Safe and full houses

The private rental sector has actually entered the second wave of the pandemic in better shape thanks to its experience over the previous months. After the ‘Covid wobble’ in the spring, optimism has returned to the market and those who work in it have been left in no doubt that it will continue to grow

Discounts for clients who have fallen into financial difficulties and online home viewings are just two of the marketing ploys that PRS operators have introduced in response to the challenges posed by the pandemic. However, the market has not seen any kind of slump, and those involved in it are now planning further investment. “The PRS sector has proven to be very resilient. When we compare rental apartments with other sectors, such as shopping centres, hotels and even offices, it becomes clear that the current circumstances have not caused the same kind of disruption to the PRS market,” claims Łukasz Mazurczak, the managing director of property managers MVGM.

The greatest difficulties faced so far by operators occurred in March and April, during the lockdown period. “People were simply afraid and so they put off making decisions about renting. As a result we went into the high season with more vacancies than usual,” explains Sławek Muturi, the founder of the Mzuri group, which manages 5,500 apartments, mainly owned by private investors.

Then things got worse as the supply of short-term rental apartments coming onto the market grew at the same time as tourism fell away, prompting many owners to take their apartments off the short-term market and offer them instead for long-term rental. In spite of this, over the weeks that followed the market revived. “In May things were already beginning to pick up for us, in terms of the number of contracts we signed. June was similar to last year; but August turned out to be much better. On top of that, the high season for rentals usually ends in the first week of October, but this year the second weekend and second week of October were also really good. It seems as if the high season has been slightly extended and it’s difficult to say how much longer it will last,” says Sławek Muturi.

Viewing on the phone

The safety measures put in place by operators have also improved the situation. “In March we introduced a remote viewing service for viewing apartments using your mobile phone, through which one of our consultants can show you around an apartment online via a communicator,” explains Sławek Muturi. Clients can ask the consultant to show them a video, for example, of the bathroom, or of the views through the windows, or what the inside of one of the wardrobes looks like. “This was extremely popular during the spring lockdown at the peak of the outbreak, but in the summer it wasn’t so popular,” he admits. Most operators have also introduced a similar service. “At the beginning of the first wave of the pandemic 90 pct of visits were online. For more or less half of the clients an online visit was enough for them to make a decision. The other half needed a second, real-life visit. We organised these in such a way so as to maximise the safe viewing of apartments: each apartment to be viewed was left open and the client was taken to it remotely. After each visit, all contact points were disinfected in preparation for the next person that wanted to see the apartment,” relates Sławomir Imianowski, the CEO of Resi4Rent. In the early stages of the pandemic, Mzuri specially disinfected apartments to prepare them for renting out. “We announced that the apartments were disinfected, but as it turned out there was no impact on the demand,” says Sławek Muturi.

After a while, the safety measures were cut back to social distancing, hand disinfection and the wearing of gloves. According to Sławomir Muturi, even during the worst stages of the first wave of the pandemic operations were able to continue much as normal. “It’s true that occasionally one of the consultants showing people around apartments came into contact with someone who was infected and would afterwards have to be quarantined, but that didn’t affect our work very much since we had enough consultants to bring in a replacement,” says the founder of Mzuri.

The need to maintain social distancing to a certain extent clearly favours the institutional market, where the client usually views several apartments and doesn’t need to talk to more than one consultant to do so. The electronic tools that such operators use is also a big advantage. “These days the institutional market is similar to with is apps and internet sites. Documents can even be signed in many cases electronically. Leases are safer with these tools and don’t require personal contact,” explains Łukasz Mazurczak.

Rental correction

However, the increase in supply and fall in demand had to have an influence on prices, but in the opinion of Maximilian Mendel, who heads the apartment investment team at JLL, the price adjustment was nonetheless small. “The claims in the media of a collapse in the market were grossly over- simplified and based on reports from a small sample of landlords – generally those who have been unable to rent out their apartments over a long period of time and had to lower their prices. But the sector is much bigger than this and performing much better than the official statistics reveal. Our recent research also shows that a small proportion of landlords have been planning to pull out of the sector, and this means in effect a small rental adjustment – which we estimate at 2–5 pct depending on the city – is acceptable for them,” says Maximilian Mendel. Sławek Muturi is of a similar opinion about the prices: “The rents for many of the apartments on offer haven’t changed. Price adjustments have only been made for some apartments, and mainly those that were too expensive. Most tenants haven’t noticed any change.”

Landlords of individual apartments have been more prepared to lower their prices than institutional investors. For someone who owns just one apartment, losing a tenant is certainly a bigger problem than for an institution that owns 200 or more. “Even if ten apartments were to stay empty, the other 190 would still generate good revenues. Landlords who lose 100 pct of their rental income are bound to reach more quickly for the lifebuoy of lowering the rent to fill their apartment. Especially if they still have to pay off the mortgage on it,” explains Maximilian Mendel. He also points out that the current pandemic-related problems only affect to a small degree apartments that have already been rented out. “It’s rare for a tenant to stop paying – and if someone stops because of the pandemic, that’s even rarer. I can count such cases on one hand,” claims Sławomir Imianowski.

Institutional investors also have an advantage over individual landlords if tenants come to them with financial problems, in that they can offer to move them to smaller apartments. “This is how we have dealt with tenants that came to us with financial problems. Of course, they have had to provide us with the documentation to prove their claims and then we can help them in this way or another, such as offering them a discount. In exchange, what we get is a renewal of the lease – so this has been a win-win situation for the both of us, as well as increasing the tenant’s trust in the owner,” reveals Dariusz Węglicki, the head of Catella Residential Investment Management in Poland.

Difference as standard

According to Agnieszka Nowak, the managing director of MVGM in Poland, the current situation, which is more favourable to institutional investors than to individual ones, also results from the difference in the standard of service. The products offered by institutional investors are more uniform and designed to meet the needs of tenants who are ill-served by a fragmented market. This can be seen clearly in the rather more tricky student accommodation market. “Students often rent cheap apartments of a poor standard and are often badly treated by their landlords. But the fact that these are cheaper apartments doesn’t mean that they shouldn’t get what they pay for,” insists Agnieszka Nowak. The institutional market certainly offers a solution to this problem, by providing apartments in which students won’t be at the mercy of the landlord’s whims or changing plans. For this kind of student accommodation, the procedures are very clear as they are set out in the building’s regulations and in the lease contract.

Catella has 139 rooms in a student residence that forms part of its Trio Kraków project. Despite having to operate in a difficult market, it has rented out 90 pct of the rooms. The company offers rooms of 15–16 sqm with bathrooms and a kitchen annexe for PLN 1,350 a month, which includes utilities and other costs. It seems, therefore, that Catella has clearly found a niche in the market. “Today, landlords of poor quality apartments are having problems as well as those of buildings leased out by the room,” points out Dariusz Węglicki. If someone buys a house and divides it into ten rooms to rent out to students for PLN 600–700 each, they are not always going to find tenants. After all, it should be possible in such places for their residents to maintain social distancing. “Other typical problems are old furniture and unfashionable designs, because – to put it quite bluntly – the young don’t want to live in an old granny’s room. We offer them something completely different,” promises Dariusz Węglicki. As well as student apartments, Catella has 152 new rental apartments in the same complex. Their commercialisation began in what might have been the worst possible moment for the developer – in February, when the pandemic first broke out – but this has not proven to be a major issue. “Since then we’ve leased out 95 pct of the apartments directly through our internet site,” reveals Dariusz Węglicki. Resi4Rent had a similar experience, when just before the imposition of the lockdown it finished the construction of a building with 269 apartments for rent on Kępa Mieszczańska island in Wrocław. “Now we have just ten apartments left and I think soon they will also be rented out,” believes Sławomir Imianowski.

The rapid growth of the PRS sector comes as no surprise to Agnieszka Nowak. “The organised rental market and the fragmented market are basically two separate sectors. It’s similar to the different generations of shopping centre, which evolved out of supermarkets with shopping alleys. Now we have fourth or fifth generation malls, which are also centres of community life and culture,” she says.

Investors want more

MVGM is pinning much of its hopes on the further development of the PRS market in Poland. The company manages a large number of such properties in Western Europe. Overall it manages 90,000 apartments and homes across Europe, including apartments and houses for rent owned by investment funds and cooperatives, as well as student residences. Its two largest markets for these services are the Netherlands and Germany. “The Netherlands is a very mature PRS market. I think this is to a large extent due to the high level of professionalism in the sector there and the mobility of residents. It is also the natural direction we are heading in and a place from where certain models and standards will come to us here,” predicts Agnieszka Nowak.

The company is currently working on bringing its European platform for managing apartments to Poland. “I think international investors also expect a certain standardised management service for rental apartments in Poland too. For investors the important thing is the certainty that their investment is not going to drop in value, but when they have managers that can guarantee that it won’t, they can lower their risk assessments,” claims Łukasz Mazurczak, the managing director of MVGM. In addition to this, as he goes on to point out, major investors are at the moment actively seeking out the chance to invest in the PRS market across Europe, as can be seen in the acquisition of more than 42,500 apartments in the Czech Republic by Swedish fund Heimstaden at the beginning of this year. In Poland, however, the main issue continues to be the lack of available product. The number of apartments in the hands of institutions still comes to less than 5,000, which represents only a tiny fraction of the entire rental market. Depending on the estimate, there could be between several hundred thousand and as many as 1.2 mln rental apartments across the country.

The pandemic – a chance to grow

One might expect that the pandemic has prompted operators to downsize their plans for further development. On the contrary: “When it comes to our investment plans, we are if anything adjusting our figures upwards. Recently we planned to build 5,000–7,000 apartments. But now, having gauged the potential of the market, we’re already talking of 10,000 apartments by 2025,” points out Sławomir Imianowski.

Łukasz Mazurczak has a similar rosy view of the prospects. “I believe that Covid could boost the PRS market. People who rent don’t have to take out a thirty-year mortgage and having such freedom in an uncertain situation is of great importance. Moreover, people currently have less access to credit as the banks become more cautious and tighten up their lending. So right now people need to put up a greater share of their own capital when taking out a mortgage,” explains Łukasz Mazurczak. A similar situation has already been seen in the US, where, following the 2008 credit crunch, the growth of the rental apartment market really took off. “This is also an opportunity for investors to diversify their portfolios – and we’re not just talking about our clients who specialise in PRS, but also more traditional investors, who up until now have only been interested in the office or retail market. The growth of the PRS market in Poland could be an opportunity for them to diversify their portfolios with the addition of another asset class – and one that is both attractive and a secure investment,” says Łukasz Mazurczak