets such as Poland’s with increasing frequency as return rates decline in Western Europe. Following the Brexit referendum, many buyers of investment properties have opted for Poland as an alternative, as it is the largest developing market in Central Europe, accounting for half of the investments in the region.

Commercial property investment volumes, Poland

Earnings potential: yield rates higher than in other EU countries

Prices for real estate in Poland are trending upward, whereas rental rates in 2015-2016 were stable (in the retail real estate sector) or in decline (in the office and industrial sectors). This is the reason for yield rates’ decline in Poland, as in most other European countries. Therefore, offices’ profitability decreased from 6% in 2014 to 5.2% in 2016, the profitability of retail slid from 5.8% in 2015 to 5.2% in 2016 and industrial property profitability dropped from 7.8% in 2013 to 6.75% in 2016.

Prime yield rates, Poland

However, despite the decreasing returns, the ratio of rental income to real estate cost in Poland is higher than in other countries. For instance, premium-class offices in Warsaw generate on average 5.5% per annum, whereas in Prague the average is 5%, in Vienna 4% and in Berlin 3.9%.

Premium-class property yield rates, Poland

A stable market: no slumping house prices in the past 10 years

As is already well known, real estate can generate income not only from rent, but also from resale. Poland offers good opportunities for income due to capital gains: its residential real estate market stands out with its relative stability, and it did not experience price slumps as Greece and Spain did. Periods of decline in the Polish market lasted 1-2 years, after which growth started again.

Housing prices tended to grow from 2004, the year of Poland’s EU accession, through 2010, after which prices fluctuated. From 2014 to 2015, the price of a square metre fell by 1.4%; however, in 2016 there was visible growth (4.2%). For the past 10 years, housing prices have increased by 56.3%.

Average residential property prices, Poland

Increases in housing prices in Poland are affected by low mortgage rates, as well as incentive programmes for borrowers aged up to 35 years (Mieszkanie dla Młodych, MdM) buying their first houses. The programme offers subsidies totaling 10% for singles and couples and 15% for families with children.

The average cost of a square metre in Poland (€934.5) is significantly lower than in other European countries. For comparison, housing in Spain costs on average 1,600 €/m², and in Germany 2,400 €/m². Prices significantly vary from city to city, though. For instance, the highest cost per square metre can be found in Warsaw (€800 on average) and Krakow (€1,600), and the lowest in Zielona Góra (less than €800 on average).

Consequently, housing in Poland attracts investors with its low price and opportunity to profit due to price appreciation.

How to choose Polish investment objects

Warsaw is the biggest business and finance hub of not only Poland, but also the whole of Central and Eastern Europe. There are offices of major multinationals, developers and investment funds located in this city. Other cities in Poland also draw attention from foreign investors. The seven largest real estate markets of the country consist of Warsaw, Krakow, Breslau, Trójmiasto (Gdansk, Gdynia and Sopot), Katowice, Poznan and Lodz.

The largest office markets in Poland are Warsaw and Krakow. These cities are in demand regarding the residential segment. Retail properties in Krakow, Poznan and Trójmiasto bring in most of the capital. Investments in industrial properties are concentrated in Breslaw and Trójmiasto.

Retail real estate accounted for 43% (€1.9 bln) of commercial investments in 2016, and it is attractive due to rental rate increases and active construction. Investments in offices amounted to 40% (€1.8 bln). This sector stands out because of unparalleled demand for leases and record development scale. Industrial objects, which brought in 17% (€774 mln) of commercial investments, are also popular with investors due to high demand for leases.

Advantages and disadvantages of investment into different real estate segments in Poland Source: Cushman & Wakefield, Knight Frank, Colliers

Advantages Disadvantages
Retail
  • Existing stock of 11 mln m²
  • Active construction (670,000 m² Q1-Q3 2016)
    and redevelopment
  • Low vacancy rate (3.2%)
  • Increasing rental rates
  • Abundant retail space,
    240 m²/1,000 residents
    (above average in Europe)
Office
  • Construction volume of 1.4 mln m² in 2016
  • Record demand (921,000 mln m² leased in Q1-Q3 2016)
  • Potential demand growth,
    as Poland is a key European
    outsourcing destination
  • Rental rates
    in premium-class segment
    have tended to decrease
Industrial
  • Construction volume of 1.51 mln m²
  • Record demand (5 mln m² were leased
    within 2 years)
  • High demand from international
    manufacturers, transport companies
    and e-commerce representatives
  • Low vacancy (5.4%)
  • Distribution of projects
    with the purpose of trade-ins
    can “overheat” the market
Residential
  • Increasing prices
  • Low prices compared
    to Western Europe

A forecast: what to look out for in 2017

Both the forecasted GDP and consumer demand growth match the increasing activity in the commercial real estate market in short and long-term perspectives. Apart from that, impressive demand for office and industrial space, as well as the increasing volume of commercial property construction, indicate increasing activity in the market.

Investors consider Poland a steady market. Commercial real estate supply in Warsaw and provincial towns is still under development, which is why there is still more potential for market growth.

We expect the main trends in 2017 will comprise the following:

  • Continued decrease in profitability. Rental rates may well decrease, which is a reason for a possible decrease in profitability
  • Increase in the rental rate gap between premium-class and lower quality-class objects
  • Shift of investors’ interest towards provincial towns (e.g. Gdansk, Lodz and Poznan)
Yulia Kozhevnikova, Tranio.com
Originally published on thecity.com.pl