Analysis: Investors eye a new market in Central Europe: homes for rent

TAG Immobilien AG

19/12/2022 08:00

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      Large cities and economies fuel market
    

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      Poland stands out
    

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      Big gap in quality
    

  
    By Canan Sevgili, Jason Hovet and Gergely Szakacs
       GDANSK, Poland/PRAGUE, Dec 19 (Reuters) - With rising
interest rates and limited supply putting home ownership out of
reach for a growing number of people in emerging Europe, global
and local real estate investors are placing bets on the region's
nascent private rented sector. 
    From almost nothing five years ago, the institutional
residential property market has grown to the point where
investors say housing is starting to challenge office buildings
as a focus for their cash. 
    "There are many large cities in the central European region
with positive demographic and economic dynamics and an
undersupplied housing market," Stanislav Kubacek, head of
investment for eastern Europe at Sweden-based Heimstaden
 HEIMpref.ST , told Reuters. 
    "These are good ingredients for residential rental
investments." 
    Investment in the sector, mainly in Poland and the Czech
Republic, jumped 38% to 130 million euros ($138 million) in the
first half of 2022, according to a CMS and CBRE report. 
    And higher yields and scope for growth are spurring new
projects, market players say.
    Denmark's NREP entered the Polish market in 2021 and plans
to invest some 500 million euros in the residential and
logistics sector over the next three years, with projects in
major cities such as Warsaw, Wroclaw, Gdansk and Krakow.
    "Investors can see a clear market opportunity as younger
generations are becoming more open to renting, following the
trend of decades past in Western Europe, while the supply of
modern rental stock is very limited," Rune Kock, chief executive
of NREP's real estate division, told Reuters.
    OLD AND OVERCROWDED
    Poland, the region's biggest economy, stands out for its
growing population in multiple large cities and estimated
shortage of 3 million homes, but the Czech Republic and
potentially Hungary also offer opportunities.
    Radim Bajar, a partner at Czech investment group Mint
Investments, said his 1.25 billion Czech crown ($54.81
million)fund was exploring projects in Prague, Brno and Plzen,
with a goal to add 300 to 500 apartments to its portfolio next
year.
    "We are currently surprised ourselves by the speed of the
change and how the market is changing," he told Reuters.
    "We believe over the next 10 years two-thirds of the
apartments built in this country will be sold to funds like ours
and only one-third sold to homeowners."
    According to Eurostat data, Poland has an overcrowding rate
- where homes lack enough rooms for the number of people in the
household - of nearly 37%, compared to the European Union
average of 17.5%. 
    Much of the housing stock is Communist-era flats, often
pre-fabricated, that are badly in need of modernisation. That is
an advantage for developers, who can target a growing pool of
expatriate workers with amenities like high-speed internet, gyms
and leases in English.
    "There is a huge gap in things such as quality, stability
and predictability of leases between private landlords and
institutional players," Marek Obuchowicz, a partner at Griffin
Capital Partners, told Reuters. "This makes for an attractive
entry point for PRS (private rented sector) players." 
 ** For an interactive graphic: https://tmsnrt.rs/3FU1fMk
    PRICED OUT
    A traditional preference in the region to own rather than
rent has been challenged by the huge run-up in home prices since
the 2008 financial crisis, fuelled by economic growth and a
decade of rock-bottom mortgage rates.  
    "We will follow our strategy of investing in major Polish
cities," G City Europe (formerly known as Atrium European Real
Estate) Managing Director, Residential for Rent Anna Dafna told
Reuters. She said the company plans to launch a project to build
500 units in Warsaw in the first quarter of 2023.
    Current yields on residential real estate are 100 to 200
basis points above those in western Europe, Cushman & Wakefield
data shows, with Warsaw at 5% and Prague at 4.10% compared to
2.70% in Berlin, 3% in Amsterdam and 3.25% in London.
    Demographic change is another factor. Immigration to Poland
both before and after the war in Ukraine has exacerbated housing
shortages, as has a business services boom attracting foreign
workers who demand higher-quality flats, added
Wysokińska-Kuzdra, a senior partner at Collier's in Warsaw.
    "Many institutional investors are looking to gain the first
mover advantage and moving in," Wysokińska-Kuzdra told Reuters.
    A sharp rise in interest rates across the region in the last
year has priced out some potential home buyers. Construction
costs for developers are soaring. The war in Ukraine has also
created uncertainty, so that some investors are focused only on
finishing current projects.
    But investors and analysts say these are blips that will not
derail a market set to triple by 2028, to more than 63,000 flats
in Poland, according to a recent PwC report. 
    Germany's TAG Immobilien AG  TEGG.DE  said in its third
quarter report that it plans to speed construction of
residential holdings in Poland, while Budapest-based Flatco Kft
is searching for potential acquisitions in Budapest.
     "The demand is there," Marta Jacoby, Flatco Kft's chief
executive, told Reuters. 
  ($1 = 0.9406 euros)
  ($1 = 22.8040 Czech crowns) 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Private Rented Sector (PRS) yields in European cities    https://tmsnrt.rs/3j5gVUf
Private Rented Sector (PRS) yields in European cities    https://tmsnrt.rs/3FU1fMk
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 (Writing and additional reporting by Michael Kahn, Editing by
Catherine Evans)
 ((michael.kahn@thomsonreuters.com; +420 234 721 612; Reuters
Messaging: michael.kahn.thomsonreuters.com@reuters.net))