Who will invest in rental apartments?

In Denmark, PRS accounts for close to 50 pct of the annual real estate transaction volume. Its share in the investment market in our region is just under 5 pct, but this is likely to grow to 10 pct in the next few years.

In Poland, rental apartments make up app. 15 pct of the country’s total housing stock (2.3 mln out of 14.8 mln homes). Most are privately or municipally owned. The development pipeline for rental units is estimated at 35,000, of which around 10–15 pct will be delivered in the next 12–18 months. The PRS market is driven by the kind of demographic, economic and social changes that are yet to be seen in Poland. Most residential developers are just beginning to consider PRS projects on the back of very strong sales of apartments in recent years – and even today, despite the pandemic.

“Despite the Covid-19 headwinds, housing prices on the new-build and resale markets in Warsaw and the largest regional cities have held up. This is mainly because demand remains relatively strong. A substantial proportion of affluent individuals with bank deposits who are paying virtually no interest at the moment are trying to protect their capital values and are therefore buying apartments with cash,” explains Mira Kantor-Pikus, a partner for equity, debt, alternative investments and capital markets at Cushman & Wakefield.

Poland has one of the fewest rooms per person in the European Union at around 1.1, compared to the EU average of 1.6. Its density of apartments per 1,000 inhabitants is just 80 pct of the EU average. It is estimated that there is a shortage of about 2 mln homes in Poland in terms of satisfying the demand. In addition, affordability compares favourably with other EU countries and migration trends support demand for housing with net immigration growing.

Chasing opportunities

“All investors chase opportunities and assess the risk-return trade-offs. The demand and supply dynamics of Poland are interesting. This is a large market with multiple investment opportunities and strong economic fundamentals,” comments Jeff Alson, a CE partner in the capital markets group at Cushman & Wakefield.

PRS challenges in Poland include a lack of credible and experienced operators, currency hedging costs, limited market research and hesitation of institutional investors, for instance from Germany. Experts of Cushman & Wakefield expect that the Polish PRS hatch phase will last about 12 months, but maturity will definitely take a little longer.

“Investors and other market players tend to be more agile on their feet at the moment. There is enough professional expertise to adapt quickly to situations. It’s true that experienced, quality operators are not plentiful, but this is changing. In three years’ time Poland will be a much more mature market with an increased proportion of such assets in the transaction volume,” adds Jeff Alson.

Poland on the radar?

According to the experts, the PRS market will grow in the next three-to-five years through direct acquisitions of development projects and larger joint venture deals. The pricing will be influenced by the success of early transactions, competition from the buy-to-own market, as well as the operating and currency hedging costs.

“Most overseas investors will factor in the costs of hedging this risk, which could decrease net returns. On the other hand, assuming leverage of an investment with a PLN loan at the level of 55–60 pct, the investor needs to hedge only free cash, which would compensate some loss,” believes Mira Kantor-Pikus.

It’s worth noting that an investment fund has yet to finalise a transaction of a fully commercialised or leased PRS asset or portfolio.

Who will invest in Polish PRS? Global capital sources are interested in rental apartments. Initially, it’s likely to be largely European capital. Regardless of the pandemic, some developers are considering diversifying their exit routes from investments, and given the low cost of capital matching the low risk of residential investment the investor demand will be there.

“The PRS market is on the radar for all mainstream global fund managers working with pension funds, insurance companies and sovereign wealth funds from Europe and the US, and APAC funds to some degree. It’s not clear, however, how many will actually include Poland in their European allocations,” concludes Jeff Alson.

About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that provides services for both real estate occupiers and owners. It is among the largest real estate services firms globally, with around 53,000 employees in 400 offices and 60 countries. In 2019, it generated revenues of USD 8.8 bln across its core services of property, facilities and project management, leasing, capital markets, valuation and other services.