Second hand competition

“Secondary housing is no danger to the primary market,” analysts keep telling us, repeating the mantra that they are complementary segments. But are they really?

The Polish real estate scene during this year’s rather drowsy summer was awoken from its slumbers from time to time by news from the residential market. A whole host of analysts, journalists, developers and estate agents wondered what would happen in the housing sector in the second half of the year. But since the crazy surge in prices of tens of percent annually in 2005, 2006 and the first half of 2007, when queues snaking out of sales offices and down the street was a common sight, things have started to cool down. The rather nervous reactions to any suggestion that the secondary market might provide serious competition could be seen at the half-year summary meetings of developers – especially in Warsaw, where investors are the most active. And any talk that foreign and particularly Polish investors are now selling homes bought speculatively under the 10/90 system (10 pct paid on signing a contract, the rest on delivery) was received with bitter indignation.

When analysts are proved wrong

Leszek Piotr Nałęcz, Dom Development’s member of the board responsible for finance, stresses that: “The real demand for new homes has been diminished by those bought up earlier by investors who now want to cash in on their profits. Analysts who identified the phenomenon one or two years ago underestimated its scale. It now appears that we have to compete for the same customers.” At Dom Development’s half-year summary conference, the Warsaw developer – which has the majority of its projects located in the capital – also told us that several of the company’s projects are to be put on hold. Other developers, including J.W. Construction, are also cutting back on their home sales forecasts. L.P. Nalęcz told us he had contracted advisory companies to draw up analyses which would accurately establish the number of homes which would originate from what we might term the ‘primary-secondary market’. He wonders: “We are now fully aware that estimating this pool to be around 10 pct of the total – i.e. around 2,000 assuming customers can choose from about 20,000 offers on the Warsaw market – was much too modest. We have no idea what the real situation is. We would also like to know just how long they will remain on the market.” Again, analysts differ as to whether we will have to see in the next few months if the market manages to ‘clean itself up’, or whether it will last into next year. Robert Chojnacki, the president of the board of RedNet Property Group, thinks the reserve of housing bought speculatively should be sold off by mid-2009.

Speculative flood

The Reas residential consultancy estimates the number of homes on offer on the primary market (sold from developers’ sales offices) to be around 15,000 in Warsaw. There are also around 4,000 speculative flats already in existence and 3,500 under construction looking for purchasers, which means they amount to 50 pct of what is offered on the primary market. The president of the board of Reas, Kazimierz Kirejczyk, adds that: “The number of speculative purchases of homes to be finished in 2008-2010 is surely larger, probably amounting to about 10,000, which means that around 6,500 might gradually appear on the market in the next few years.” On the other hand, RedNet estimates that around 6-8,000 flats have been bought as investments in Warsaw.

Homes purchased as investments have also flooded the markets of Poland’s other large cities. The number of speculative flats in Kraków which already are or can be offered for sale within the next year or so is estimated to be about 3,500, with around 3,000 homes in the TriCity and 1,500-2,000 each in Wroclaw and Poznań. A Reas official told us they amount to around one half of the year’s forecast for new home sales.

Two faces of the secondary market

The primary market has a competitor, although perhaps somewhat weaker in projects completed in shortly after 1990. And flats built earlier, in communist Poland and with the technology of the time, today suffer the most in terms of falling value. According to Szymon Jungiewicz, head of analysis for the Emmerson agency, which sells flats and houses on both the secondary and primary markets: “We are picking up signals indicating that a slump on the primary market is increasing customer interest in the secondary market. With the exception of Warsaw, second-hand home prices are lower than those for new homes bought from developers which, in addition, usually deliver homes in an unfinished state. Location has a fundamental role to play when a person buys a flat and just wants to live and settle down in it. New are projects often built on the outskirts of the city, where there is a poor transport and entertainment infrastructure, and without the necessary shops and schools.”

Purchases are usually financed by mortgages. And there is yet another surprise that is generating some optimism – the total amount of debt taken on by Poles for this purpose rose by a record-breaking PLN 5.2 bln in July. The previous record was set in May, when its value rose by PLN 4.3 bln. Around 5 pct of the total is taken up by refinanced loans. Paweł Majtkowski, a financial analyst at Expander Advisors, reveals that: “According to our data, 16 pct of existing loans are for primary market purchases – with the rest being for the secondary market. A year ago these figures were 19 pct and 81 pct for the secondary market. Although they are more cautious in the wake of the US credit crunch, banks are still quite open to individual customers, since they are competing and fighting for every percentage point of market superiority. And spice is added by a number of banks, for example Allianz and Alior, which have announced that they will now be focusing mainly on mortgages.”

A bit uncertain

Stability, although slightly in the red – this is how analysts are characterizing the price situation on the Warsaw market. According to a report from Szybko.pl and Expander, the average sqm price has been around PLN 8,800 for several months. It stood at PLN 8,797 this July, 9,098 in January and last July it was PLN 9,068. The data collated by Emmerson reveals that the average price in the second quarter was PLN 9,608 – around PLN 400 below that of the first quarter of the year. Slight falls of around PLN 200 were also recorded in Łódź down to the level of PLN 4,560. Szymon Jungiewicz claims that the value of flats built out of prefab slabs in poor locations is also falling, which puts even more downward pressure on the average price. The prices are those offered tend to differ by no more than 10 pct from the final transaction prices, according to Pawel Majtkowski of Expander.

Houses, especially small buildings, took pride of place in recent months. Prices have started climbing since their values have fallen in relation to apartments. The choice was simple for those who could choose between an 80-100 sqm apartment near a city centre and a house of 150 sqm in a poorer location, but of comparable price: the house won. Research undertaken by Szybko.pl and Expander reveals that the value of a 150 sqm house in Warsaw rose 44 pct over the year, by 57 pct in Wrocław, 21 pct in Poznań and 7 pct in Kraków, with the respective prices being PLN 1,030.000, PLN 810,000, PLN 640,000 and PLN 650,000.

Exorbitant prices, rising rates of interest and the more cautious attitude of the banks in terms of loan policies are the principle reasons why the renting out of homes has come back into vogue. Rents are expected to rise by around 10 pct in Warsaw, 10-15 pct in Kraków and 5-10 pct in Poznań during the next few months, forecasts Szymon Jungiewicz.

Starving Poland

There is still some way to go before we have a crisis on our hands. Collapse would also be an incorrect term, but it is not easy to find an appropriate word to describe the situation on the Polish residential market. Developers, analysts and even customers are holding their breath, waiting for what September and October hold in store. Will the crisis of recent months move to the sidelines, as some journalists and analysts expect, or will the situation stabilize as developers are still maintaining? All in all, there is one indisputable fact: the market still requires around 1.5 mln homes, and that must provide a great deal of scope for optimism. ν