Don’t burn down the forest

What’s your assessment so far of the new Polish Tax Deal, a year after its introduction?

Paweł Toński, managing partner, Crido: If I was only going to talk about the intentions behind their introduction, they’re not all that bad. The Polish Deal was aimed at changing the proportion of the tax burden borne by different social groups and in Poland it’s still the case that the well-off are taxed relatively lightly. So, from an economic point of view, the Deal is targeted at improving the lot of those whose lives, for various reasons, have gone relatively badly. But that’s all from the conceptual point of view. However, the way in which the new laws have been introduced, both in practice and in terms of PR, has been a disaster. The vast majority of the regulations that make up the Polish Deal have been written into the tax system in a very clumsy manner. This could be seen straight away and everyone pointed it out, but the Ministry of Finance and the politicians ploughed on regardless. A few months later, a number of people were fired from the ministry and some of the rules were reversed, corrected or removed altogether. This created total chaos, while the public was left uninformed about the goals or the means by which they were to be achieved.

So in what kind of a position does this leave business?

Of course, at Crido we normally work with big businesses from the commercial real estate sector that face difficulties at many levels. What I’m mostly thinking about is the ban on writing off the depreciation of residential and commercial real estate buildings against tax. This clearly raises taxation levels, even though the rate itself hasn’t changed. The next problem is the wider issue of reporting, which even if it were done clearly and correctly, would be overly burdensome in administrative terms in relation to the information given by the Ministry of Finance. One egregious example is that a company has to report to its shareholders while they have to report their own activities. This is simply a repetition of information, which for the average real estate company is going to require at least one additional employee.

What are the risks of such instability?

Polish business people have been gritting their teeth and are at least taking into account financially the changes in their business plans. However, outside the country the situation is being viewed really badly. Potential investors feel lost and can’t keep up with the changes, nor why they are even happening. It is certainly discouraging them from investing in commercial real estate here in Poland. The emotional exhaustion in the market helps no one, while at the same time the treasury likes to attack the real estate sector with new responsibilities, limitations and changes. Our clients are often afraid that what they do will no longer mesh with reality.

What about the status of REITs, which still remains unclear?

Attempts to introduce REITs, in other words, funds that allow people to safely invest collectively in commercial real estate, have been ongoing in Poland for the last 15 years. When compared to other forms of investment savings, they are more secure than stock market shares and government bonds. Moreover, they provide an opportunity for investment diversification to provide higher returns. REITs enable individuals to pool their savings in a structured manner for large financial investments. The situation that we now have, however, is somewhat schizophrenic. On the one hand, property is generally seen as a solid investment, while on the other, the government has been blocking people from doing it in a sensible way for many years – and particularly those who don’t have that much money. At the same time, the government complains that commercial real estate is in the hands of foreign investors while doing nothing to strengthen Polish funds. This is a grotesque legislative failing.

Could institutional rentals also bounce back?

With the current economic situation, the regulation of the sector has almost become a necessity and this could stabilise the market. Fewer and fewer people will be able to afford mortgages and this is definitely going to improve the rental sector. Private rentals do not yet have the right platform, they are unpredictable and scattered, and this can result in abuse of the system. Rentals should not be limited by regulations that demand huge reports, but should instead simply secure the rights of both parties.

Do you know of any countries that might serve as a good example?

We have just had our third or fourth transaction this year with a Czech fund, which is actually a de facto REIT. The principles on which it operates make it possible to purchase large office buildings and logistics warehouses for a sensible return. Where the capital comes from is not important and you can see this through the foreign companies that own Polish office properties and logistics centres. The only thing that might unfreeze REITs is the possibility of Polish investors being allowed onto the institutional rental market, so that the wolf is fed but the sheep are still kept safe.

Interview: Julia Cudowska