The flight of the condo?

The principle is simple: you buy a suite or a room by the sea, on a lakeside or in the mountains, and you can use it for your own holidays; and when you’re not there, the property earns money for itself from being rented out to other guests. The operator, with whom you sign a 5 to 10-year contract, takes the hassle out of handling the rentals and passes on the proceeds to you. Unfortunately, in Poland there have been quite a few hiccups, some of which are due to market regulators – namely, the Polish Financial Supervision Authority (KNF) and the Office of Competition and Consumer Protection (UOKiK).

Lots of supply

The boom in the condo hotel market started in Poland around 2017. The pandemic has also made a difference to the sector, but it’s had more of an impact on existing properties and earnings, and less on the rate at which new projects are being launched. According to Emmerson Evaluation, in August 2022, there were more than 35,000 condo units in Poland, with another 5,000 under construction. “Due to last year’s slowdown in apartment sales, developers have shifted their interest onto the condo hotel market as an alternative investment and as an addition to what they offer,” claims Tatiana Piechota, the CEO of the consultancy Upper Finance Group. “The largest hotel chains, such as Marriott, Intercontinental and Westin, have also started to operate in a similar way, by launching condo hotel projects. The hotel market has changed – a condo hotel is now easier to build and sell, and, moreover, investing in this type of accommodation is considered a worthwhile way to protect one’s equity, especially in times of high inflation,” she argues.

Developers are building, but buyers are not coming in at the same rate. “Condo hotel projects in resorts are being built all the time and there’s no sign of this changing. However, it has changed into a buyers’ market – there are now fewer buyers around and they are taking longer to make their purchasing decisions,” admits Marlena Kosiura, an expert on the market for condo hotels, holiday properties, resorts and spas, and the owner of the InwestycjewKurortach.pl portal. She also points out that as recently as two or three years ago, sales would often be closed as soon as a project was announced, but now it can sometimes happen that a project will already be in use but buyers yet to be found for all the units. This is partly due to the fact that the supply is currently huge. “When it comes to the time taken for purchasing decisions, the period has actually lengthened somewhat. This is due to the current geopolitical situation, and before that it was the pandemic. Despite this, holiday apartment sales are doing very well and this is still the third most popular form of investment following bank deposits and bonds,” emphasises Agnieszka Urbańska-Pucek, a board member and the development director at Platan Group. The company develops hotel projects under the Aries brand and currently has six projects under development.

Whose money is it?

A system whereby a hotel is financed by contributions from people buying individual units has obvious advantages for the developer, especially when banks are holding back on financing new developments due to the pandemic and because the cost of such credit has skyrocketed. But the formula also has obvious disadvantages when there are too few buyers. “There have been considerable delays to such investments, and several projects that are supposed to have opened some time ago are still under construction. This is also the consequence of a model in which financing comes mainly from buyers’ down payments,” points out Marlena Kosiura. She also notes that banks in Poland have always been reluctant to provide credit for such investments due to their diverse ownership structure. This has been compounded by increased wariness towards the entire hotel market, which is now considered extremely risky following the pandemic. For this reason, developers often seek out additional financing through bonds, usually at 10–20 pct of the investment cost. However, the pandemic restrictions have meant that, compared to the hotel sector as a whole, holiday apartments have proven to be relatively robust, as they are often the only viable holiday destination. This has encouraged the banks to approach condo hotels more favourably, but the developer has to be experienced in this sector and to have pre-sold at least 20–25 pct of the apartments. Tatiana Piechota points to yet a fourth financing option – a loan from an open investment fund. “In such a case, the bank takes into account how much the developer invests as well as customer contributions. We are keeping a close eye on this market and we secure financing for many projects of this type at every stage – including the purchase of land and advanced construction work, and also when, for example, a developer’s sales have slowed down but it needs additional financing,” she explains.

Where the law does not reach

Even before the pandemic, the condo hotel market had experienced a major upheaval – in September 2019, the KNF issued a communiqué warning those investing in condo hotels that this type of investment “carries the risk of losing the funds invested”. The same warning was made by UOKiK, which pointed out that the condo hotel market is not covered by the Developers Act, and therefore, in the event of the developer’s bankruptcy, buyers might irretrievably lose the money they have paid in. Marlena Kosiura believes that this is still a real danger. “In real estate, it is said that the most important thing is location, location and location, but for condo hotels, I would put the developer’s credibility first. Condo hotels are sold as commercial premises – with VAT of 23 pct – and are not covered by the Developers Act. So, if a client has paid money and the project is not built, there’s basically zero chance of recovering the money paid out. And apartments in condo hotels are definitely not cheap. The price per square metre of a fully equipped apartment is usually PLN 20,000–30,000. Meanwhile, the buyer usually pays 80 pct of the price of the premises as early as the shell stage, even though the highest development costs come in subsequent stages, such as the installations and equipment. If, for some reason, the developer declares bankruptcy at the shell stage, the owners will be left with just bare walls and a project that they don’t know what to do with,” she explains. “If the developer decides only to use its own funds, the risk of a hole appearing in the cash flow during the project development is quite high. So supplementing funding with, for example, bonds makes it easier to meet the completion deadlines,” adds Tatiana Piechota.

Vanishing percentages

Both the KNF and UOKiK have also repeatedly pointed out in their communications that the so-called “guaranteed profits” that developers were so fond of tempting buyers with, simply don’t exist. This was painfully demonstrated during the pandemic, when the pay-out rates, their timing and how they were settled had to be renegotiated with unit owners. “In the autumn of 2020, InwestycjewKurortach.pl prepared a report that clearly showed that most of the problems with disbursements were experienced by those facilities that had promised huge returns. And this has basically not changed to this day,” claims Marlena Kosiura. “Some operators have changed the terms of their contracts – the provisions on fixed profits have been replaced by payments based on the occupancy rate. I also know of cases where they have returned to a fixed rent model. And this turns out to be not much at all in comparison to the purchase price of three or four years ago, when the properties were much cheaper. Furthermore, accommodation prices have gone up a lot,” she explains. Also, there is no way investors could have failed to notice the dramatic change on the traditional long-term rental apartment market. Since last year, rents have been rising at an astronomical rate – so a profit of 7–8 pct for a condo apartment, even if it could be guaranteed, is no longer so tempting. “It should also be borne in mind that this percentage is often calculated on the price of an unfurnished unit without a parking space. So, for example, on top of the PLN 500,000 paid for the condo apartment itself, you have to add another PLN 200,000 for the furnishings and PLN 60,000 for the parking space,” adds Marlena Kosiura.

Capital export

Condo hotels are not only in competition for investment with traditional long-term rental apartments, they also have to compete with holiday home ownership in normal apartment buildings. For this reason, some buildings that were originally planned as condo hotels eventually become apartment buildings. “There’s still a lot of demand for holiday apartments. They also help the developer to avoid many problems, such as finding an operator or paying out profits or shares. Many people who had been considering purchasing condo hotel units eventually decide to buy normal rental apartments. And they also have the choice of a wide range of apartments in Polish resorts, or holiday homes in, for example, Spain. Polish developers are beginning to feel the effect of Polish capital going abroad,” says Marlena Kosiura.

According to Monika Tramś, the country manager of TM Grupo Inmobiliario in Poland, many property owners in the country say they are planning to sell their premises to invest in the eurozone. “They are trying to escape inflation, and also to diversify, which has become so important because of the war in Ukraine. We make sure that these are informed decisions that result from their love of Spain and its climate and culture. As a result, we provide buyers with trustworthy information about our properties, including on Spanish taxation,” explains Monika Tramś. TM Grupo offers holiday apartments in Spain, where it currently has 20 projects. During the pandemic, the company opened a number of regional offices. TM Grupo does not operate condo hotels, but the developer has an internal unit that offers serviced apartments throughout the year. According to the company, Poles are most interested in seaside apartments. “We have four offices outside Spain – in Poland, Sweden, Germany and Belgium. Poles comprise 20 pct of our foreign clients. They buy more than the Swedes, but at the same time, they are the most demanding group of buyers. In 2021, TM Grupo sold over 200 apartments to Polish people, which was our best-ever sales figure for Poland and we hope to achieve this again this year,” declares Monika Tramś.

Investing in honesty

Hoteliers point out that many condo hotel projects are not run according to the rules of good hotel management. The fact remains that it’s difficult to enforce compliance with the principles of good practice. “At the moment, the investors in the condo hotel market are highly dispersed. In the early days, there were two or three large companies, but the boom between 2017 and 2020 resulted in not only residential developers taking on such projects, but also others from outside the sector. This has, unfortunately, resulted in a lack of professionalism,” admits Marlena Kosiura.

On the other hand, the market has matured and investors have learnt some harsh lessons, so they now pay attention to investor references, rental safeguards, the developer’s financial standing and the number of projects that have already been completed. “Buyers understand all too well that those who have many years of experience in the hospitality sector will be the best at securing high profits for the owners,” argues Agnieszka Urbańska-Pucek. “When it comes to the market over the long-term, right now it looks really good. This can be seen from the number of projects that are about to be put on the market as well as from the investor interest, which still remains strong. However, it’s already the case that only the best projects are winning out and the competition is growing stronger,” she stresses.