Trust but verify

My brother, having worked in India for several years, recently came back to the UK to live in London. What he found there was that the only way he could rent an apartment was to pay for an entire year in advance as a deposit because, as he explained to me, he was considered as a risk to the landlord since he had no rental history. This all came as a surprise to me, because, when I left the UK shortly after completing university, the market was entirely dominated by private landlords who had no inkling of where their new tenants might have lived before. Although the rental market here in Poland is still dominated by individual landlords, some of whom buy apartments specifically for the future use of their still school-aged children, we are now seeing the Polish market becoming much more similar to that of the UK (institutionalised), with rental apartments being grouped together in portfolios of revenue generating assets. But landlords still feel the need to protect themselves from the risk posed by their tenants. I discovered this to my own cost some years ago when I was suddenly forced to find a new home, I was told by a (private) landlord that I had to provide the address of an alternative abode in the case of eviction. Personally, I thought this was ridiculous, as I wouldn’t have even been looking for an apartment if I’d had somewhere else to live. As for my brother, he’s now gone back to India.

Small, but growing fast

Nonetheless, the need for protection to mitigate the risks posed by tenants has led such companies as iExpert to offer insurance policies for rental apartments. However, as Anita Trochimiuk, the Digital manager at iExpert explains: “We currently don’t sell insurance to those who rent apartments and are looking for financial protection against unreliable tenants. We have simply ceased to sell this product – what we currently offer only includes tenant liability insurance. The purchase of this product is often required by renters. Thanks to this, they have a guarantee that in the event of damage to the apartments, civil liability insurance will cover the landlord’s claims against the tenant.” Nonetheless, it should be borne in mind that PRS accounts for a relatively small share of the rental market – only 1 pct of the total stock of around 30,000 rental apartments is managed by private companies, according to the ‘RE:PRS 2024’ report published by Dentons and Knight Frank. According to the same report, however, the market is set for rapid growth across Europe. “Alongside offices, logistics and retail, this sector is now regarded by investors as the most attractive. This is further confirmed by Knight Frank’s survey of 44 institutional investors active in the living sector in Europe, who manage EUR 70 bln worth of residential assets across the continent. Those responding to it collectively plan to invest an additional EUR 151 bln in the European living sector by 2027 – a projected increase of 115 pct on the EUR 70 bln invested to date,” reads the report. And there are particular reasons for international investors to covet a slice of the market in Poland, since here it is set to grow especially fast. The same report estimates that the housing shortage in Poland amounts to around 800,000 units. Moreover, due to the recent interest rate hikes, many people now prefer to rent rather than buy an apartment. “For a long time, renting a flat was more expensive than paying the standard mortgage rate for the same type of apartment. This situation went into reverse at the beginning of 2021 due to the increases in both interest rates and the prices for buying homes. In addition, the tightening of the rules for calculating creditworthiness since April 2022 has drastically limited the opportunities for borrowing money for first-time buyers. As a result, many have decided to continue or have even started renting apartments,” states JLL in its ‘Private Rented Sector’ report. In addition to all that, the housing shortage has been further exacerbated by the war in Ukraine. JLL writes in the same report that: “Although in H2 2022, a large number of refugees returned to Ukraine, over one million still live in Poland. From the demand perspective, one key fact is that the majority of refugees have decided to stay in the largest metropolitan areas, either within cities or in their surrounding areas.” The same report highlights the shortage of available accommodation in Poland: “As a result of demand outstripping the supply, the number of available rental units has decreased significantly, with March 2022 seeing the steepest drop. Between Q4 2021 and Q4 2022 inclusive, asking rents increased by 20–40 pct in major Polish cities, as the private market maintained an exceptionally low vacancy level of 1–2 pct.” Indeed, the European Bank for Reconstruction and Development (EBRD), whose loans are never based solely on commercial considerations, recognised the problem at the end of 2022, when it lent EUR 50 mln to Polish-based platform Resi4Rent PRS. According to the ‘RE:PRS 2024’ report, “the funds were provided under the EBRD Resilience and Livelihoods Framework and will be used to develop and operate a portfolio of rental apartments across the country with a focus on Warsaw, Kraków, Wrocław, Gdańsk, Łódź and Poznań – amid a chronic housing shortage exacerbated by inflation and the influx of refugees from Ukraine. This is the first case in which the EBRD has provided financing for the PRS sector in Poland.”

Outsourced to a start-up

Returning to the topic of mitigating the risk posed by unknown potential tenants, the first concern of any landlord is to ensure that they have the ability to pay. This is a task that almost all the PRS operators in Poland have outsourced to one particular company - Simpl.rent. As Piotr Pajda, the co-founder of the start-up explains: “Tenants undergo a three-step process that verifies their identities and income as well as their payment and credit history. In some cases, the process includes the additional step of checking their name against sanction lists, if required by the landlord. After the background checks are completed, the tenant receives a tenant certificate together with the final result and the results of each individual stage of verification. This certificate is also shared with the landlord.” He also explains that Simpl.rent largely has the market to itself at the moment because it is still rather small, and that the platform also sells insurance. “The tenant certificate was our first product – and we have been conducting tenant background checks since 2020. In 2021, we began partnering with the two largest real estate platforms in Poland, Otodom and OLX, who promote our verification standards. In 2022, we introduced insurance policies to what we sell, including tenant insurance, as well as an innovative form of rent payment insurance – which is the first policy of its kind in Poland. Our verification process has been improved over time and we work closely with our insurer (PZU) to meet its requirements. We are usually the only background check that our clients use and they do not request more information related to financial verification.” One client of Simpl.rent is Heimstaden, whose leasing policy is explained its head of letting and marketing communications, Izabela Stańczak: “We have a general policy of a one-month deposit and tenant liability insurance. Before signing a contract, we also ask potential tenants to undergo Simpl.rent’s verification process, which includes their identity, their payment and credit history as well as their earnings. We make sure that the process is carried out efficiently and respectfully. We also cover costs of the background check.”

White Star Real Estate is another client of Simpl.rent. “We work with Simpl.rent to verify the financial credibility of the potential residents of Elektrownia Powiśle Apartments in Warsaw. Simpl.rent verifies each client’s income and credit history. Passing this background check is a standard condition that enables us to sign an agreement with the client,” explains Aneta Cholewińska, the PRS senior leasing manager at White Star. But when it comes to insurance, she stresses that the company’s collaboration with Simpl.rent does not so far include insurance. Thus it appears that insurance is only a requirement with some landlords, but at this stage it is certainly not demanded by all. On its website, Simpl.rent describes itself as a UK-Polish company and, according to Piotr Pajda, the standards it promotes have been inspired by the UK rental market. “The UK has a well-developed rental market and we have been inspired by its approach and standards. For instance, tenant background checks in the UK are nothing new – a government survey conducted back in 2010 revealed that 73 pct of agents and 37 pct of private landlords require tenant screening. Data provided by OpenRent (a site for private residential landlords in the UK) shows that 92 pct of landlords perform such checks on their tenants. We also have British shareholders,” he reveals.

The operations of start-ups like Simpl.rent could represent the initial stages of a greater professionalisation of the Polish PRS market, which is still nascent and fragmented. But in the opinion of Piotr Pajda, his company is playing an important role in this process. “Considering that we work with almost all the PRS players, I believe that we add real value to this market. Our products are part of their renting process and are often integrated into their management software. The key products they use are tenant screening (tenant certificates), tenant insurance and rent payment insurance (coverage in the case of loss of rent or unpaid rent),” he explains. And for White Star, Simpl.rent’s verification is certainly a crucial step that needs to be taken before a contract can be drawn up with a tenant. “If our company is unable to verify the financial capability of a client through Simpl.rent, then this is a major warning signal for us. However, there are different ways we can ensure the security of such an agreement, among others, by insisting on a higher deposit, the payment of a certain amount of the rent upfront, or the declaration of an enforcement submission (commonly known as a ‘777’). We analyse each client on a case-by-case basis,” insists Aneta Cholewińska.

Don’t worry, be happy

Perhaps landlords’ anxieties about the possible non-payment of rents are overblown. According to the ‘Private Rented Sector’ report published by JLL: “To date, there have not been any cases of evictions in institutional private tenancy stock. Most landlords currently use either a contract for the provision of units in non-residential premises or an institutional lease contract. All professional landlords are using thorough screening methods and selecting the most reliable tenants. In the case of rent arrears, these problems are usually effectively solved through negotiations.” On the other hand, the willingness of institutional investors to negotiate might also be a reflection of the relative difficulty of legally enforcing evictions. As the ‘PRS: RE’ report by Knight Frank and Dentons points out: “Investors operating on the Polish housing market have major concerns as regards the stability of rental agreements. For many years, the lack of appropriate legal regulations posed significant risks for the landlord in cases where tenants fall behind on their rent payments and do not want to move out voluntarily. It might take several months to complete a standard eviction procedure, which includes obtaining a court order and summoning a court enforcement officer. And then there is a reduction in the expected rental income, the additional costs, and the hassle involved in all the further legal wrangling to recover the arrears.” However, the same report goes on to state that recently enacted legal regulations provide an easier framework for evictions.

Despite how unpleasant it might be to throw people out of their homes, PRS landlords certainly cannot be portrayed as the bad guys in this situation. When I brought up the story of the exorbitant terms my brother would have had to agree to for renting an apartment in London to Izabela Stańczak of Heimstaden, she insisted: “We welcome tenants from abroad and understand that many of them won’t have a rental history – not only in Poland, but also where they come from. At Heimstaden, we value being in a position to contribute to society, while growing in a responsible and sustainable way. Wherever we operate, we strive to be a reliable partner for our tenants, which is why we try to make the entire letting process transparent. Our tenants receive clear contracts and constant information about anything affecting their situation. We show our clients respect and make sure they feel safe and secure at all times.”