Central European housing famine

The residential market in Central and Eastern Europe has one common denominator: demand far exceeds supply. A home in the most EXCLUSIVE locations can reach mind-boggling prices, while the more popular areas are flattening out

In Poland, 16.3 pct more homes were built in 2007 compared with 2006, rising to around 116,000 units, according to data from the Central Office of Statistics (GUS). But this is nothing to be proud of, since the amount of housing people are seeking in Poland is estimated to be around 1.5 mln homes. GUS claims that the price of 1 sqm of utility space amounted to PLN 3,014 in the third quarter of 2007, but this mean figure does not reflect prices reached by residences in Poland’s largest cities. Warsaw registered a record-breaking PLN 38,000 in the ‘glass sail’ building at Złota 44 designed by Daniel Libeskind and developed by Orco Property Group. Data published by Rednet in November showed that the mean price for 1 sqm stood at PLN 8,673, while the December 2006 figure was ‘a mere’ PLN 7,354. Changes also occurred last year in the ranking list of Warsaw’s most expensive residential districts, with the city centre still in the lead but with Ochota very close behind.

Mikołaj Martynuska, director of the residential department at CB Richard Ellis, comments that: “The average prices for new homes in the latter district put it in second place, due to the low supply of relatively expensive projects in this part of Warsaw. This also meant that Mokotów slipped into fourth place behind Wola, where the high average prices reflect the large supply of residential projects. It must also be borne in mind that the prices in various districts may differ widely in individual estates. For instance, prices paid in Saska Kępa are almost 30 pct higher than the average prices demanded in other sections of the Praga South district, rising by all of 25 pct in 2007.”

A study by Reas illustrates that the combined market value of new homes offered throughout the entire Warsaw conurbation amounted to PLN 10 bln. The largest number of residences presently under construction is in Białołęka (23.3 pct), Bemowo (12.3 pct), Wilanów (11.4 pct) and Wola districts (10.8 pct).

Under- or over-valued

The average price for a home in Kraków at the end of the year was PLN 7,660 per sqm, with the total market value standing at around PLN 2.5 bln, according to Reas. Łódź, Poland’s erstwhile textile centre, which is presently the relatively poorest large city (population-800,000), became the most attractive location for both developers and investors. The reservations expressed by property developers about the city have quickly evaporated, and Łódź - which had seen falls in the number of completed homes for many years - is currently the location of several increasingly attractive projects. An estimated 1,330 homes were completed in Łódź in 2007, with the prices of individual apartments rising by 41.3 pct to an average of PLN 4,110 per sqm, while the value of the housing market reached
PLN 630 mln. Investors have been making full use of the city’s post-industrial infrastructure and are adapting defunct factory buildings into loft-style apartments, commanding prices of between
PLN 5,000 and 7,000 per sqm.

Mikołaj Martynuska of CB Richard Ellis adds to his previous remarks that: “In my opinion, Łódź is one of the most undervalued cities in Poland. It is a city of a relatively low supra-regional impact, which means that the major part of the supply should be addressed to local purchasers. This is why it is so difficult to sell residences at prices exceeding PLN 8,000 per sqm. Many projects were started in the city in 2007 at prices substantially exceeding the financial potential of the city’s population. Simultaneously, a large section of the more expensive Łódź homes were purchased speculatively. I feel a considerable period will pass before they become the property of their target owners, i.e. Łódź’s citizens.” The total value of the Łódź housing market could well exceed PLN 900 mln in 2008.

In Poznań, another large Polish city, 3,500 homes were made ready in 2007. The first quarter of the year saw an eye-catching apartment project from the Wechta company, with prices reaching PLN 15,000–16,000 per sqm, which had a tangible influence on the average prices of housing in the city – reaching more than PLN 8,800 per sqm. The total value of the Poznań housing market added up to around PLN 1.7 bln in 2007.

The TriCity in northern Poland saw around 4.200 homes completed at an average market price of PLN 8,480. The value of the market now stands at around PLN 2 bln.

The historic city of Wrocław is an equally interesting city, where 4,600 homes were built in 2007, with the number expected to increase to around 5,200 in 2008. The average (per sqm) price of a home in Wrocław is between PLN 6,000 and 7,000. The value of the housing market exceeded PLN 2 bln last year, and is expected to achieve around PLN 2.3 bln in 2008.

No sign of vertigo

Developers on the Polish market have set their sights high - literally. Orco Property Group’s 192m  ‘Złota 44’ tower building in Warsaw is being followed by the Lilium company owned by BSR, which intends to develop a 70-storey, 250m skyscraper in Warsaw city centre next to the Marriott hotel. This is to be designed by Zaha Hadid, an architect of world renown. Also in Warsaw, the Kulczyk Tower, 280m in height, should be delivered in 2009. This will be the highest apartment building in Poland so far and is a project of Chmielna Development - a company owned by Jan Kulczyk, one of Poland’s richest citizens. And it is not only in Warsaw that residential tower buildings are appearing. In Gdańsk, Hossa is developing what it calls the ‘BigBoyBuilding’, which will extend 202m skywards.

Prices surge again

Rises in the price of homes on the secondary market started soaring again in 2007. Auctions were even held by developers for potential buyers to force prices upwards to the greatest extent possible, a fact which convinced agents that contracts should be pored over with unusual rigour to make sure that the purchases were for real. The boom cooled off slightly in the final months of 2007, with prices in Kraków dropping to around PLN 8,320 per sqm, to PLN 6,360 in Poznań and in Warsaw to around PLN 9,590 (by 1.2 to 2.3 pct). In Gdańsk and Wrocław, however, a slight rise was recorded of 0.8 and 1.3 pct respectively. According to a Szybko.pl and Expander report, prices reached around PLN 6,890 in the first of the mentioned cities and around PLN 7,340 in the second.

A garage thrown in

In a further statement, Mikolaj Martynuska of CB Richard Ellis remarks that: “Regional markets have risen at a similar rate as the Warsaw market to date, which has resulted in them becoming overvalued. Despite higher prices, the purchasing power visible in Warsaw is greater than in smaller towns and cities where residents are unable to meet the asking price of between PLN 7,000 and 8,000 per sqm. But prices in smaller locations, where upward movements were not noticeable, seem bound to rise, largely due to the spiralling costs of building materials.”

Interest rates are also rising, with the Polish National Bank increasing the basic rate several times last year to keep the galloping mortgage market in check. The supply of ready homes also rose, according to data published by GUS for the first three quarters of 2007, when more than 141,000 home starts were registered. That would suggest a total of around 180,000 homes will be ready for occupation by the end of 2008.

It was only a few months ago that the managers of real estate agencies for the first time in many months had to inform a rather nervous market that they would have to correct their sales plans. The effect was the announcement that parking facilities would be included free of charge with an apartment and available in a flexible (10/90) payment system. The current year may force them to take more care over price calculations, particularly when buying building sites and estimating construction costs, since it may now be the case that not every project makes a profit.

In Dracula’s clutches

Since the collapse of the communist regime in Romania 20 years ago, modern housing development has become nonexistent to all intents and purposes, which means more than 85 pct of the population live in post-socialist tower blocks, with 35 pct of the country’s housing resources requiring immediate repairs. Old buildings devastated by two earthquakes in Bucharest are still standing and may not be demolished under existing legal provisions. And this is one of the reasons why so little land is available in the capital for development.

Joanna Iwanowska, senior consultant for Reas, remarks that: “The normal practice in Bucharest is for very cramped development. Housing investments do take place, but are generally of poor quality. Spatial development, performance and the materials used in construction leave much to be desired. But this is beginning to change. Western capital groups and experienced developers, including Poland’s Globe Trade Centre and Echo Investment, are investing in Romania where, in the course of time, they will introduce other development standards to those practiced until now.”

Around 4,500 homes were constructed in Bucharest in 2007, with as many as even 6,000 units to be delivered in 2008. This is a truly staggering result, considering that there has been an annual supply of 1,500 homes in recent years. Many upmarket projects have started in Bucharest in the past few years, with prices at around EUR 2,000 per sqm. At present, as a result of developers investing in the mid-range segment and high quality housing estates, average prices stand at around EUR 1,000 to 1,100.

Joanna Iwanowska adds that: “The Romanian construction industry differs drastically from that in other EU countries. Romanian people delight in wide spaces and often prefer to live in the inferior conditions available in large old apartment buildings, rather than in modern flats with a limited floor space. With the purpose of maximizing living space, single-family houses are built almost up to the fence enclosing the plot. A typical practice is the building of homes by local developers without dividing walls, thus allowing buyers to arrange their living space as they think fit. Apartments of 60 to 70 sqm are also coming on to the market, in which no dividing walls are constructed at all.  Instead, only one large open space is used as seen fit by the occupants.”

The Romanian provinces

Outside Bucharest (which has a population of 2 mln), there are three cities of 350,000 inhabitants, and another seven with 150,000 citizens. Developers are also not dragging their feet in these locations - for instance in Arad, a centre boasting a well developed industry, where around 1,200 homes are to be completed in the next 2 years. Compared with the 300 homes built in the last few years, this is a truly astounding figure. The cost of 1 sqm of living space in Arad is between EUR 400 and 600.

In the western city of Constanta, the country’s largest tourist centre, the cost of 1 sqm in the mid-range segment is between EUR 800 and 1,200, while between EUR 1,700 and 2,100 will have to be paid for a premium apartment.

The golden sands of Bulgaria

In Bulgaria, as in Romania, buildings constructed during the communist regime, and mainly from prefabricated materials, require urgent repair. Around 1.8 mln people live in such housing throughout the whole country. A total of 13,000 homes were built in 2006 throughout Bulgaria’s Black Sea resorts, but the number is expected to rise to 20,000 annually in the next several years. The total number of homes in Bulgaria stands at 3.7 mln at present, which means that there are 480 homes for every 1,000 citizens. But it must be remembered that many of these homes cannot be lived in. In the best locations in Sofia, house prices exceed EUR 2,000 per sqm, but the mean rate is no higher than EUR 1,000 per sqm.

Orange housing industry

Two million square metres would have to be developed annually to fully satisfy Ukraine’s housing requirements. The demand for new apartments is huge - as it is in the whole of Central and Eastern Europe. Currently, 1 mln sqm of residential space is coming on to the market annually, at prices ranging between USD 500 per sqm to more than 4,000 in the capital Kiev. The average price rose rapidly by 57 pct in 2005 and 25 pct a year later to around USD 2,370 at present. The largest demand on the Kiev market is for two-room and larger apartments, with more than 63 pct of potential purchasers selecting such homes, and only 37 pct of customers looking for one-room flats. The Kiev market is dominated by local companies such as Kievgostroj, Capital City Corporation, Solstroj, Domstroj-Kombinaty, 3 and 4, TMM, Konmsol, Trest-Kievgostroj 3, Osnowa Solsif and XXI century, which have found it much simpler to battle through all the bureaucratic regulations than foreign companies, in order to obtain building licences and purchase construction sites.

Joanna Iwanowska adds to her earlier remarks that: “It is nigh on impossible to estimate the size of housing supplies in Ukraine – even local experts are tight-lipped about such data. But it may be safely assumed that some several thousand homes are built annually and that the number is rising.”

The largest of the great

Russia is the world’s largest country, spanning 17 mln sq km and with a population of more than 143 mln, 10 mln of whom live in Moscow. The construction industry presently generates 5.6 pct of Russia’s GNP, in which 130,000 companies and organizations operate and which last year employed 4.9 mln workers. The number of homes built for occupation in 2007 rose by almost 25 pct and the total living space by 35 pct. The Moscow housing market is one of the world’s most expensive. In 2006, prices for new developments rocketed by 92.2 pct and by 69 pct on the secondary market. The average price of 1 sqm in the mid-range segment was around USD 3,900, while as much as USD 5,500 was required to pay for 1 sqm of a higher standard apartment. Wealthier people could pick and choose among homes costing USD 36,400 per sqm – prices which put them well out of the reach of the man-in-the-street.

Moscow’s city authorities also discovered a way to acquire land for development – by demolishing post-Soviet residential buildings by 2025. The space these occupy amounts to 20 mln sqm (i.e. some 400,000 flats). According to the Association of Russian Constructors, the estimated cost of the operation will be between USD 600 mln and 1 bln. New homes are to be built where the demolished buildings stood, with the total cost of this scheme estimated at USD 30 bln. Thanks to this, the construction industry will have a steady income guaranteed for the next 18 years. n