Plan B

To get the US residential market moving, the government has prepared 10,000 green cards for all who buy properties from 35 accredited estate agents. In our part of Europe, developers must deal with a glut of unsold apartments without any outside help

Zuzanna Wiak, Mladen Petrov

The penny has finally dropped: the crisis is upon us and more and more homes are waiting for buyers. According to RedNet, there are 3,000 new homes in Warsaw standing empty. Analysts from the REAS consultancy, on the other hand, have calculated that 900 finished homes are without owners in Warsaw, while there is a total of 3,100 in the five largest Polish markets: Warsaw, TriCity, Poznań, Wrocław and Kraków. As a result of the overall difficulties people are now having in obtaining loans or depositing cash in high-interest accounts, a rising number of Poles are putting off buying new homes until things improve. Marketing campaigns targeted at potential customers that can even throw in a free car or Caribbean holiday with the purchase of a home, are now proving less effective and profitable for developers.

Backs to the wall

Basically, developers are now looking for new ideas to cash in on unsold properties. One possibility might be to rent out unsold homes, with J.W. Construction being among those leaning towards such a solution – in this case for the Warsaw Górczewska Park project (around 900 apartments), although no concrete plans have yet been made. Market analysts have also been speculating about whether Orco Property Group will possibly decide upon such a step for its Feliz Park development (40 apartments, with the end of construction planned for Q3 of the current year and with only 8 apartments currently sold). Company officials have stated, however, that it is still too soon for such decisions to be made.

Łukasz Madej, head of ProDevelopment, admits that in the present market situation developers have their backs against the wall. The weak demand has been added to by the fact that the speculative investors who often buy residential projects are currently nowhere to be seen. A developer has two solutions to choose from at such a grim time: either to sell the apartments cheaply to investment funds or to rent them out.

Łukasz Madej adds: “The lack of any other way out other than, for example, renting out the homes, stems from the fact that developers, at the most three months after the construction phase ends, must repay the bank loans they took out for the investment. If they fail to do this, the banks demand a hard times ‘Plan B’ from them. Renting out homes was the last thing developers had in mind, but the scale of the crisis means that the most important thing is liquidity, and revenue from rents allows loan interest to be paid, as well as the costs of administrating an estate.” He goes on to remark that the main problem in Poland is that apartments are delivered in an unfinished or so-called ‘developer’ state. “In such circumstances, companies must acquire additional finance to finish the apartments to be rented, with the banks unwilling to grant further loans. If the companies find it impossible to obtain the required means, then the banks take possession of the project and then sell it at prices 20 pct below the market average.”

However, internal reorganization of the company has to take place before it can switch from selling a residential project to renting it out. Accordingto Łukasz Madej: “A homes sales office within the area of the project will have to be changed to a homes renting office.”

The Latvian way

Latvian developers are also having to cope with serious problems, as the good times of rising demand and prices now fades into a distant memory. According to Latvian consultancy company Immostate, in Riga alone there have been around 3,750 apartments completed since 2004 that are remain unsold. And another 1,500 homes from temporarily frozen projects must be added to this number. 
In Lithuania, according to Ober-
Haus, 4,500 newly completed flats are waiting to be bought.   
Edgars Buksevics, Immostate’s development director, identifies three possible ways out of this situation. The recession and rising unemployment are creating credit repayment problems for more people. This means one of the outcomes will be  that the banks will have to repossess more homes this year than in 2008 when 175-225 homes were taken over, of which around 130 have already been put up for sale, according to Immostate. In spite of the attractive prices, purchasers are few and far between. Edgars Buksevics predicts that: “In such a situation, Swedbank, SEB and Nordea banks are wondering what to do. There is currently some talk that they may create dependent companies to deal with facility management and renting such homes.”

The full monty

As in Estonia, Latvian developers are wondering how to change strategy and focus on home renting with the possibility of purchasing the property at a later date. Creditors will first have to agree to such a move. Edgars Buksevics claims that: “To judge by all the signals, such consent may be given. In such a case, to promote the renting option, developers may take 50-75 pct of a monthly rent as an instalment for the purchase of an apartment 2-3 years after renting. We regard this as the best solution today.” 
  Despite the Latvian economy’s current pitiful situation, Mr Buksevics is of the opinion that it will find a way out of the mess in the longer term. The present is a good time, for instance, to acquire entire apartment buildings at greatly reduced prices. Funds or private investors could make use of the complex situation to rent out apartments and sell them when times improve to those who currently rent them.

Hotel as a home

Another option for developers is to change residential projects into apart-hotels. This should be carefully studied, especially in tourist locations where selling apartments is more difficult than in large cities. The Warsaw Arche company has decided to take this route, and is not only selling but also renting out the units in the Puławska Residence Warsaw apart-hotel project, which is being built at the junction of ul. Puławska and ul. Pileckiego. The apartments are between 20 and 50 sqm and equipped as standard flats with kitchens, bathrooms, living rooms and bedrooms.

On the heels of the investors

Institutions planning package purchases of homes may prove to be the saviours of development companies. One such example is the Wojskowa Agencja Mieszkaniowa (Military Housing Agency or WAM), which has already purchased several hundred flats from developers. Transactions involving WAM include one for two tenement buildings in Warsaw’s Białołęka district bought from Dom Development, with the military paying PLN 64.4 mln for 127 flats. The agency has also bought several dozen flats from Polnord and Agrobex. It is planning to purchase apartments this year in other cities with military garrisons, such as Lublin, Kielce, Koszalin, Rzeszów, Opole and Zamość.

Paweł Kossecki, the president of WAM, declares that: “In 2009 we intend to purchase and build another 1,400 to 1,500 homes (WAM and Wojskowe TBS). We plan to buy around 198 flats from developers, in transactions that were already partly agreed last year. When I