Putting up the rentals

This is a hot investment product. At least that is one conclusion that can be drawn from the data for the demand in Europe. In 2015 a total of EUR 41 bln was invested in apartments (according to Savills’ Alternative Assets, March 2016 report) on the seven main markets – Germany, the UK, the Netherlands, Sweden, Finland, Spain and Ireland – which is even four times larger than four years earlier, when the investment amounted to EUR 11 bln. The largest companies in this segment enjoyed substantial success over this period. Vonovia (based in Bochum) is the largest European company offering apartments for rent, with a portfolio of 350,000 flats with a total value of EUR 21 bln. Another smaller firm is Deutsche-Wohnen (based in Frankfurt am Main), which has almost 160,000 apartments worth over EUR 15.5 bln. After a number of significant mergers, these European giants can now compete in terms of scale with the American REITS, which had previously been in a different league, such as Avalon Bay (USD 25.5 bln, 84,000 apartments) and Equity Residential (USD 23.5 bln, 77,000 apartments).

Hundreds of millions from Bouwfonds

Poland is hard to pick out among these huge markets. Bouwfonds European Residential Fund is the only foreign investor here, having so far purchased two buildings. The fund, which operates in Germany, Denmark, France, the Netherlands, Norway and Sweden, is administered by Dutch management company Bouwfonds Investment Management and German company Catella Real Estate. Last summer the company bought the Apartamenty Pereca project, which is currently under construction in Warsaw’s Wola district (by Matexi Polska) for app. PLN 100 mln. If all goes according to plan, the tenants can start moving into the 193 apartments in the middle of next year. In April this year the same fund purchased another project under construction, this time on ul. Rakowicka in Kraków – 146 apartments and 113 student apartments and a total useable area of 9,200 sqm (Apartamenty Novum by Hines and Heitman). Bouwfonds is currently negotiating the management contracts with local companies, which would include the responsibility for the renting of each building. However, its ambitions here are much greater. “We are planning to invest between EUR 100 mln and EUR 110 mln over this year and possibly into next,” reveals Dariusz Węglicki, an advisor to the board of Bouwfonds Investment Management. He explains that the amount should be enough for app. 1,500 apartments. The fund intends to limit its operations in Central and Eastern Europe to Poland for now. “We are working on investing in Wrocław, Gdańsk and Poznań. And, of course, we will be willing to buy more properties in Warsaw,” adds Dariusz Węglicki. Bouwfonds is treating such purchases as long-term investments and planning to hold onto them for a minimum of ten years. It is also interested in completed and rented facilities. “However, there aren’t any of those on the market,” adds Dariusz Węglicki.

... and just as much from Griffin

Griffin Real Estate is already working on the development of such a product. Last year the company announced the launch of the Resi4Rent apartments for rent platform. “Over the next two or three years we want to invest in 5,000 to 6,000 apartments for rent,” reveals Adam P. Świrski, the CEO of Resi4Rent. Griffin states that it has raised EUR 100 mln for this purpose from investors. Resi4Rent is to operate on a similar basis as Student Depot, Griffin’s platform for managing a chain of student halls. It will be buying either completed apartments or plots where it will pay Echo Investment, which is connected to Griffin in terms of ownership, to build apartments. The platform will subsequently manage them. It also plans to buy the app. 1,400 apartments for rent that Echo Investment is already building.. A member of Echo’s board, Rafał Mazurczak, has recently told us that as many as half of 1,000 apartments built in the developer’s flagship project Browary Warszawskie could be end up being rented. “The first few apartments will be offered at the end of 2018 or early 2019. At first they will be located in Kraków and Wrocław,” Adam P. Świrski informs us. Apart from these cities and Warsaw, other locations include the TriCity, Poznań and Łódź. The rental offers will be addressed to individuals as well as companies wanting to provide apartments to their employees as fringe benefits.

Thousands of apartments from Murapol

Residential developer Murapol also wants to create its own portfolio of rental apartments in newly developed projects. The company is planning to offer its first thousand flats to tenants as soon as this autumn. “We could increase the number to 4,000–5,000 apartments within three years,” claims Michał Sapota, the CEO of Murapol. These would be in Warsaw, Kraków, Katowice, Wrocław, Łódź, Poznań and Gdańsk. “We will choose apartments from our portfolio based on data provided by our analytics department, which assesses the needs and preferences of tenants in individual locations,” he explains. Thus the company will not be renting out entire buildings, but instead will be choosing the apartments, the areas and locations where they are likely to be rented. The business is to be managed by Murapol’s subsidiary Major Facility Management, which will be responsible for tenant sourcing, rent collection and the maintenance of the apartments. Murapol is also planning to set up its own residential REIT or investment fund in the future. “Such a formula will allow us to invite external investors to participate in it after the development of this business, by offering them investment certificates,” adds Michał Sapota.

According to Dariusz Książak, the CEO of Emmerson Evaluation, based on his firm’s market research, more and more companies are considering investment in the rental apartments sector. “They know that each bull market ends sooner or later, so they have to prepare alternatives. Some of them are considering the development of projects exclusively earmarked for renting out,” he says.

Golub adds some more

Golub GetHouse, which is planning to build a portfolio of 2,000–3,000 apartments for rent in the next three to five years, is also opening up its own front into this market. According to the strategy, Golub will build a number of projects with 300 or more apartments in the six largest cities in Poland. “The first two projects will be developed in Warsaw. In two and a half years we will be completing our first few buildings,” reveals Czarek Jarząbek, the company’s CEO. A total of app. 800 apartments are to be developed in Warsaw’s Służewiec office district and in the city’s Wola district. Other projects are to be built in Kraków, Poznań and Wrocław. In the future Golub will offer these buildings for sale to investors, either individually or as a portfolio, depending on the market demand.

The funds that could be fighting over the new residential product in Poland include Catella Wohnen Europa, which is under the management of the above-mentioned Catella Real Estate. Last year the fund purchased 72 units in the Złota 44 skyscraper in central Warsaw (the preliminary contract is to be finalised in June 2017). These are luxury apartments and the average price per sqm throughout the entire building is PLN 28,000 (although the actual transaction price in this case has not been disclosed). It is also worth mentioning a small project by Danish fund Core Poland Residential V, which is managed by Core Property Management. This is its first project in Poland so far and involves the construction of 39 apartments for rent in Warsaw’s Szczęśliwice district with the help of TK Development.

And that’s not all, folks!

What are the forecasts for this market? “This is a sector that could change very rapidly. In three or four years there could really be a lot of this product around,” predicts Tomasz Trzósło, the managing director of JLL Poland. Much of this will be driven by changes in the attitudes of young Poles – there should be less attachment to ownership and more of a desire for mobility. Poles are changing their residences more and more often. Furthermore, following the lead of the large German employers fighting it out to secure the best personnel, companies in Poland might start renting large numbers of apartments at wholesale prices in order to offer them to their employees at rents below the market rate.

The unfulfilled potential of our market also suggests it has room to grow. Just 4 pct of apartments in Poland are rented. “This bears little comparison to countries such as Germany or the Netherlands, where the figure is 20 pct or more,” points out Dariusz Węglicki. It will also become increasingly difficult to buy your own apartment due to the banks’ stricter requirements for granting mortgages. “A 20 pct contribution has already been required since the beginning of this year,” says Czarek Jarząbek, who also believes that the market will grow strongly over the next few years.

What will the prices be for finished and leased investment products? The CEO of Golub GetHouse believes that the yields obtained from the sale of such properties will be similar to those typical for other sectors. “The cap rates could initially be higher because investors are likely to treat these properties as alternative products. So they will probably estimate a higher risk. This will remain the case until their popularity takes off,” believes Tomasz Trzósło. Bartłomiej Krzyżak, the associate director of the investment consultancy at Savills, believes that developers should not have any problems with the sale of these products. “There is a premium for being among the first. I have absolute faith in these portfolios of residential projects. They just need to adapt the ideas that have worked so well for our western neighbours in the right way here,” he believes.

Despite the expected dynamic growth, the sector will have to wait for large foreign funds to enter. As Maximilian Mendel, the head of the transaction advisory at residential consultancy REAS, points out, for many long-term investors, such as risk-averse pension funds or insurance companies, there is the problem of scale. They need a volume of at least EUR 50 mln – and often even above EUR 100 mln – to make the move into a new market. “Therefore I believe that the market will need pioneers with a value-add strategy, who will build up portfolios to catch the big fish in three to five years from now,” he concludes.

The willing will help

It seems that some development companies are starting to see opportunities in co-operating with funds on such projects. “The construction of a project with selling it to institutional investors in mind is an attractive alternative to the traditional path,” claims Mirosław Bednarek, the CEO of Matexi Polska. He hopes that the sale of Apartamenty Pereca to Bouwfonds will provide the company with valuable experience and that projects of this kind will turn out to be an important element of Matexi’s business model. The Fundamental Group (formerly Budner) is also thinking about institutional investors. Last year the company sold the Mokotów City project on ul. Samochodowa in Warsaw to the state-owned Apartments for Rent Fund, which is managed by BGK Nieruchomości. Now the company is looking for other locations with institutional clients in mind. The company has the advantage of being the general contractor of its own development projects, thus helping it to achieve better margins.

So does cooperation with international funds really represent such good business for residential developers? “Selling a whole building to a single entity in a forward deal is almost risk-free for the developer. On the other hand, such investors expect to receive a discount on the prices that developers could get by selling the apartments to individuals. This means a lower margin for the developer. Given the current state of the market, not every developer would be willing to lower itsmargins,” says Maximilian Mendel of REAS. So it is mainly a matter of assessing the risk-to-gain ratio.

However, Dariusz Węglicki, representing the largest private institutional investor on the market, emphasises that it is important for Bouwfonds to establish the lasting relations with developers that would make it possible to create tailor-made projects in the future. “We are particularly talking about turnkey-finished apartments. Their layouts sometimes need altering too,” he explains. In the case of its purchase in Kraków, the fund required Hines and Heitman (the former owners of the project) to adapt one of the buildings into a student hall.

Undaunted by the state

One question that arises is whether state-run initiatives, such as the Apartments for Rent Fund and Apartment Plus, represent any kind of threat for such private involvement in the rental sector. The impact of the Apartments for Rent Fund has so far been minimal, apart from the possible psychological effect it may have had in popularising apartments for rent as an institutional investment. Six projects comprising a total of 766 apartments have been completed in the two-and-a-half-year existence of the fund, which is not that impressive considering that 150,000 apartments are put on sale by developers each year. By 2018 the state fund is aiming to offer a total of just 5,500 apartments to tenants, which is not that impressive either. There are no further plans because funds are now being allocated to a new governmental programme – Apartment Plus. Does the latest scheme have any chance of making a greater mark? Perhaps. However, Dariusz Książak points out that a question mark still hangs over its scale and this will not change until all the issues concerning its financing become clear. The REITs Act, which is presently at the consultation stage, has a particular bearing on this, since it would open up the possibility of establishing a feasible source of financing for Apartment Plus.

Even the potentially extensive plans for the Apartment Plus scheme, however, are not scaring away those developers determined to invest in the rental apartments sector. “If the scheme makes a few thousand or even tens of thousands apartments available for renting, this would still be a mere drop in the ocean,” argues Czarek Jarząbek. Furthermore, the profiling of the governmental programme will be crucially different. “It will be targeted at people who earn below the national average. Provided that developers foster a slightly different client, they could successfully achieve this even if the programme operates on a large scale,” believes Dariusz Książak. The results of the Apartments for Rent programme to some extent confirm that the sector is set to grow. “According to our information, the rental levels are high and the rates of return are comparable to those generated by individual investors renting out apartments. In my opinion, this should encourage other entities to invest in the sector, as it promises a rate of return that is not that high but relatively stable” concludes Dariusz Książak of Emmerson Evaluation.