Home-made goulash or bigos?

Cordia, the residential arm of Hungarian developer Futureal, has plans to become one of the top five residential developers in Poland over the next few years. The company, which is also active in the Hungarian office, retail and residential sectors, as well as across the region, has also entered the Polish retail market with its Nova Park shopping centre in Gorzów Wielkopolski, but now states that its focus for the country is the residential sector. However, the growth of prices on the Polish market – or rather, the lack of this – contrasts sharply with what has been seen in Hungary. So why would a developer from the latter country consider the Polish housing market to be a good bet?

Strangely subdued Polish prices

The reasons for the fall and sluggish recovery of the prices of Polish homes do not boil down to over-supply, but are more to do with the giddy rises seen before the credit crunch, when the market was buoyed by the recent entry into the EU and the easy availability of mortgages on good terms. However, due to interest rates in CEE countries being permanently higher than in the eurozone, many of these – 575,000, or around half of all mortgages currently held – were taken out in Swiss francs, which was a sensible course of action as long as the exchange rate with the złoty remained stable. It didn’t. The value of the Polish złoty plummeted in the second half of 2008, ending up at half its previous value against the US dollar and Swiss franc. In such times currency speculators flee to safe havens, as the Swiss franc had hitherto been regarded. And the situation became even worse around 2011 when, due to the falling value of the euro against the Swiss franc during the sovereign debt crisis, the decision was taken to cap the rise in value of the latter currency. In 2015, this policy became unsustainable as the pressure on the Swiss franc intensified. The cap was removed and the currency allowed to soar – adding to the agony of Polish mortgage holders in that currency. The result of all this is that such borrowers have been saddled with high repayments and negative equity – the situation where the amount they are paying is greater than the value of the asset borrowed against: their homes. Unable to sell their properties on at a profit, the Polish residential market has remained flat with average prices having only just managed to struggle up to where they were in 2008.

Stroke or genius – or luck?

By comparison, the Hungarian residential market has seemed rather more vibrant. Admittedly, prices were less high than in Poland prior to the crunch and fell further, but they have gradually risen since 2008 to the point where they are now growing at around 15 pct a year. But the same issue of Swiss franc denominated mortgages has also needed to be addressed – and this has been done so in a radically different way than in Poland so far. In late 2014, the populist Fidesz government of Viktor Orbán legislated for the forced the conversion of such mortgages into the local currency – a deal the banks were then prepared to swallow. This was either a masterstroke or incredibly fortunate timing, coming shortly before the cap on the Swiss franc was lifted, when the banks would have been much less amenable to such measures. This was the environment when the populist Law and Justice (PiS) party took office in Poland later that year. One of the reasons it was elected was its promise to resolve the Swiss franc mortgage of issue, which it had indicated it would do in the same manner as Fidesz. However, it now has much less room to manoeuvre, as it would mean the banks taking a much bigger hit and could possibly jeopardise the business sector in the county. Early proposals to convert mortgages according to their 2008 levels would appear to be unacceptable to the banks, but PiS remains under pressure to fulfil its election promises, not just from the electorate but from pressure groups and political opponents and allies. After more than a year in office, PiS has still yet to bite the bullet on Swiss franc mortgages, but it now seems that they are exploring some kind of compromise solution, possibly involving a compensation pay off while retaining Swiss franc denominated loans.

Most stimulating

Other measures introduced in Poland to stimulate the housing market and address the need for housing have included the continuing Apartments for the Young programme, under which apartments are being built or bought up and renovated and then offered at favourable terms for young couples buying their first homes. The funds for this scheme and its renewal, however, are likely to be exhausted next year. The latest government scheme, also run by state-owned bank BGK Nieruchomości, is Mieszkanie+, which is aimed at providing rented accommodation with a rent-to-own option. Under the pilot scheme for this, homes are being rented at PLN 10–20 per sqm a month and PLN 12–24 for rent-to-own accommodation. Two German investors have recently shown an interest in the Polish rental market: Catella RE, which has bought 72 luxury units in the Złota 44 skyscraper in central Warsaw, and Bouwfonds Investment Management, which has bought the 193-apartment Apartamenty Pereca project in Warsaw’s Wola district. Catella is expecting a rental yield of 6.6 pct from its investment in Złota 44. Bouwfonds also has its eye on the promising Polish student accommodation market. Its Bouwfonds European Student Housing Fund II intends to invest a minimum of EUR 20 mln in such flats across Poland and the eurozone.

Although Polish house prices have only made a slight recovery over the last few years, in the last quarter there was evidence of more dynamic growth. According to residential consultants Reas, the average price of homes sold in the six largest conurbations (Warsaw, Kraków, Łódź, the TriCity, Poznań and Wrocław) rose by 4.2 pct q-o-q and by 5.8 pct y-o-y. Similar figures were recorded for the prices of homes put on sale (3.1 pct q-o-q and 6 pct y-o-y). The consultancy puts this down to a larger number of mid-range apartments being added to the market in Q3 than had been the case in Q2. The average price of flats already on offer was little changed, indicating that they are being rapidly bought up. The stand-out performer in terms of pricing was the TriCity, which saw 9.1 pct q-o-q and 12.4 pct y-o-y increases in the prices of newly marketed apartments. Thus the demand for homes is certainly there, but the question is whether there has been enough of a stabilisation and a resolution of the factors deterring home purchases for the market to get going again. All things remaining equal, this seems probable – and perhaps developers are expecting that once there has been closure on the Swiss franc mortgages issue the market can really take off again – as interest rates remain low and the economy grows in the one EU country that avoided falling into recession after the credit crunch.

Less stimulating

Hungary’s economy was rather more badly affected by the financial crisis and its recovery more sluggish. But since around 2013, its GDP growth has been similar to Poland’s, between 0 and 1.5 pct. The government also has its own programme for boosting sales, the Home Purchase Subsidy Scheme, but according to the Central Bank of Hungary (MNB) the stimulus this has provided “has been slower than previously expected”. However, in H1 2016 the number of mortgages taken out rose by 47 pct due to an increase in the credit available. Around 140,000 purchases took place in H1 – close to the long term average figure of 160,000. The prices of homes nationally grew by 3.8 pct over Q1 2016 and by 14.4 pct y-o-y. According to the MNB’s research, the removal of the Swiss franc denominated loans factor is playing its part in this: “The protracted reduction of foreign currency debt accumulated before the crisis was a strong demand constraint on the real estate market in earlier years.” Adequate supply has been the main problem in recent years, hindered by a lack of labour and raw materials – and this is perhaps a factor in local developers looking for opportunities abroad. But among the projects that have been carried out or are underway, Cordia’s large-scale Corvin Quarter urban regeneration project in the Pest district of the capital is one noticeable success story. As well as offices, retail and services, the project involves the construction of 2,700 apartments. On the other side of the river, another Hungarian developer Property Market has launched a similar mixed-use scheme, BudaPart, which will also see the construction of several thousand apartments over the next few years.

Cordia is now aiming to focus more on middle-market homes in Poland, where it plans to build more than in Hungary and Budapest. In Kraków it has already developed its Nowe Bochenka estate (388 apartments) and is now onto stage two of its Cordia Cystersów Garden project (323 apartments altogether). The company is also entering the Warsaw market, where it expects to be able to start the construction of a project in Bemowo district where 400 apartments could be built. According to Futureal’s CEO Gábor Futó, the developer is planning to launch two or three other projects in Warsaw and Kraków in H1 2017 and is also looking at other Polish cities. One difference in the way it carries out its Polish projects compared to those in Hungary will be that they will be unfinished apartments, since unlike in Hungary, in Poland there is no legal requirement for developers to complete finished units – and Poles very often prefer to buy unfinished homes. Cordia remains confident about its Polish investments, with Gábor Futó describing it as an “unprecedented market”, in terms of the potential arising from the migration of people into the large cities. Whether his company and the other international players entering Poland achieve the success they are expecting still remains to be seen in these far from predictable times, but one thing we can say for sure is that the local developers who have overwhelmingly dominated the Polish scene since the credit crunch now have company.