With a shortage of housing estimated at about 1.5 million units, Poland is among the most promising housing markets in Europe.
With a shortage of housing estimated at about 1.5 million units, Poland is among the most promising housing markets in Europe. The markets in the largest Polish cities show a clear imbalance between supply and demand. Consequently, over the past two years both housing construction and prices have grown more rapidly than before. At the same time, this is a diverse market that varies considerably from one city to another.
Construction projects, especially those undertaken by developers, are concentrated in the six biggest conurbations. About 32 percent of all new apartments built by developers in 2005 were in Warsaw, followed by 29 percent in Cracow, Poznań, Wrocław, the Tricity of Gdańsk, Sopot and Gdynia, and Łódź put together.
While Warsaw remains the country's best developed housing market, other cities have reported accelerated development since 2005. Today Wrocław is the most dynamic market outisde Warsaw, while the highest average prices are reported in Cracow. There has been a revival in smaller centers such as Olsztyn, Rzeszów and Szczecin.
In Warsaw and Cracow, 99 percent of housing is sold before a project is finished. In other cities this index ranges from 80 to 90 percent. Developers increasingly accept reservations for apartments long before these are built-when they are still in the process of arranging formalities involved in obtaining a construction permit.
Buyers looking for a new home usually make their purchases in areas that enjoy high prestige, good transport links and lots of greenery. Even so, due to the high demand and limited supply of new units, buyers also snapped up homes that only partly met these criteria.
There are many developers in Poland, but most of them operate locally. Few developers other than multinationals and exchange-listed companies decide to invest in several cities at once. However, there is a prominent trend toward consolidation on the market.
Warsaw
Warsaw is the largest city in Poland, with a population of 1.7 million, or more than 2.7 million counting the entire metropolitan area. The Polish capital is the main economic center and the chief labor market. Unemployment here is the lowest in the country, at about 4-5 percent. At the same time, Varsovians earn the most and have the highest purchasing power. The city's main problems include traffic jams and a shortage of good roads and air links between Warsaw and other major cities in Poland and abroad. Since mid-2003 demand has clearly outstripped supply on the Warsaw market, and this trend has intensified from mid-2005. The reason is growing demand from people buying homes, both for their own needs and as an investment, coupled with a slow growth of supply.
The demographics of Warsaw is certainly conducive to demand. Almost half the residents are aged under 40. Every year a sizable group of baby boomers enters the job market. Another baby boom is expected around 2010-2012, which will lead to increased demand for larger apartments and houses.
The situation on the local labor market, already quite good, is improving visibly. This is reflected mainly in the growing number of employed, but the unemployment rate is falling as well. Demand is also fueled by a large group of university students in the capital. Given the good prospects for economic growth, the migration of young people to Warsaw should grow markedly in the coming years.
The fastest demand growth over the past few months has been among speculative buyers, who buy homes only to sell them before construction is completed or treat them as an investment, planning to lease them out in the future. A major role in this group is played by foreign investment funds and private buyers from Britain, Ireland and Spain.
As prices grow rapidly, the price-to-income ratio is changing to buyers' disadvantage, representing the key factor that limits demand.
The number of housing projects in progress has grown greatly from 2003, when developers and housing cooperatives started construction of just 5,200 units. It is now comparable to that recorded in 2000, the best year of the decade. However, supply has been insufficient to meet demand. One of the major factors limiting supply growth is the poor efficiency of the Warsaw administration, the lack of local zoning plans and protests that slow down the process of obtaining construction permits for new projects. Existing zoning plans cover just 14 percent of the city's area, which greatly limits the supply of land and lengthens the project preparation process. The huge surplus of demand over supply has led to unusually rapid price growth. Prices are rising 20-25 percent annually, though this rate has slowed down lately.
The total market value of new housing units offered for sale in the Warsaw conurbation in 2006-2007 is estimated at zl.14 billion. Contrary to expectations, consolidation in the sector is not progressing very fast: the two largest companies are approaching a total market share of 16 percent, but the market is still heavily fragmented. In 2006 the total number of developers was the highest over the past few years, and new companies are appearing all the time, established by both Polish and foreign entities. More than 40 percent of companies present on the market in 2001-2006 completed or carried out just a single project, and their total market share is estimated at about 9 percent.
Thanks to rapid price growth and limited supply, the high profitability of developer operations has grown even further in the past year, despite the fast growth of land prices and construction costs, exceeding the inflation rate. Since a major increase in supply can be expected, together with the still rising land prices and construction costs, profitability is expected to decrease over the coming months, though it should remain attractive. Expected gross profit margins for typical projects reach 25-35 percent, while the return on capital is 150-250 percent. The actual rates are often even higher thanks to the possibility of raising prices in the course of a project. Overall, developers enjoy more attractive profitability rates than other segments of the Polish real estate market.
The great majority of people declaring their wish to buy a home in Warsaw are young. The average buyer is aged 31, and this has decreased since 2003 by 2.5 years. More than half (58 percent) are aged 26-35. These are usually people with an above-average income, often married, living in rented accommodation. Almost one in four prospective buyers (23 percent) is 18-25 and has lived in Warsaw no more than five years. Over half (57 percent) of this age group are single, of which one in three still lives with their parents. Seventy-nine percent have no children, and among them just 14 percent plan to have a family anytime soon.
The most popular districts are Mokotów (36 percent), Ursynów and Bemowo (24 percent each) and Żoliborz (16 percent). Bielany and Ochota are also attractive. Compared to the previous survey, in absolute terms, the districts of Ursynów, Białołęka and Wilanów have lost popularity. On the other hand, Praga Południe and Piaseczno have gained.
Prospective buyers of new housing in Warsaw say they want to buy apartments in taller buildings and with a larger number of units per floor than they did in previous years. Almost every second respondent (49 percent) prefers several-story buildings (four to seven floors, with an elevator) and this is a substantial increase compared to previous years. Buyers are also more inclined to accept a larger number of neighbors using one staircase on the same floor. This greater acceptance of taller buildings and more apartments per floor, meaning less coziness and less privacy, is probably related to price attractiveness and the specific nature of the currently offered range.
Medium-sized apartments are still the most popular-almost half the respondents plan to buy an apartment of 46-60 sq m (48 percent). The next preferred group are small apartments (up to 45 sq m), which are sought by almost a quarter of the buyers; this marks a substantial increase. Investment in real estate for rent is one of the most interesting and most profitable means of long-term investment, bringing income from monthly rent as well as a higher price for a property when it is sold.
Planning such an investment in Warsaw, a buyer needs to be aware of the differences in rent depending on location and apartment size. Location is a major factor affecting rents in Warsaw. The average monthly gross asking rent per sq m of a rented apartment ranges from about zl.20 in outlying Wesoła and Rembertów to more than zl.45 in the central district of Śródmieście. For Warsaw as a whole, the average asking rent is zl.39. Only three districts exceed this average: Śródmieście, Wilanów and Mokotów. In the case of Śródmieście and Mokotów, the high average rent per sq m is the effect of large demand in the popular apartment segment due to the small distance from the center. Wilanów, on the other hand, despite its great distance from the center, is perceived as a prestigious district. Another reason for high rents in these districts is the large share of luxury-standard apartments in the offered range (11 percent of offered accommodation in each district).
On the other end of the scale are Białołęka, Wawer, Wesoła and Rembertów-districts with practically no luxury segment, and, given their substantial distance from the center, not attractive locations for tenants from the popular segment.
The greatest number of apartments for rent have two rooms (39 percent). There is a general trend that the more rooms there are, the higher the rent per square meter, one-room apartments being an exception.
Relatively high rents (zl.43/sq m on average) are asked for apartments of up to 30 sq m (94 percent of these are one-room units). The largest number of such apartments are offered in Śródmieście (74 percent). As the space grows, the rents go down. The lowest rents (zl.36/sq m on average) are asked for 40-70 sq m apartments. Once apartments cross the 70 sq m barrier, the rents per sq m start going up again.
The Warsaw rental market is at a stage of stability, if not stagnation, at present. There is a noticeable surplus of supply of apartments, especially in the luxury segment. The capitalization rates that can be attained from renting the great majority of newly built housing units in Warsaw are estimated at 4-5 percent (before tax).
Cracow
Cracow has been prominent among Poland's other conurbations in recent years for its high level of economic development. In this sense, it is ahead of all the other cities except Warsaw and Poznań. Cracow's role as a tourist destination and an academic center has a substantial impact on its good economic situation.
Cracow is Poland's second-largest housing construction market after Warsaw, in terms of both volume and value. So far the record year in terms of value was 2001, when the value of the Cracow market exceeded zl.800 million, but this year will break all previous records. This is the result of a sudden rise in the expected number of completed units and rising housing prices on an unprecedented scale. According to experts' estimates, in 2007 this market is sure to overstep the zl.2.4 billion mark. This means that the value of the market more than tripled in 2006, compared with 2005. There are 260,000 housing units and 307,000 households in Cracow, meaning a shortage of about 50,000 units. On the other hand, there is some incompatibility between users and the existing housing stock. Cracow has the largest number of small, one- (107,700) and two-member (74,200) households, which together account for 60 percent of all households. From the point of view of demand, this means that relatively small apartments will still be the most sought-after, with a surface area no greater than 55-60 sq m. Apart from this quantitative shortage, like other Polish cities, Cracow suffers no less from a qualitative shortage caused by overdue renovations and modernizations, poor construction technology and insufficient outfitting of both housing and infrastructure in urban areas.
Housing prices have changed in Cracow, and so have average salaries. A comparison of these two figures gives an idea of the accessibility of housing. The 2000-2003 period saw an increase in the number of square meters one could buy for the average wage (from 0.69 to 0.78 sq m). From 2003 this index has been decreasing, with a particularly severe drop recorded last year when the average wage could buy just 0.5 sq m of an averagely priced apartment.
Only half the buyers (48 percent) seek housing in Cracow to satisfy their own needs. The next large group (27 percent) of market players are those looking for a new unit as an investment and to derive income from rental. The most important criteria in the decision to purchase housing are its location and price.
The most attractive districts of Cracow as seen by buyers are the Old Town and Zwierzyniec as well as Kleparz. Nowa Huta is definitely a no-no. Small (up to 45 sq m) and medium-sized (46-60 sq m) apartments are the most sought-after, especially those in low buildings. A relatively large group of buyers (7 percent) is interested in buying a very large apartment of over 100 sq m.
Since 1997, Cracow has seen the completion of 3,000-4,500 housing units per year, with substantial yearly fluctuations in construction output. The year 2001 was special (a record year all over Poland), mainly due to the expected introduction of value-added tax (VAT) on the sale of housing units-over 5,500 units were completed that year. After 2001 the situation on the housing market deteriorated noticeably.
Cracow is the second-largest housing market in Poland in terms of value, and its further growth can be expected. However, the lack of local zoning plans is a significant factor that hampers supply. Just 5 percent of the city's area has these plans in place, the lowest figure in Poland. At the same time, rapid price growth has caused a situation in which some housing units are now being sold above their real value. Similar to Warsaw, prices in Cracow can be expected to grow more slowly soon, compared with the past months.
The Tricity
Gdańsk, Sopot and Gdynia, the three cities making up the Tricity area, differ demographically and economically among themselves. Administratively, each is a separate entity with its own urban planning policies and separate offices, including units handling cooperation with housing investors.
Given the number of households, the shortage of housing units in the Tricity can be estimated at about 42,000. The housing deficit does not translate directly into the size of demand, but does largely influence its scale. Beside this, there is a qualitative shortage resulting from the poor condition of existing housing, incompatibility with present-day standards and the need to replace decrepit or outdated homes.
The relationship between the average monthly wage and the average price per square meter of a new apartment changed little in 2001-2004. Tricity residents could buy about 1 sq m of usable space for an average wage. As of 2005 this index began to drop rapidly, and in October 2006 it stood at just 0.54, meaning that to buy a 45-sq-m apartment, a buyer had to spend the equivalent of seven years' average wages. People in the Tricity are still in a better position than the residents of most other large cities.
Meanwhile, within the next few years the area's economic and cultural attractiveness and the qualities of its natural environment could cause increased demand for luxury apartments in the best locations from buyers from outside the Tricity. Gdańsk's Main Town and its direct vicinity is a special place. Another unique location is Sopot-attractive and fashionable for housing investments. The most important criteria in deciding to buy an apartment in the Tricity are price and location. The most attractive areas, according to prospective buyers, are Sopot, Gdynia's districts of Orłowo and Redłowo, and Gdańsk's Oliwa. In contrast, Podgórze, Obłużne and Oksywie in Gdynia as well as Gdańsk's Port district have a poor reputation. More than two-thirds of prospective buyers in the Tricity are looking for apartments in low buildings of up to three stories. The most sought-after apartments are medium-sized-46-60 sq m (39 percent). Buyers interested in apartments of up to 60 sq m account for 70 percent of those seeking homes.
The number of housing units completed in the Tricity has ranged significantly in recent years, from 1,900 in 2000 to 4,900 in 2003. The dominating investor group in Gdańsk are developers, who currently account for almost 75 percent of all completed units, whereas six years ago housing cooperatives controlled 80 percent of the market. Cooperative housing is also on the decline in Gdynia, with developers building 56 percent of all housing units last year. Housing construction in Sopot is on a small scale, largely due to a shortage of land. In 2006-2007 developers and cooperatives in the Tricity will complete a total of about 7,400 units. In the popular apartment segment, the greatest supply is concentrated in the southern parts of Gdańsk, in areas such as Zakoniczyn, Ujeścisko, Chełm, Mostowice, Maćkowe, Szadółki and Św. Wojciech. One relatively new trend in the Tricity region are projects located within or on the edge of huge old tower-block neighborhoods such as Przymorze, Zaspa and Witomino. Since 2003, Sopot has seen a number of luxury apartment projects.
The Tricity has great potential in terms of housing market development. The local government's investor-friendly policies and openness are an additional asset. Thirty-five percent of the Tricity's area has valid local zoning plans, which is a record result among Poland's conurbations.
Łódź
Łódź has the second-largest population of Polish cities, and an excellent location in the country's center-at a junction of major transit routes from the west to the east and from the south to the north of Europe. At the same time, Łódź and its residents have significantly lower economic potential than other large cities. A high unemployment rate combined with the small distance to Warsaw causes a high level of migration to the capital.
In terms of housing output, Łódź is a long way behind today's leaders, and this distance is growing. Whereas most markets in large Polish cities are recording consistent growth, housing output in Łódź remains stable. As a result, in 1995 Warsaw, with its almost double number of residents, saw the completion of four times more housing units than Łódź. In 2004, the Warsaw figure was seven times higher, growing to 20 times more in 2005. In recent years, 1.5-1.8 housing units per 1,000 residents were completed in Łódź annually, but this index dropped suddenly in 2005, to 0.9 units per 1,000 residents, six times less than in Cracow, Poznań and the Tricity, and over nine times less than in Warsaw.
In relation to its population, Łódź, compared to other cities, has quite substantial housing resources-close to the average for the "old European Union" countries, but the types and quality of housing are varied. The negative migration index has been systematically increasing for several years, and the population growth rate is also negative, reducing the demand for housing.
Łódź's residents earn less than residents of other large conurbations, giving them less spending power. Still, the low level of earnings has its upside in the form of lower labor costs, a fact that attracts investors, who are increasingly setting up factories here.
With the current low output, demand clearly exceeds supply. Prices are growing faster than in Warsaw. Although under the present circumstances, with high unemployment, low wages, migration and a decreasing birth rate, there is no solid basis to predict any great upsurge of demand for housing in Łódź, this market seems to be putting the time of stagnation behind it. The problem is determining the time horizon in which the accumulated housing needs will translate into actual demand for housing. This is sure to take place as the overall economic situation in the city improves, the first symptoms now becoming visible in the growing interest of both foreign and domestic investors in the city.
Some optimism can be derived from the active policies of the local authorities aimed at attracting new investors, the potential of local university-level schools, steadily improving transport infrastructure and the city's changing image. That's why systematic, substantial growth of local demand is realistic. Given the low prices, investment capital can also be expected to arrive in the city. In the perspective of several years this should lead to increased supply, to about 2,000 units. The basic product on the local market will probably still be popular apartments, mainly two- and three-room ones. The recommended method of investing should involve flexible reactions to the rapidly changing local market, preparing projects in stages and keeping in mind the demand for relatively small units.
Poznań
Poznań has the best economic situation after Warsaw among the largest housing markets in Poland. The city lies halfway between Warsaw and Berlin and for decades has been Poland's most important trade exhibition center. Poznań is also the second (after Warsaw) banking center in Poland-with 10 bank headquarters and numerous branches.
Ever since 1997 it has also been second in Poland in terms of foreign investment per resident. However, the multiple-family housing construction market in Poznań was relatively small for many years, and apartment prices changed little. The annual value of new apartments barely exceeded zl.350 million in 2001. The situation changed completely in 2005 when the value of this market almost doubled, from zl.253 million to zl.501 million. This strong growth trend continues and estimates put the value at zl.800 million in 2007.
Today the shortage of housing in Poznań is about 30,000 units. Even if construction output grows to more than 3,000 units annually, the needs will not be satisfied in a period of well over 10 years. The job market in Poznań is stable. At the end of July 2006 the unemployment rate was 5.4 percent, giving Poznań the second-best result in the country after Warsaw.
The most popular districts are Grunwald, the Old Town and Jeżyce, which are perceived as attractive areas to live. The New Town is viewed neutrally by buyers, while Wilda gets the lowest marks. The great majority of prospective buyers plan to buy an apartment for themselves or their family.
The most important criteria in the decision to buy a home include the apartment's functionality and its price. The least important factors are the potential future growth in the home's value and the building's infrastructure. Buyers show the greatest interest in medium-sized apartments-46-60 sq m (47 percent). Small units of up to 45 sq m are the focus of interest for one-third of the buyers looking for a home for themselves. Altogether those interested in apartments up to 60 sq m account for 78 percent of prospective buyers. Agents say that only a tenth of their customers are looking for apartments 61-80 sq m in area. A similar number are looking for places over 80 sq m.
About 3,000 apartments were built annually in Poznań in recent years. Thanks to good transport infrastructure in and around Poznań, single-family homes built by individual investors account for a large proportion of the housing output. As with other cities, the largest number of housing units, 2,400, were completed in 2001, and the number decreased over the following years, to just 1,400 in 2004. The market developed rapidly in 2005, when the output of apartments for sale and for rent doubled. Forecasts for subsequent years predict further growth. Today new apartments in Poznań are being built by 20 developers, three housing cooperatives and five public building societies.
Poznań is still an underdeveloped market with an insignificant rate of growth. Among all the conurbations, the Poznań market has the lowest prices and the least diverse range on offer. In combination with rents that are comparable to other cities, this means relatively good profitability of investment in apartments for rental. The excellent economic situation of the city and its residents allows for predictions that within a short time this market too will see a revival.
Wrocław
Wrocław lies along one of the most important European transport corridors: the route linking Germany's Dresden and Berlin with Cracow and cities in Ukraine. The rivers Odra and Oława flowing through Wrocław add to the city's charm on one hand, but create a threat of recurring floods on the other. This has many consequences for the housing market and influences the decisions of both investors and buyers.
The rivers' numerous branches do not facilitate a solution to the city's transport problems. Many road projects are being carried out or planned, aimed at alleviating the situation, at least partly. As transport and land development projects progress, new land will be made available for housing.
The current housing shortage in Wrocław-calculated on the basis of the number of households living together and also comparing the number of housing units per 1,000 Wrocław residents with the average for the "old EU"-is about 44,000 units.
According to recent data from the Wrocław Statistical Office, about 120,000 people are employed in the corporate sector, of which 90 percent work in the private sector. Many of those working in Wrocław commute to work from outlying localities, which could lead to a future growth in migration, increasing the demand for new housing.
Since 2005 housing prices have been growing much faster than the average monthly wage, which today can buy just 0.49 sq m of averagely priced housing. This is a decrease compared to 2000-2004, when the average wage in Wrocław bought an average 0.8 sq m of housing space.
The districts perceived as the most attractive for living are the Old Town and Krzyki. The central Śródmieście district, surprisingly, is considered neutral in terms of attractiveness.
Compared to previous years, a large proportion of buyers (32 percent) are people looking for new accommodation as an investment, with an eye to leasing it out. This could be the effect of the substantial housing price increase observed in Wrocław over the past year or so. Previously the high housing shortage and unsatisfied needs were considered almost the sole motive for trade in accommodation. Prospective buyers show the greatest interest in medium-sized apartments (46-60 sq m), which account for 45 percent of buyers. The interest in small apartments (up to 45 sq m) and large ones (60-80 sq m) is also relatively large. The great majority (71 percent) of prospective buyers seek apartments in low buildings of up to three stories. Just 8 percent of clients say they want to live in a building taller than seven floors.
Over the past decade, the volume of housing construction in Wrocław has varied substantially, but the share of developer construction in overall output has stabilized at just under 60 percent. In 2001, a record year for the entire country, developers and cooperatives completed 4,400 housing units in Wrocław, but only 1,100 in 2004. In 2006-2007 developers have been completing an average of 3,000 units per year in Wrocław.
The current situation on the Wrocław housing market is excellent for developers. In the cheaper segment, the demand for housing clearly exceeds the supply, a fact additionally influenced by the influx of new residents who find attractive job offers here. At the same time, the luxury segment is maturing, with projects whose asking price is about zl.20,000 per sq m beginning to appear.
Conclusion
The annual supply of new housing in large cities accounted for almost one-third of the total number of units completed nationwide. As always, the largest number have been completed in Warsaw. The next most intensively developing city has been Cracow, while the scope of housing construction in other cities has been about the same. Generally, developers are building too little compared to market needs. One of the main barriers for companies carrying out residential projects is the lack of local zoning plans, a fact that delays these projects considerably. This means that in each of the cities mentioned earlier, the most rapidly developing districts are those where developers have access to land for housing construction.
In Warsaw, the greatest number of units was built in the districts of Mokotów, Bemowo, Białołęka and Wilanów. Cracow offered housing mainly in the southwestern (Dębniki and Łagiewniki) and northwestern (Prądnik Biały and Bronowice) parts of the city. In Wrocław, the most construction projects were carried out in the areas of Krzyki (Gaj, Ołtaszyn and Krzyki) and Fabryczna (Grabiszyn and Muchobór Wielki), while in Poznań the newly built supply was concentrated in the Old Town (Piątkowo and Naramowice) and the New Town (Łacina and Rataje). In the Tricity, the most projects were completed in Gdańsk's Chełm and Orunia, Gdynia's Redłowo, the center of Sopot and the seaside belt.
Projects planned in both Warsaw and regional cities show that the upward trend in the volume of new housing supply should continue over the next few years. Due to long waiting periods for construction permits and growing land prices, the characteristic features of new housing projects are changing. Developers are moving away from small-scale projects in favor of increasing the density of construction with the aim of maximizing their profits. The scale of housing investment is different depending on the city. Warsaw and Cracow display a tendency toward the tallest possible buildings-often anything from 10 to 20 stories, while new housing projects in the other regional cities are reaching the five- or six-story level.
