The rental market during coronavirus clearly slowed down. Meanwhile, buying an apartment for rent is a very popular form of investing Poles’ savings. In the long run, it is a safe capital investment, especially when the purchase is made for cash, at a bargain price. However, when such an undertaking has an investment character and is financed with a mortgage loan, a question arises about the level of return on such investment and the level of investment risk. Experts from BIK and Otodom have examined what risks accompany leveraging a residential investment with a bank loan, especially in the period of an ongoing pandemic when the demand for rent is decreasing and rents are falling from month to month.
When considering taking out a loan to buy a property for rent, one should always analyse the risks associated with such an investment. One of the key risks is a drop in rental income. The value of rent is determined by the demand for and supply of real estate for rent. Both the demand and supply are local in this case. And it is the local market (the relation between demand and supply) that determines the value of rent that we can obtain, and thus the rate of return on investment and the level of risk accompanying it.
Koronavirus infected the rental market in Poland
In recent months, the demand for long-term rental has significantly decreased as a result of a lack of students (online studies), the outflow of employees from abroad (leaving Poland) and the practical suspension of business trips (switching to remote working).
The fact that demand on the rental market has fallen as a result of the pandemic is confirmed by Jarosław Krawczyk, an expert from Otodom portal.
– The proportions of demand and supply have been upset. On the one hand, students and foreign workers have returned to their homes, laying off the previously occupied apartments. There are also no tourists who have used short-term leases, from daytime rented flats, common on the market today. Less demand has clashed with a greater choice of available flats for rent, which results in lower expectations of owners regarding the amount for rent. They prefer to rent apartments cheaper than to keep them empty, which, after all, still generate maintenance costs, and if they are bought on credit, they require further instalments.
– Fluctuations in apartment rental prices occurred regularly. For a long time, however, there has not been a month in which we have seen falls in all cities. In April, prices fell the least in Katowice (by 1.6%) and the most in Warsaw – by as much as 7.2%, concludes Jarosław Krawczyk from Otodom.
The arguments in favor of real estate owners and the confirmation of the rightness of the decision to invest in apartments for rent in the long term are indicated by BIK’s chief analyst, Prof. Waldemar Rogowski, who also assesses the current situation in terms of availability of loans:
– Banks’ requirements for granting new loans, i.e. higher own contribution, decrease of acceptable LtV index, increase of acceptable scoring level determining creditworthiness, decrease of acceptable DtI index, translate into lower credit availability, especially among young people. These people, in the absence of the possibility of obtaining a bank loan, will decide to rent a property.
How many people are affected today by the change in rental prices and what is the scale of real estate investments can be assessed on the basis of analyses prepared by BIK analysts on the basis of the largest database of information on loans taken out by over 15 million adult Poles in the country.
The landscape of mortgage loans in Poland
As of 31 May 2020. 2,545 million active housing loans were held by 4,041 million Poles. The total amount of debt under housing loans was PLN 477.585 billion. In the structure of borrowers, there are those who have more than 2 housing loans to repay:
– more than two have 54,486 people (1.3% of the total number of borrowers):
– three loans are owned by 44,918 people;
– four loans have 7,045 persons;
– five and more loans are held by 2,523 persons.
Of those with more than two housing loans, the majority – 82% – are those with three housing loans. Persons with three or more loans have 102,577 loans, which accounts for 4% of all housing loans. 77,048 loans are loans for persons with three active housing loans.
BIK assumed that persons with more than two housing loans finance properties for investment purposes. In this case, these persons, as investors, benefit economically from both short-term and long-term rental. Leveraging of property purchase transactions for investment purposes (for rent) is not yet popular. The amount of housing loans to be repaid by persons with three or more housing loans as of 31 May 2020 amounts to PLN 22.24 billion and represents 4.66% of the total debt under all housing loans. Of that, 15.9 billion (71.5%) is the debt of people with three loans.
About 13% of borrowers with more than two loans are Warsaw residents. Their share in the amount to be repaid is as much as 21.7%, which requires a higher loan due to the highest property prices in Warsaw. Therefore, especially here the return on investment translates into the amount of rent collected, which in the pandemic period fell the most. The second city where business and student rentals play a significant role is Wroclaw, followed by Krakow, where short-term renting is important, slowed down due to the reduction of tourist traffic.
At the same time, it should be mentioned that the investment is not always carried out in the place where the borrower lives. That is why some investors from large cities buy investment properties in mountain or seaside resorts, often in the formula of condo hotels, aparthotels. This type of investment is based on the benefits obtained from seasonal rent by the property operator, and a significant part of the rent goes into the pockets of investors. The cost of m2 is therefore significantly higher than the cost of a metre purchased individually from the developer.
In the current situation the return on such an investment is close to zero, especially as the attitude of Poles to the selection of accommodation is changing. Instead of large hotels, they book their vacation in cottages located far away from people’s homes.
Is it worth investing in apartments?
When investing your own savings or so-called financial surpluses, you should pay attention to many factors for the success of such an undertaking. Investments in capital instruments or placing funds on the stock exchange, which in the face of a pandemic crisis is rather waiting for the moment of making up for losses, should be treated with caution. Although money in banks is always safe, a situation where income from bank deposits drops to symbolic values encourages to look for other forms of investing one’s funds. A slight outflow of deposits from banks and the search for other safer forms of investment by Poles is already observed. The choice, apart from the optimal diversification of investing our funds, should determine the decision for which period we want to invest. An alternative may be the real estate market, but in the case of partial financing with credit, it is connected with certain regulations, “entry barriers” or, in the case of purchase for cash, freezing the capital for a longer period.
– It should be remembered that in the case of investments for rent, the risk concerns both financing the asset with a loan, accompanied by an environment of changes in interest rates, as well as foreign exchange risk in the case of foreign currency loans, and the lack of obtaining benefits from rent, in the current situation of a drop in demand and rental prices, and thus endangered income for the repayment of the loan taken out, which financed the purchase of the investment – explains the chief analyst of BIK.
The worst solution is hasty actions, observed especially in the initial phase of the pandemic. They concerned sudden withdrawal of life savings from banks, transferring them to ROR or worse, keeping them at home, in cash. This phenomenon raises an economic problem, connected with granting financing in the future, and from the perspective of the household – incomprehensible especially as the proverbial keeping cash “in a sock” may expose it to theft.
The economic situation connected with the coronavirus epidemic has changed the attitude of Poles to planning their expenditures. Consumerism has clearly decreased, but the demand for credit has also decreased. Customers are certainly considering alternative ways to multiply their capital, although they still keep their savings on deposits, in banks.
As indicated by the monthly data of the banking sector, published by the Polish Financial Supervision Authority (KNF), as of 30 April 2020, the level of Poles’ savings increases faster than the debt level, with household deposits at the end of April 2020 amounting to PLN 959 billion.
The National Bank of Poland’s June 2020 Report on the Stability of the Financial System, a special edition devoted to the effects of the COVID-19 pandemic, shows that the increased demand for cash and the projected reduction in income suggest that “the high growth rate of household deposits observed so far may weaken”.
The question is, is now a good time to look for investment opportunities? Will Poles, as a result of the pandemic, consult their experienced investors and tempt other forms of capital multiplication after the pandemic. Or maybe they will simply redefine the goals for which they are saving?
At the moment, the research conducted by the Polish Bank Association shows that as much as 57% of the respondents indicate that it is important to put money aside for the so-called black hour, we rarely have specific goals, and the least frequently indicated goal of saving is to buy a flat – only 8% of Poles declare it.