Reinventing renting

Nathan North, ‘Eurobuild CEE’: Your company entered the Polish market late last year and has since signed a number of other contracts with Polish developers. Could you sum up for us your general approach and strategy?

Stanislav Kubáček, the head of Heimstaden’s acquisition team for Germany and the CEE region: Heimstaden is a long-term owner and operator of rental housing – we are not looking to sell any of our portfolio. In that way we are more like a corporation than a buy-and-sell investor. And since we’re in this for the long term, we have devised our own ‘Friendly Homes’ concept, to give rental housing more of a human touch. This involves additional services, such as a reception, parcel pick-up points, a playground and the use of sustainable energy.

How big is Heimstaden now, in terms of its portfolio? And how have you gone about growing it?

From being a company set up in Sweden more than 20 years ago, we are now present in eight countries. We have a portfolio across Europe of more than 114,000 homes making us the third biggest on the continent. And I will stress once again, we hold these assets for the long term. We have never left any of the markets we’ve entered and typically we never sell any of our properties in any of them. What does vary from country-to-country is how we have obtained our product there. In some countries we buy older, existing stock. This might have been, say, built by the state fifty years or so earlier. We tend to use this type of approach in more mature markets.

You’ve only recently turned your attention to the CEE region, first in the Czech Republic where you yourself are based. Are you taking a different approach to expanding your portfolio in our part of the world?

Well, we actually entered the Czech Republic in 2020 with the EUR 1.3 bln acquisition from Round Hill Capital and Blackstone Tactical Opportunities of the Residomo portfolio of more than 42,500 residential units. These were mainly built in the 50s, 60s and 70s. This was an opportunity that arose, so we took it; but In the CEE region since then we’ve been more willing to invest in new-build, turn-key apartments with local development partners, because CEE institutional rental markets are more nascent and specific than elsewhere.

But you chose a different tack in Poland, by turning to local developers instead…

Yes, this has been our approach since we entered Poland towards the end of last year. We contracted Eiffage for EUR 65 mln to build 640 flats in two projects in Warsaw – on ul. Białostocka in Praga Północ and on ul. Postępu in Służewiec. Then in January we contracted three projects, also in Warsaw, with 707 apartments from Marvipol for PLN 380.9 mln [EUR 84 mln]. These are the already under-construction Tower D on ul. Grzybowska in the CBD and Moko on ul. Bokserska in Służewiec, as well as Studio Okęcie in Włochy district. All five projects are to be completed in 2022–23 and all of them will be fully-fitted in terms of bathrooms, kitchens, wardrobes, tables, sofas, lighting and so on.

And your latest transaction, with Budimex Nieruchomości, now renamed Spravia, was an even bigger statement of intent on your part.

This transaction formed part of Crestyl and Cornerstone Partners’ takeover of Budimex Nieruchomości. This time we signed a PLN 1.4 bln [EUR 307 mln] contract with the developer for eight projects with 13 phases. Two of these projects are also in Warsaw, but the transaction will take us outside the capital city for the first time, as three of the projects will be in Kraków and there will be one each in Wrocław, Poznań and Gdańsk. Altogether almost 2,500 apartments are to be built in the eight projects over the next few years. And we hope to increase our pipeline in Poland to over 10,000 flats over the next few years. In half a year’s time, our first Warsaw project, Tower D, is due to be delivered and we will be able to start leasing it.

You described the institutional rental market in the CEE region as being in a nascent phase. Doesn’t it also have something of a bad reputation that needs to be overcome?

There has been a bit of a stigma attached to the rental housing market in Poland and the CEE region since the political transformation and the advent of the free market. Most rented homes even in the decades after the fall of the Berlin Wall were cheap, state-owned and poor quality. And another reason why we are generally not looking to buy standing assets in Poland is that with the gradual privatisation of these properties, the ownership of rental apartments became very fragmented. These private owners have dominated the market since then – mums & dads renting out flats as a side business. But this has meant that there has been no approach towards providing services for tenants. Which means that the tenants have often had to pay for their own repairs and maintenance. And with individual landlords rather than institutions dominating the market, there has been no security of tenure – you never know if you’re going to be served a termination notice or not at any moment, or whether the rent will suddenly go up. Indeed, this kind of thing happened to me when I was younger living in Prague, so I know this from my own experience. So it’s not surprising that the rental sector has developed a rather bad reputation in this part of the world.

So what are the main advantages of renting from an institutional investor rather than an individual landlord?

Well, our tenants have a very different experience to what they are used to with individual landlords. We can provide security of tenure. There is no kicking out of tenants all of a sudden, since we have a standard approach to our contracts and they are signed for several years and guarantee that there will be no dramatic hikes in rents. Due to their scale institutions can also provide additional services, such as concierges, as well as additional features like playgrounds and the other services I’ve already mentioned, we are also in a position to negotiate better energy prices. At Heimstaden we call our approach ‘Friendly Homes’.

But in an under-developed PRS market, does the demand actually exist to justify the expansion you are planning?

The demand is definitely there for institutional rentals. Certainly in the big cities in Poland we are targeting, where there are many young people just starting their careers who are not looking to buy a home straight away. They may not be able to afford to buy at this stage in their careers, or they maybe don’t know if they will be changing jobs soon and moving elsewhere in the near future. We are sure that we can do here what we have done elsewhere, but maybe with less competition initially because we are one of the pioneers on this market.

Did the pandemic force you to change your strategy at all?

Our plans and strategy haven’t changed due to the pandemic – we are still a long-term owner and operator. Of course, we all hope that the pandemic is just brief episode in all our lives, but maybe it did open up new opportunities for us. We were able to identify these because, as an experienced international operator, we are used to having our finger on the pulse. For instance, when people discovered they could digitise their homes as work space, which has boosted the demand in our market. Our competitors on this market, meanwhile, are maybe more risk-oriented and hit the pause button. We didn’t pause. While they were putting their plans on hold six or nine months ago, we were contracting 4,000 apartments in Berlin – and the 2,500 in Poland were also contracted during the lockdown.

Since institutional PRS has been one of the success stories during the pandemic, isn’t the market likely to become much more competitive?

This situation on the market is now changing. By the end of the year we will have more competition, certainly than in the last four months. There’s more capital available for residential, as it is now seen as a stable market. But we’ve been pretty busy recently in major cities in Poland and the Czech Republic, where we would like to build up that critical mass. We need to build up that scale in cities like Poznań, Wrocław and Gdańsk, which each have populations of more than 500,000, and keep building projects with all the required services. This will keep us investing in those cities.

What about the future locations of your projects? Are you looking at new markets? And will you be working with the same developers?

On June 21st, we announced our first turnkey development deal in Prague – this was for 164 fully furnished flats for more than EUR 45 mln with the local leading developer Finep. And we hope to work on more projects with them in the Czech Republic. We are constantly looking at older standing assets that can be improved, but as I said, the privatised stock in buildings with multiple owners is always difficult to reconstitute and add new services. But even in Denmark and Sweden we are now investing in modern stock. So we don’t have a single, global approach and can adopt either depending on the opportunity that arises. Along with Poland, we have also recently entered the UK market and we are looking at others, but don’t expect us to enter any new ones soon. Maybe Bratislava, but we would treat this as more an extension of our Czech operations than a market entry. In Poland we are going to be doing more with Eiffage, Marvipol and Spravia over the next five years and into the future. They have the landbanks and will be able to propose the best locations for new projects to grow our portfolio. We will be relying very much on them and have been very happy with our cooperation so far.

Stan the rental housing man

Stanislav Kubáček studied finance and business management at The Paris Institute of Political Studies in Paris, where his interest in rental housing as an asset class began. He has been involved in investments and administration in the field of rental housing in Europe as well as in North America for 15 years. He gained a significant experience while working for investment banks Société Générale and Goldman Sachs. For six years, he successfully led the residential investment team at Round Hill Capital in London, where he purchased and managed residential portfolios in several European countries. This international experience gave him a keen eye for identifying trends early. In 2020, he accepted a job offer from Heimstaden and returned to his home country of the Czech Republic. He is now responsible for investments in Central Europe and Germany.