It may be a mere footnote in history, but the trade union movement Solidarity, which swept to power in Poland just prior to the fall of the Iron Curtain, was founded in Gdansk. So it is perhaps fitting that one of the clearest signs of capitalism in this country of nearly 40 million people can now be found in the same city that gave birth to its post-communist order.
On the perimeter of Gdansk's old city, a new private residential development may soon be sprouting up on the banks of the Motlawa River. The project, which is being financed by a joint venture between Cypress Grove International and Pirelli Real Estate, will come complete with penthouse suites offering views of the city and river, as well as the marina below, where residents will be able to moor their boats. Last month, Poles looking for a new home apparently began reserving some of the 270 apartments, even before the project has been granted full development approvals.
Gdansk, located on the coast of the Baltic Sea, may be the birthplace of Solidarity, but it is only one of many cities in Poland attracting residential property investors. Further inland, you can add Krakow, Poznan, Wroclaw, Katowice and Lodz to the list, in addition to the most active market of them all, Warsaw.
Salvatore Ruoppolo, Pirelli's head of business development for New Europe, says that four of his five current projects are in Warsaw, but he adds that Pirelli is definitely looking at Krakow and Wroclaw. “All the cities of Poland are very interesting,” he says.
Ruoppolo explains that there is a “social phenomenon” occurring in Poland as people living in crowded Soviet-era housing blocks look to move into larger apartments. In Warsaw, he says, the average size of older flats is approximately 50 square meters, giving each resident a living space of approximately 20 square meters compared to the average of 35 square meters in Western Europe.
“These people want to buy new flats and they want to buy bigger, bigger, bigger,” he says.
Much of Poland was destroyed during the Second World War and much of its housing stock was rebuilt during the Soviet era. However, those dreary monolithic residential blocks are gradually giving way to Western-style accommodations.
According to the Polish Ministry of Infrastructure, the country faces a housing shortfall of approximately 1.5 million apartments, a figure that may even be understating the problem. According to a report by Ernst & Young, Poland's housing need could be as high as 2.5 million units.
Nowhere is the shortfall felt more keenly than in Warsaw, where the vast majority of development is taking place. Each year, approximately 20,000 people move to the city from surrounding villages in search of better paid jobs, a university education and a higher standard of living.
“Warsaw is currently the hottest market,” says Nir Netzar, chief financial officer of Engel Group, a property development firm run by Israeli Jacob Engel. “Current demand is 80,000 residential units. It is an unbelievable market. There's a lot of construction going on.”
Charles Graham, principal at Europa Capital Partners, observes that sales of apartments before completion represent between 70 to 90 percent of the market; in one area of Warsaw, it is 100 percent.
According to research conducted for Europa, the rate at which demand is outstripping supply can be seen in the run-up in housing prices over the past five years. In 2001, the price of a Polish flat was 3,000 Polish zloty per square meter (€783 per square meter). Prices remained flat in 2004, the year Poland joined the EU, but then rose sharply to 3,500 zloty by May 2005, 4,300 zloty by March of this year and then 4,700 zloty this August. At an average size of 60 square meters, the average price of a house is approximately €72,000, which is still cheap by Western standards.
Apartments at the higher-end of the spectrum have risen in value quicker, but activity is slower relative to more affordable projects. For example, the price for a top-end apartment rose from 6,800 zloty per square meter in 2001 to 11,250 zloty today.
Poland is drawing comparisons with Spain and Ireland, which both saw an explosion of housing activity after joining the EU. In Spain, the increased affluence of its 40 million people, as well as social demographic changes such as higher divorce rates and a greater number of unmarried adults, led to soaring demand for new apartments. In Poland, which has the same population and Catholic culture as Spain, rising prosperity is also leading to the increasing existence of one- and two-person households.
“What we are really seeing is the growth of the middle class,” says Graham. “It is the formation of the middle class that creates big movement in residential markets, which we saw in Spain and Ireland.”
Poland has high unemployment, large emigration and an agricultural economy, so monthly wage costs are relatively low at €700 a month. But they are rising in accordance with the wealth of the country. GDP increased 153 percent between 1995 and 2003 and GDP in the province that includes Warsaw has risen 213 percent.
Another player active in the Polish market is Heitman, which has entered into condominium developments in joint ventures with both Engel and Hines, the US developer and real estate investor. “The condominium market in the US has slowed down significantly but this market is being driven by different things,” says Gordon Black, European managing director at Heitman. “In Poland, there are 38 million people so there is deep demand. In Warsaw and Krakow there is a lot of construction.”
Netzar adds that while Engel is primarily operating in Warsaw, it has its eye on other cities. “Krakow is a good place and there are other major cities where the residential boom has already started,” he says.
Krakow, located in the south of Poland, is the country's second largest residential market. And the city, with a population of approximately 750,000, has maintained its historical character since it sustained limited damage during World War II. In the intervening years, a number of industries have gravitated to the city, attracting workers from surrounding areas. According to real estate investors, Krakow is one of the few places in the country where there is demand for true luxury apartments. According to brokerage firm Knight Frank, housing prices in the city have climbed 10 to 20 percent in the last year, which is comparable to many parts of Warsaw.
In addition to Gdansk, Krakow and Warsaw, a number of other cities in Poland present compelling opportunities, including Poznan and Wroclaw, each with populations of approximately 600,000 people.
The cities of Lodz and Katowice are also generating interest, the latter due in part to a new highway that will soon connect the region to Germany in the west and the Ukraine in the east. A number of companies have located their headquarters in Katowice, which could also present one of the next waves of real estate opportunities. And Lodz, where large companies such as Philips and Dell have production plants, is generating interest among foreign homebuyers, according to Michael Clay, a British estate agent who specializes in Poland.
A RISKY MORTGAGE
But it is not just the desire for better housing, rising wages and an overall improvement in prosperity that is leading to the residential boom in cities across Poland. The capital markets are playing a role as well.
“The biggest stimulant was the availability of financing to the consumer,” says Heitman's Black. “Only five to six years ago, people would have to put up all of the equity or borrow on unattractive terms where the fixed payments were very high. But that market has changed. You can now get Western-style loan-to-value ratios.”
The Polish mortgage market was worth approximately €6 billion at the end of 2003, but by the end of 2005 it had grown to approximately €8.5 billion, according to Europa Capital.
The market has been fueled by the acquisition of domestic banks by foreign institutions. Approximately 30 banks in Poland now provide loans and investors believe there is reason to expect further growth. Figures suggest the amount of mortgage debt per capita in Poland (€280) remains significantly lower than in the Czech Republic (€644), which joined the EU the same year. To underline the potential growth in Poland, mortgage debt per capita is substantially higher in the UK (€20,835), Spain (€9,000) and the EU 25 (€10,000).
But even as the market evolves, there are risks. As in any market, but even more so in one with an immature mortgage system, interest rates are a primary concern. Although rates have actually fallen in recent times, there has been a trend of rising rates across the Eurozone.
“Obviously if interest rates rise that will squeeze a number of people who want to come into the market and we are well aware that the buoyancy of this market will be sensitive to interest rate volatility,” says Graham.
A separate but related issue is that many Poles are financing their houses using mortgages denominated in euros, not Polish zloty. So too are a number of foreign homebuyers, particularly the British, Irish and Spanish, who have been actively snapping up apartments across the country. (Justin Figgins, head of international business at British online property website Rightmove, said searches on its website, which list around 100 Polish properties primarily in Warsaw and Krakow, increased from 4,500 in July to 7,500 in October.)
“Interest rates, relatively speaking, are high if you take out a mortgage in zloty,” says Clay. “But there is the option to take mortgages in euros and, for investment purposes, mortgages in Swiss francs. There are more Poles with Swiss franc mortgages than zloty.”
While such financing mechanisms are beneficial, it highlights the degree to which the Polish mortgage market remains in its infancy. And it also suggests that a lot of buyers, be they foreigners or Polish residents, are subject to interest rate fluctuations outside of Poland itself. It also presents a currency risk for those in Poland, who earn their paychecks in zloty, but pay off their mortgage in a different currency.
Poland's central bank is aware of the risk and it remains concerned that approximately 62 percent of residential mortgages were taken out in hard currencies. It has also been spooked by events in Hungary where there has been a run on the local currency due in part to financial mismanagement of the government. The fresh fear now is that Hungary's problems will somehow spread to Poland. To try to limit these problems, some banks are demanding that homebuyers take out credit insurance to protect against potential currency issues.
While there is increasing financing available for the individual homebuyer, debt financing is still a problem for developers, suggesting that private equity firms could play a role in supplying capital to domestic players. In the past, developers were only able to finance projects by selling apartments in advance, which restricted the size and scale of their housing schemes. Today, some developers, backed by deep-pocketed private equity firms, have plans for huge projects incorporating thousands of apartments.
Unlike other parts of Western Europe, such as Germany, which has seen huge swaths of apartments sold to the likes of Fortress and Terra Firma, the residential market in Poland is all focused on development. In much the same way that Solidarity revolutionized the way the Polish people governed, real estate investors are hoping to revolutionize the way they live.