The Berlin syndrome

Berliners are currently so unhappy with their local housing market that in August more than 1 mln of the city’s residents voted in a referendum (56 pct of the vote) for the nationalisation of large institutional apartment owners. If enacted, any company that owns more than 3,000 apartments in the German capital would have to relinquish their properties, meaning that 240,000–250,000 units owned by the twelve biggest landlords would be taken over by the authorities. The campaign movement pressing for this to happen has its own webpage: Deutsche Wohnen & Co Enteignen webpage, which translates as ‘Nationalise Deutsche Wohnen’ – the city’s largest residential property owner. On it they insist that these landlords would be compensated for the loss of their properties, but at a level far less than their market value. The compensation is to be paid by the city, financed through loans that would be repaid through the future rent revenue. “We seek to end the rental insanity,” declares the website.

Funds in the firing line

Deutsche Wohnen owns around 110,000 apartments out of the city’s total of 1.9 mln. However, the fund does not believe that any nationalisation is going to take place. It points out that most political parties in Berlin city hall are opposed to the move, including the SPD, the CDU, the FDP and the AfD. It also insists that the referendum is not legally binding. The city’s current mayor, Franzisk Giffey of the SPD, even before he was appointed to his current position stated that he disagreed with the idea; and not long ago the constitutionality of the plan was also called into question. Marko Rosteck, the press spokesman for Deutsche Wohnen, suggests that the authorities need to find a solution to the problems of the housing market that suits all parties. “We, as Deutsche Wohnen, and as the largest landlord in the city, are open to this. After all, this challenge can only be overcome by working together rather than against each other. The expropriation debate only costs money and valuable time. For legal and political reasons, we do not believe that expropriation can actually take place. Most experts agree on that,” he claims. He also argues that nationalisation would tarnish the city’s reputation. “For Germany as a business location, and Berlin, in particular, this would be a hug deterrent to investment – especially for the construction industry. Who’s going to build new apartments in a city if there’s a chance that they’ll eventually be nationalised?”

What has led Berliners to consider such radical steps is the fact that, as the movement’s website points out, rents have doubled over the last ten years, while wages have remained stagnant. Home prices haven’t remained static either, with the average price per sqm rising from EUR 1,700 to today’s level of EUR 5,000, according to figures from Berlin real estate agency Guthmann. Rising rents are a serious problem because 80–85 pct of people living in the city rent their homes. The companies mostly at risk of nationalisation own around 16 pct of the total stock in Berlin, while a further 42 pct is owned by smaller investors including private individuals. Another 15 pct is owned by Berliners with one or two apartments, with the rest owned by the city (16 pct) and housing cooperatives (10 pct). Those advocating nationalisation argue that the largest residential funds bear most of the responsibility for the situation, by raising rents without justification.

A question of supply

Marko Rosteck does not agree with this assessment. According to him, the soaring rent levels cannot be blamed on the activities of the big residential funds – the real reason is the shortage of housing in the city. “If we advertise an empty apartment on the internet, we get 100 or more enquiries in just two to three hours,” he says. “The real reason for rent growth is the huge influx of people into urban areas and attractive cities. More and more people want to live in cities and the demand has been increasing for years. The supply is not keeping pace with this and that’s why prices are rising,” he insists.

The current housing shortage in Berlin is estimated at several hundred thousand units. According to The Polish Association of Developers (PZFD), Berlin, a city with a population of 4 mln, saw only 14,500 apartments handed over to residents in 2020. However, in Warsaw, a city with a population of 2 mln, 23,500 apartments were completed in the same year. And to compound the issue, each year Berlin’s population increases by around 40,000–60,000.

Unfortunately, there’s no easy solution to the supply problem. “There are no vacant development plots in the city, but when they do appear they are exorbitantly expensive,” explains Waldemar Wasiluk, the vice-president of Victoria Dom, a Polish developer that has been operating in Berlin since 2016. As a result, the Brandenburg suburbs around Berlin are undergoing rapid residential development. However, the possibilities of developing such projects in the inner-city itself are limited. As Waldemar Wasiluk points out: “The main problems the sector in Berlin has to deal with include the lack of sites, construction laws that are not investor-friendly and overly-complicated administrative procedures.”

The funds come to play in Warsaw

Even though not many residential funds operate in Poland, their presence is already becoming a cause for concern. In November, the Polish Association of Developers (PZFD) decided that it was needed to issue a press release to make the case that it was a “misplaced conviction that the current apartment price rises in Warsaw are due to investment funds”, while pointing out that “PRS accounts for around 0.5 pct of the entire stock of rental apartments in Poland [editorial note: around 7,000], and in Warsaw, PRS funds account for 2.5 thousandths of the total stock [about 2,500 apartments]” Even though PRS is still undeniably rather small scale, fears are rising over its inevitable future expansion. According to a report published this year by ThinkCo, 25,000 apartments are under construction and another 60,000 are planned. We should therefore expect the number of institutional rental apartments to grow maybe twelve times over the next five to seven years, reaching around 90,000 by 2028. But these are only the numbers from development plans that have already been announced and they don’t take into account the newcomers that are certainly going to enter this market.

Michał Sapota, the chairman of the board of HRE Investments, believes that foreign capital of almost unlimited volumes is set to enter the Polish PRS market, driving up the price of homes. Institutional investors often plan to achieve long-term profits over periods of even 30–40 years, and this includes not only the rental income but also the price of the apartments. “They can simply afford to pay more for properties than private investors can,” admits Michał Sapota.

Alright for some

And yet, current residential investors are already driving up the prices – although for the time being these are mostly private individuals and not PRS funds. The skyrocketing prices, however, are going to result in even fewer Poles being able to afford their own apartments. “We’ve seen rising private investor activity over the last two years as well as funds building up their rental apartment portfolios. It would seem that the greater number of rental apartments available has resulted in a fall in rents, while at the same time surging home prices have forced some potential buyers off the market. As a result, the proportion of homeowners to the number renting has been transformed. The number of those who live in their own home continued to shrink in comparison to those who can’t afford to buy and are forced to rent,” points out Zuzanna Należyta, the trade director of Warsaw development company Eco Classic in a recent report prepared by Dompress.pl.

JLL also mentions that rising prices pushing people out of the market in its ‘The current state of – and risks for – the construction market’ report, which was commissioned by the PZFD. The report states that between 2023 and 2024, prices in Warsaw will be well over 20 pct higher and will be rising quicker than wages. According to the report, not only is supply not keeping up with the demand, but this situation will only worsen since the number of building permits granted is likely to fall. The report states that the situation in Warsaw is the worst of the six largest markets in Poland. “The figures for 2020 were a cause for concern at the time, but the numbers from Q2 2021 could only be described as nothing short of a disaster,” admits the report. It also predicts that a number of destabilising factors, such as speculative buyers. could exacerbate the situation over the next few years. When demand outstrips supply, (as in the communist era) the market gets mired in speculation and other irrational practices, no matter whether this has been caused by a lack of sites or something more artificial, like the local bureaucracy. When an investment pays off only because of the rising price of the asset, business becomes overheated – and during the communist era this contributed to the emergence of a black market.

Even without this additional fuel being poured on the flames, for a long time it’s been worthwhile investing in homes in Poland. According to the National Bank of Poland’s estimates, in 2019 (in other words well before the current high inflation, which has been encouraging residential investment), around 30–40 pct of apartments have been bought for investment purposes rather than for personal housing needs.

Regulating the funds

Maybe we should prohibit PRS funds from setting up in Poland, and thus easing the pressure on prices and from the investment demand? “That would be complete nonsense. Our country is too poor to put limits on the demand of any part of the economy. Before these funds become large apartment owners on the market, they are going to be a huge source of capital, which will make its way down to the owners of development sites, architects, utilities administrators, sellers and real estate agencies. It’s not a sensible idea to say no to such money,” argues Michał Sapota. The key to solving the problem might be not to stifle the demand but to free up the supply, rather than limiting the activities of funds (while a degree of deregulation for PRS operators would also not go amiss). “Most developers would say that they could deliver more apartments to the market if it wasn’t for the shortage of sites resulting from administrative proceedings taking too long. Deregulation is, therefore, the simplest step and it wouldn’t require any capital investment,” insists Michał Sapota of HRE Investments. He also makes the point that an experienced developer can complete a project, from the purchase of the land to the final handovers of the apartments, within two years – but due to the current levels of bureaucracy, it’s not unusual for projects to take between five and six years. Waldemar Wasiluk believes that Warsaw still has much scope for further development. “Unfortunately, the city has very few spatial plans in place designating specific plots for residential use and it takes a long time to navigate the procedures to apply for building permits. I think the best solution is to let the city spread out beyond its very centre,” he admits.

No such thing as risk-free rent

Returning to the situation in Berlin, are there any lessons to be drawn from it for home buyers and sellers in Warsaw? We can conclude that a lack of housing on the market would have disastrous long-term consequences for both those that are looking to buy and rent apartments. Anyone who thinks that renting their home is a cheap way to live needs to be aware that in 10–20 years’ time the situation could have changed completely and maybe rents will have risen to astronomic levels. The situation in Berlin would be much less acute and its residents probably not in open revolt were it not for the fact that 85 pct of the city’s population now find themselves in a such a situation. Of course, the way the open market blindly operates could have been more merciful to those who rent. Who knows? Maybe even Warsaw is heading in that direction. Considering what’s happening in Germany, the notion that “these non-thinking Poles are blindly attached to their properties”, that they don’t appreciate the freedom and modernity of a rental agreement, no longer holds water. Particularly, when across other parts of Europe, policies have been enacted to stimulate demand from those looking to buy their own home. In Amsterdam, The Hague and Utrecht a total ban has been imposed on buying newly-built apartments for investment purposes.

It’s difficult to guess what impact investment funds will have on the housing market. The analysts themselves disagree about this. Adam Czerniak, the head of institutional economics and political economy at the Warsaw School of Economics believes that the entrance of institutional investors will at first indeed drive prices up, but over the longer term this will cause prices to fall. The price rises will result from developers reserving some of their land for the PRS market, so fewer apartments will come onto the market. Over the longer term, however, institutional funds will make rental agreements more readily available leading to a drop in rental levels. “This, in turn, could push private investors out of the market, increasing the availability of apartments for those looking to buy their own home. Cities like Berlin are in an entirely different situation to that of Warsaw. It will take 70–80 years before such problems arise here,” he says.

Anyway, let’s hope that after the problems seen in Berlin and the constant complaints from developers about the interminable bureaucracy in Poland will, finally, be met with a little more sympathy and understanding. In the end, the time it takes to issue each administrative decision (for spatial plans, building permits or whatever) directly impacts the number of new homes that can be delivered to the market – and this has a huge knock-on effect on prices. It’s fair to say that civil servants at every level have their hands on the apartment supply tap – and the more they tighten the valve, the lower the supply and the worse the situation will be for the less wealthy. Turning on the taps now seems to be a necessity in Poland if we want to avoid what has happened in the German capital.