Banking on a housing revival

Rafał Ostrowski, ‘Eurobuild CEE’: The aim of fund is to stimulate the residential market. Its announcement has provoked the immediate response that this is an example of state interference with the free market and is almost a return to a centrally-planned economy. How would you answer such critics?

Piotr Kuszewski, the director of the capital investment department at Bank Gospodarstwa Krajowego: Any talk of distorting the market is groundless here. We are establishing an ordinary closed investment fund that will operate on the same basis as many others on the market. Similar funds exist for properties in the office, retail and warehouse sectors. They also operate on the residential market. When it comes to our fund, the novelty consists in the fact that it will buy buildings and sections of residential buildings and subsequently rent them. However, each such decision will be market-based – that is, it will be economically justified.

However, there are doubts about the top-down fixing of rent levels. You have assumed that the point of reference will be an annual rent close to 4 pct of a property’s value. The intention is to set the rents at a lower level than the market rate. This is not popular with opponents of state interference in the free market.
The projected 4 pct rate of return on equity is definitely market-based. The same rates of return, app. 4–5 pct, are achieved by investors across Europe. Besides, each property will require an economic model that takes into account the building’s technological installations, the quality of the apartments and the surrounding area, as well as whether it could pay for itself. In principle each apartment and each building will have different rent levels. I am not able to answer the question about how much cheaper our offer will be compared to the market rate. According to our estimates we will be able to offer lower rents because we will be the first institutional investor in this sector in Poland, which will give us a clear advantage over individual investors who have been dominating the market in Poland so far.

So why not assume a 5, 6 or 7 pct rate of return?
The market effectively limits such ambitions. With a 5 or 6 pct rate of return, it could turn out that a mortgage payment is lower than the rent and so everyone will prefer to take out a mortgage and buy an apartment instead of renting one. Assuming that any rate other than 4 pct would not make any sense, any lower and we would have to subsidise the enterprise, while going higher would mean that people will not want our apartments. It needs to be remembered that the property will be maintained using the rent revenue, so after deducting all the costs you need to be left with a rate of return of 4 pct. We should be able to offer lower rents, mostly due to the fact that our cost of money will be low. Having the fund’s money at our disposal we do not have to take out loans and we do not have to pay any of the margin to the banks. Moreover, when buying an entire building we have a much stronger negotiating position compared to buyers of individual apartments. We also have many more possibilities for assessing the quality of the buildings and their technical installations, to carry out market research, and finally, to create entire buildings that fulfil our requirements.

What are these requirements?
Building apartments for rent is different from building them for sale. There are a lot of things that you need to take into consideration. The apartments will be rented many times and need to stay attractive after a long time. Lowering the standard, e.g. buying buildings that do not have a sufficient number of parking spaces or playgrounds, is out of the question. Such properties deteriorate quickly and have no potential in terms of long-term renting. You also think differently about the communal areas, i.e. such amenities as laundry rooms. Americans are often surprised by the fact that everyone has a washing machine in Poland. From their point of view this is a considerable extravagance. A lot of buildings in the US have laundry rooms with coin-operated washing machines in the basement. We are also considering such solutions. Besides, rental apartments should be well laid out and include basic equipment, such as cookers and fridges. We are still working on ensuring these standards.

What will be the criteria for choosing the developers for a given project?
The economic calculation will be the decisive factor. We will invite tenders for market analyses and work out what will generate the required level of demand, determine whether a given project is attractive for tenants and has suitable operating costs, whether its developer is credible and has appropriate technologies, and so on. As banks draw up their own project assessment models, we will also be working on such models.

When will the fund start its operations?
The management of BGK is to establish a business entity to manage the fund in Q4. Its working title is BGK Nieruchomości. We believe that we will have managed to put together all the elements of this puzzle by the end of Q1 2014.

Where will you be buying the properties?
We will start investing in places with the highest demand for apartments for rent. We believe they are going to be within the largest conurbations: Warsaw, Kraków, the TriCity, Poznań, Wrocław, Katowice and Łódź.

The fund is to operate on an “evergreen” basis – that is, without a closing date. Furthermore, it will be able to generate profits from its own projects. After what kind of period of time will you be selling your properties and buying subsequent ones?
We do not know this yet. A well-built residential building for rent can stand for 100 or 120 years. If the rate of return amounts to 4 pct, it would means that after around 25 years it will have paid for itself and start to generate a profit.

Which business models are you looking at?
There are various models for supporting the rental market in the world today, starting from discounts for developers to government agencies that build and rent the apartments themselves – as exist in Hong Kong, for example. We fall somewhere in between these approaches as we have only adopted some of their features. We need to bear in mind, though, that the rental market in Poland is very small compared to other developed countries, particularly in Europe, where often a substantial percentage of the apartments on the market is earmarked for rent. It is only a few per cent in our case. This is why we believe that a new institutional investor would encourage others to enter the market.

Developers do not want to get into renting out homes for reasons such as the regulations that protect tenants – even when they don’t pay rent. They’re probably right to be averse to such a risk.
This is why the legislation for the ‘Apartments for the Young’ programme, which will come into force on January 1st 2014, will include provisions concerning occasional rental that do not apply only to individual landlords. The occasional rental agreement requires the tenant to specify the dwelling that they could be evicted to in the case of a failure to pay the rent, as well as the consent of the apartment’s owner. We will be using these regulations.

Where does the sum of PLN 5 bln for the fund’s operations come from? Does BGK have sufficient funds for this?
The PLN 5 bln results from our agreements with the Ministry of Finance at the concept preparation stage. The fund will be supported with the money according to its investment needs. BGK will be capitalised at the appropriate time.

How do you know that developers will be interested in building homes for the BGK fund? If it is supposed to earn 4 pct and be cheaper than the market rate, will they also be able to benefit from this?
The project must be justified economically; therefore the price the developer will expect is part of this equation. ν

The investment man

Piotr Kuszewski is the director of the capital investment department of Bank Gospodarstwa Krajowego (BGK) and assistant professor in the banking department of the Warsaw School of Economics. Previously he was managing director of the infrastructure financing division of BGK. As an employee of the bank, he was involved in the development of the ‘Polish Investment’ programme and the establishment of the ‘Polish Fund of Growth Funds’ with the European Investment Fund. In 2007–2010, Mr Kuszewski was the vice-president and CFO of PZU Życie. He was responsible for the finance division as well as financial and insurance risk management. At PZU Group Mr Kuszewski served as a member of the supervisory boards of PZU Asset Management and PZU companies in Lithuania. Mr Kuszewski represented PZU Group as the chairman of the supervisory board of KFA Armatura SA. Piotr Kuszewski holds a PhD degree in economics, he is a graduate of the Northwestern University (Illinois) and the Warsaw School of Economics.