An apartment block is seen in the centre of Warsaw, Poland. REUTERS/Bogdan Popescu/File photo
GDANSK, Poland/PRAGUE – With rising interest rates and limited supply putting home ownership out of reach for a growing number of people in emerging Europe, global and local real estate investors are placing bets on the region’s nascent private rented sector.
From almost nothing five years ago, the institutional residential property market has grown to the point where investors say housing is starting to challenge office buildings as a focus for their cash.
“There are many large cities in the central European region with positive demographic and economic dynamics and an undersupplied housing market,” Stanislav Kubacek, head of investment for eastern Europe at Sweden-based Heimstaden, told Reuters.
“These are good ingredients for residential rental investments.”
Investment in the sector, mainly in Poland and the Czech Republic, jumped 38 percent to 130 million euros ($138 million) in the first half of 2022, according to a CMS and CBRE report.
And higher yields and scope for growth are spurring new projects, market players say.
Denmark’s NREP entered the Polish market in 2021 and plans to invest some 500 million euros in the residential and logistics sector over the next three years, with projects in major cities such as Warsaw, Wroclaw, Gdansk and Krakow.
“Investors can see a clear market opportunity as younger generations are becoming more open to renting, following the trend of decades past in Western Europe, while the supply of modern rental stock is very limited,” Rune Kock, chief executive of NREP’s real estate division, told Reuters.
Old and overcrowded
Poland, the region’s biggest economy, stands out for its growing population in multiple large cities and estimated shortage of 3 million homes, but the Czech Republic and potentially Hungary also offer opportunities.
Radim Bajar, a partner at Czech investment group Mint Investments, said his 1.25 billion Czech crown ($54.81 million)fund was exploring projects in Prague, Brno and Plzen, with a goal to add 300 to 500 apartments to its portfolio next year.
“We are currently surprised ourselves by the speed of the change and how the market is changing,” he told Reuters.
“We believe over the next 10 years two-thirds of the apartments built in this country will be sold to funds like ours and only one-third sold to homeowners.”
According to Eurostat data, Poland has an overcrowding rate – where homes lack enough rooms for the number of people in the household – of nearly 37 percent , compared to the European Union average of 17.5 percent.
Much of the housing stock is Communist-era flats, often pre-fabricated, that are badly in need of modernisation. That is an advantage for developers, who can target a growing pool of expatriate workers with amenities like high-speed internet, gyms and leases in English.
“There is a huge gap in things such as quality, stability and predictability of leases between private landlords and institutional players,” Marek Obuchowicz, a partner at Griffin Capital Partners, told Reuters. “This makes for an attractive entry point for PRS (private rented sector) players.”
Priced out
A traditional preference in the region to own rather than rent has been challenged by the huge run-up in home prices since the 2008 financial crisis, fuelled by economic growth and a decade of rock-bottom mortgage rates.
“We will follow our strategy of investing in major Polish cities,” G City Europe (formerly known as Atrium European Real Estate) Managing Director, Residential for Rent Anna Dafna told Reuters. She said the company plans to launch a project to build 500 units in Warsaw in the first quarter of 2023.
Current yields on residential real estate are 100 to 200 basis points above those in western Europe, Cushman & Wakefield data shows, with Warsaw at 5 percent and Prague at 4.10 percent compared to 2.70 percent in Berlin, 3 percent in Amsterdam and 3.25 percent in London.
Demographic change is another factor. Immigration to Poland both before and after the war in Ukraine has exacerbated housing shortages, as has a business services boom attracting foreign workers who demand higher-quality flats, added Wysokińska-Kuzdra, a senior partner at Collier’s in Warsaw.
“Many institutional investors are looking to gain the first mover advantage and moving in,” Wysokińska-Kuzdra told Reuters.
A sharp rise in interest rates across the region in the last year has priced out some potential home buyers. Construction costs for developers are soaring. The war in Ukraine has also created uncertainty, so that some investors are focused only on finishing current projects.
But investors and analysts say these are blips that will not derail a market set to triple by 2028, to more than 63,000 flats in Poland, according to a recent PwC report.
Germany’s TAG Immobilien AG said in its third quarter report that it plans to speed construction of residential holdings in Poland, while Budapest-based Flatco Kft is searching for potential acquisitions in Budapest.
“The demand is there,” Marta Jacoby, Flatco Kft’s chief executive, told Reuters.
($1 = 0.9406 euros)
($1 = 22.8040 Czech crowns)