The Polish Rental Housing Market from a Developer’s Perspective
In Poland, apartments for rent account for a dozen or so percent of this market. Their owners are mainly private individuals. The institutional real estate sector for rent is still relatively small and primarily concentrated in large cities. However, it is getting bigger every year.
Host: Małgorzata Dankowska, Partner at TPA
Today I am talking about the residential rental market from the developers' perspective with Mr. Jacek Wesołowski, Managing Director of Trei Real Estate Poland. This is a company that in 2019, after rapidly developing a network of retail parks, made its debut in the residential real estate sector.
Host: Where are we now in the institutional rental housing market?
Jacek: If we're talking about rental housing in general, this market is no longer in its early stages. It's probably already in its first phase of development, but if we're talking about buildings that are entirely for rent, we're right at the beginning, in my opinion.
People who live in apartment blocks are either renting apartments or have bought apartments. For the latter, life at home can sometimes be disrupted by inconveniences – i.e. noise – caused by the tenants, who just rent an apartment in the block for short-term and don’t really take care of their neighbours. I know that in the Tri-City, mayors are seriously considering restrictions on certain rental agreements. I think regulations will be implemented in popular tourist cities that will begin to limit the number of rental apartments in residential blocks.
Host: So there will be some regulation in the areas of short-term or long-term renting in a building, where other residents also permanently live. This will probably direct the market towards entire projects for rent, as is the case in Warsaw. Is that correct?
Jacek: Yes, that's exactly how I see it. In apartment buildings, where everybody is renting, it's a bit different to our current business. It is organized differently. Take the example of our first project, which we are currently preparing. This building is, in people's perception, more like a hotel, because it provides a lot of amenities. An apartment building, in comparison to that, doesn’t have such a functionality, which allows the residents to concentrate purely on living and not on what else is needed to live. Therefore, I think this limitation will go in that direction. It will probably start in popular tourist destinations because this is already becoming a hot topic, and if the regulations allowed, it would be done now. As it stands, it is difficult to find such possibilities of limiting rental types within the current regulations.
Host: So we can expect that the market will be more regulated than it is now. From the developer's point of view, how would you explain the interest of developers in this sector? Why are investors interested in it, why in Poland and why now?
Jacek: This is a very broad issue. It stems in part from what we've been hit with recently, the pandemic, and the resulting lockdown. There is some excess money that has to find a relatively safe harbour somewhere. Real estate is a very good place to invest a lot of money. This product of buildings for rent, with apartments for rent, is well-known in such countries as Sweden, Norway, Germany, Austria. There are big companies that have a great deal of money already invested in this type of projects, where there is a constant income and profit margin. In these countries, there is often no longer the need or even the opportunity to invest in these projects. Land has become very expensive, which unfortunately will probably also happen here. As a result, apartments are also expensive and even on paper such a project may not be successful. Today, at least on paper, this type of project is still feasible for Poland. Poland, as a geographically close neighbour of these already saturated markets, has become a logical place for this type of investment. I would see this as the main reason.
Of course, there is also a question of natural need. The tradition in Poland is that people are not convinced about renting apartments and like to own their apartments. But economic constraints will make this choice a serious consideration. I think young people have a different outlook on life, a different perception of work. That's what I see even among my own employees and how they view their quality of life. This state of affairs will create a growing demand for this kind of product. People who won't want to own apartments or invest in real estate will, for example, spend money on tourism, improving their knowledge, or on another type of activity. You can't say that this choice is bad. It's a different choice and probably in many ways more interesting. This will also be the reason that this PRS will expand. Why has this become an important element for our company? We are today a very big player that builds retail parks. We have secured 40 Vendo Parks, which is already a serious number of locations. We will continue to do this, but we also need to grow in another direction. I used to think that by building downtown malls, I would have a job until retirement. Turns out that this is not enough. Today, downtown shopping centres are not as popular. Therefore, while looking for another direction where we could invest our time and expertise, we came to the conclusion that this kind of institutional rental could be an interesting alternative. Today we also develop apartments for sale. This is probably even more profitable than apartments for rent.
Host: Let me pause for a moment and summarize. So we have a generational shift. We have cash surpluses of foreign investors, low interest rates, which are not conducive to investing capital in other areas, so these properties are still an attractive product. We have favourable conditions in Poland, compared to the rates of return which are obtained by such an investor on the markets of Western Europe, in the Nordic countries or elsewhere. However, we are geographically close to the Nordics, so as you mentioned, this is one reason we are still doing better. Here you touched upon an important topic because every developer has a so-called BTS (build-to-suit) business, which is the go-to development for selling apartments. But here we are talking about a slightly different product, the BTR (build-to-rent) model. What is the attraction, or what can such an investor provide so that the developer decides to “change tack” from the BTS to the BTR market?
Jacek: Yes, there are obviously advantages and disadvantages on both sides. The obvious advantage of this BTS model is that the margins on sales are bigger and the profit from this type of product is still higher. But there are also disadvantages. In such a block of flats, each resident is a kind of supervisor. This is a hindrance for the developer, and a discussion with such a large group of recipients can be an issue with this type of product. With BTR we have one recipient and in principle this process takes place once. But I think that what is more important is the fact that at a certain scale, our company has already grown to almost EUR 2 billion within the group, a product like BTR represents a more appropriate solution than the sale of individual apartments. BTS projects may have issues such as how to isolate problems in a certain apartment from our whole business. This is not easy. In the case of this rented facility, these issues do not arise. This is a typical commercial property, which can be utilized in a similar way to a shopping center a warehouse, or anything that has costs and an income.
Host: Exactly, so the scale of activity is important, but also the scale of specific projects. I’d like to return to the subject of taxes. You mentioned that they are similar from a commercial and business perspective, whether it is a BTR product, a shopping center, a warehouse or an office. More or less from the investor's perspective it looks similar at least from the financial model perspective, but of course taxes come in to play. This is the issue that investors are most concerned about. Are taxes more complicated in this sub-sector than in other commercial sectors?
Jacek: This freedom to interpret taxes is a huge issue. Once upon a time, a long time ago, because I have been working in this industry for 30 years, there were times when laws or other central regulations were interpreted differently by each province. We have the same thing here. We should remember that when we talk about this similarity, it is also a commercial product. There is one big difference. The customer is the final customer, the resident is the final customer and is subject to VAT. In the case of renting, the VAT, which is taken by the renter, is returned to them by virtue of their business activity. So now if we have a certain amount of rent and the Vat rate in one city is say 8%, well okay. However, if we have a project in another city where they have set the rate at 23%, our revenue is 23% less. In addition, time has shown in many countries that the state begins to protect the final recipient and a new form of taxation is created - zero tax. Then the question remains - what about VAT during construction? This is a terrible thing. It practically kills the possibility of building on a service plan. Everyone will be happy with an across the board tax interpretation. This would save us time as well as money. This is a very difficult issue and without regulating this topic, the local service plan will have a major influence on the decision of investors.
Host: So the problem is the lack of clarity regarding certain terms, certain definitions of tax law, and the limited possibility of securing this risk (limited in time). By way of an additional comment, perhaps from a tax perspective, you mentioned the possibility of hedging, i.e. a binding contract on rates, which actually gives the taxpayer protection for five years. However, for real estate products we have to monitor the VAT charged on construction or acquisition of a project for ten years. So there is an obvious gap in such protection, which creates uncertainty. It is also certainly an important demand for tax advisors to develop some actions which would lead to this market being more consistently regulated and allow for risk in projects to be managed more effectively. This is true because it is also, of course, the main reason why we are here today, and we are talking to each other about this market. So maybe to conclude this part of the discussion regarding various issues of uncertainty, and existing regulations, what do you foresee as the biggest challenges in the near future for developers operating on the BTR market?
Jacek: In our industry, local plans were supposed to be universal, meaning the whole country should be covered by consistent local plans. This was supposed to happen about 10 years ago but today we find ourselves in exactly the same position. It cannot go on like this any longer. The limitation for developers is the lack of local plans, including a lack of well-defined plans, because we have already seen plans which again allowed for so much interpretation that it was impossible to make an investment decision. Putting a cap on access to land even with good plans is the biggest limitation. Without this, prices will rise, and the market will continue to shrink. The lack of investment security will be passed on in the form of increased prices to the end user. The second limitation (this of course is how we see it) is the management of BTR facilities which requires a certain specialization. We don't have this knowledge in Poland as the market is relatively new As a consequence, the transfer of knowledge to potential investors or companies servicing this type of investment, is also an issue. It would be difficult to quickly learn from scratch today. It takes a number of years to gain experience and learning from mistakes in order to say that we are ready. It is difficult to estimate how this lack of knowledge will affect us financially along the way.
Host: So it would be ideal to use this business model of managing these projects, to shorten the learning curve of the market in Poland so that it works better and so that it doesn't have a negative impact on returns, prices or on how these facilities operate.
Jacek: In the same way, maybe the authorities should approach the issue of protection of these residents, because in all of the countries where there is a BTR market, these issues were also anticipated. We have an idea for a “500 plus” program, probably more or less successful (probably less successful). There is also the idea about how to, for example, give subsidies to a specific group of residents who would be entitled to this assistance. It seems to me that this is a much more efficient idea to control this market, because it will go directly to those who need it. It is not such a place for further speculation as a 500 plus scheme might be. Most western countries have gone this way and I think that in the end we will not differ greatly from them. I think it is a good idea to keep a close eye on these western markets to see what works and what doesn’t.
Host: So rental subsidies for people who would need them, based on specific criteria, e.g. the income of a given family – is this an idea that would also be attractive for developers?
Jacek: Developers would absolutely agree. I know that in Germany this discussion continues to this day. It is perceived differently in different states, but as a resident, it seems to me that if we want to help someone it should be this or an even better way. Building cheap housing (which 500 plus would probably force) will create certain social tensions and this issue should not be forgotten. This BTR sector doesn't have such a risk component, so it seems to me that developers prefer the market as it is today - free, unlimited, and we'll manage it, but if you already think this way it's probably more pro social. Help through regulating aid funds via city or state authorities makes more sense to me.
Host: I think that after what you said everyone is already tuning in. I'm sure many people who will be listening to us are involved in the industry or who would like to be involved and enter this market. So as we’re coming to the end, maybe you would like to reveal the company's plans in this direction, maybe you are also looking to recruit? You mentioned that management companies have their work cut out. So what will Trei do in the near future on this market?
Jacek: First of all, we are preparing our first BTR project in Poznań, located in the city center. We want to show that these BTR buildings do not necessarily have to be drab, can fit in with the surrounding urban tissue and possess price-creative elements. We want to shape this project in such a way that, on the one hand, it fulfills its role as a BTR, and on the other, it is an attractive project. It is the building of this syntro-creative element that I am mentioning here, this centro-creative issue. I have seen shopping centers over the years been pushed to the outskirts of cities. Because these conditions have led to city centers struggling, these centro-creative elements should be more prominent in urban planning. This project is something of a pilot scheme for us, where on the basis of this project we are looking for partners - a financial partner, maybe partners in management. With this real world test we will build relations, which we intend to continue in the long term. This is our idea at the moment, and we are working on it very intensively.
Host: I am very happy that Poznań is the location for this project. It is also where TPA is based, so it's a great place to finish our discussion. I would like to thank you very much for this conversation.