Even though the first institutional investments into apartments for lease were made as early as 2017 (with Catella Real Estate’s acquisition of 72 apartments in Warsaw’s Złota 44 high-rise luxury residential building), the private rented sector (PRS) arose as an investment asset class (alongside commercial, industrial and retail) as late as 2020. The pace of transactions picked up rapidly in 2021-2022. Investments in this sector concentrate mainly in apartments, while alternative investments, such as student housing or senior housing remain extremely scarce. This is driven by the structure of the Polish market for these alternative classes, which are mainly sourced by the public sector (municipalities or public universities).
Most PRS transactions follow a forward purchase/forward funding model, with the investor committing to finance and eventually acquire, a pending (or planned) residential project. Some transactions involve block acquisitions of already existing apartments, but recently the number of these diminished. Investors’ preference is an acquisition of entire, stand-alone buildings (or complete residential project phases), as Polish co-ownership rules are not perceived as fully aligned with institutional preferences. This highlights one of several problems indicating that the Polish legal (and tax) system does not allow for capitalising on the full potential of this asset class yet.
So far, the number of apartments offered for rent by the institutional sector is by several orders of magnitude lower than on the private market. This reflects on Poles’ long-standing preference to purchase or inherit rather than to lease an apartment. However, this preference is already changing and the pace of change is expected to pick-up. The reasons lie mainly in rising interest rates, which increase the cost of financing and decrease the availability of mortgage loans to traditional apartment buyers. This trend decreases, moreover, the pool of typical customers for residential developers. Lastly, none of the announced government plans for increasing the availability of apartments actually achieved any meaningful success, despite efforts to re-enact and re-shape these schemes, both involving private developers as well as efforts to substitute private developers with public-sector operators. These trends may induce traditional apartment buyers to become apartment tenants. On the other hand, residential developers may now become more interested in institutional transactions than ever before. This may apply in particular to the developers who are financed by bonds or bank loans, which at some point will need to be repaid or re-financed.
There was no transaction yet on the Polish market regarding an existing and performing PRS portfolio. These portfolios are still an investment product under development. This indicates that the Polish market is still in its infancy. Moreover, the rents in the PRS sector are denominated in zlotys (although some operators have announced that they plan to experiment with euro-based rents). Currency risk and lack of sufficient analytical material render attributing market value to such portfolios difficult.
Even though professional landlords are scarce, they are already setting a standard that private landlords may find hard to match. The rents in existing PRS schemes in major cities rise quickly, which may be an important factor for modelling a future portfolio transaction. It remains to be seen to what extent this trend is sustainable in the future. On one hand, an important contributory factor to growth of the rental market is the influx of around two million refugees from the war in Ukraine, most of whom found their way into Poland’s major cities. Their presence has already changed some of the local apartment leasing markets through the increase of rent levels and rapid take-up of available apartments of all (premium and non-premium) classes. On the other hand, rising costs of living, including rents but also the overall prevailing inflation, may push some customers out of the premium rent market, currently occupied by institutional landlords. From the investor’s perspective, some focus will be required on lease agreements and adequate protection mechanisms to be established within the legislative framework already limiting allowed security deposit rates and enforcement of surrender of leased premises.
Even though Poland’s residential market suffers from a shortage of supply, not only in apartments-to-own but also in apartments-to-rent, not enough has been achieved in fact to release the land for residential developments. The zoning law was amended as recently as December 2022, but there is still no clearly defined designation of development land for PRS purposes. Despite the general relaxation of zoning provisions for residential purposes, there is still ambiguity concerning whether, and if so, what kind of PRS investments may be made on the basis of commercial zoning. Moreover, the zoning plans enacted by particular municipalities add to the general confusion, as they contain divergent definitions of functions allowing for residential developments and investments falling within commercial zoning but with potentially residential components. Some hope still lies with the planned legislation aimed at relaxing the rules for converting obsolete office or retail buildings into residential assets.
Despite the challenges, the rise of the PRS market seems inevitable, unless politics come into play. Following the series of PRS forward transactions, government officials announced plans to intervene in the market by either prohibiting or additionally taxing block apartment sale transactions. It remains to be seen whether, when and in what shape will such limitations be enacted. In practical terms the actual impact of institutional transactions on the residential development and rental market still seems rather marginal and this will most likely not change in material terms within the next three to five years. A premature legislative intervention may however stifle the promising growth phase. Unfortunately, the intervention plans seem to be gaining more traction recently than the (already dropped) plans for creating Polish REITs, which could contribute to the competitive landscape of this (as well as other real estate) markets or to the further relaxation of the zoning law.