CEE region Czech and Poland leading the way to PRS

There has been a growing, fragmented rental market in many countries, as private individuals invest in residential properties for personal investment purposes. This is largely because savings satin personal accounts are not providing any meaningful returns and the borrowing costs on a mortgage have been historically low in most markets. Many of these residential units are being rented out and in the meantime, values are rising, as sales prices per square metre continue to grow year on year. Coupled with the shortage of new supply in many markets and the impact of this activity, it is also fuelling this momentum, and making the dream of owning a home for many, seemingly impossible. And it is partially for these reasons that the PRS sector and interest from investors has also been rising.
Kevin Turpin, the CEE regional director of research at Colliers

In 2019, the highest overcrowding (based on the availability of rooms per person and the average household size) were in Romania (45.8 pct), Latvia (42.2 pct) and Bulgaria (41.1 pct), and the lowest in Cyprus (2.2 pct). The data suggests that the majority of households in Central Europe are more overcrowded than the EU average.

The last five years across CE have seen sales prices rising rapidly, partly driven by a shortage of supply, relative ease and low cost of debt, and the desire for people to invest, in an effort to earn more money on their savings than they would receive in the bank. There are also other factors at play, such as the shortage and rising costs of suitable land plots, drawn-out and uncertain permitting processes, and the shortage and subsequent rise in costs of both construction labour and materials. According to Eurostat data, the cost for constructing new residences in the EU has increased by 15 pct during the period 2010 to 2019. Among the CEE member states, the largest rises were in Hungary (47 pct) and Romania (46 pct). With all of these factors taken into account, many developers across the region are not tempted to deviate from the build-to-sell business model for individual units. From the stock of existing developer/investor-owned, multiple unit PRS schemes, the Czech Republic is quite far ahead with around 57,000 units, followed by Poland with around 4,500 units.

Indeed, PRS as an asset class is a relatively new phenomenon in CEE, and you certainly have less of it as you move farther east. Part of it is legacy-related: home-ownership was always extremely high in CEE and reflected a mentality that one needed to own one’s home. That is no longer necessarily the case. As demographics are changing and with prices steadily rising for development in congested areas with opportunities becoming scarcer, and many people being priced out of the market for home purchase, we expect this asset class to take hold in CEE.
Victor Constantinescu, a managing partner and co-head of real estate at Kinstellar

In the majority of markets, it is common for leases to be defined as long and short-term, with short-term typically being less than 3 months, but which can be up to 6 months. Long term is typically one year or more, which is obviously significantly less than the standard five-year leases seen in other sectors. In the PRS sector, one-year leases are most common and on completion, tenants will either give notice and move out, or extend for another year.

In the CEE countries covered in this report, there were no regulations restricting leases between private companies and individuals and there are no known plans to introduce such measures at the time of writing this report. Therefore, at the end of each year or lease term, landlords are within their rights to review rent, as no indexation is applied over a standard one-year lease contract. This can of course sometimes lead to sizeable jumps in rents depending on market conditions at the time.
Agata Jurek-Zbrojska, a real estate partner at Greenberg Traurig Poland.

Residential volumes across the CEE region have been rather limited and averaged out annually at just over EUR 200 mln in the past five years (as opposed to transaction volumes of more than EUR 60 bln in both 2019 and 2020 across the EMEA region).

This again has everything to do with the lack of standing product available on the market as opposed to a lack of investor appetite. In a few of the cases that we have seen and advised on in CEE, investors have entered the market through acquiring a residential developer or establishing a joint venture to secure pipeline and volume. This can be a great win-win scenario for some as it can help fast track both for sale and rental product by sharing the financing load.
Dorota Wysokińska-Kuzdra, a senior partner for CEE corporate finance at Colliers