Ten post dostępny jest także w języku: polski
Polish investors, both individual and institutional, still have very limited opportunities to invest and profit from the real estate market. This state of affairs is to be changed by a new act – the government is about to return to work on regulations concerning REITs, extremely popular abroad, funds investing in real estate. It’s time for Poland, a good law, i.e. the new act should provide investors with security in the boom and the slump.
So far, for most small investors, investing in the lucrative real estate market has meant buying property to, for example, store capital value or make money on renting it out. Of course, it is also possible to make money by being a shareholder in a property development venture and this can be as high as 12.5% per annum. This is extremely attractive compared to investments in deposits, bonds or flats for rent. Few people know, however, that this is only a fraction of the capital multiplication opportunities, because you can also get rich in other ways, and in the world this is provided by specialized investment funds, the so-called “REIT”. In Poland, legislation is still lacking. It is estimated that Polish capital constitutes only from 2% to 5% of the investment volume in the commercial real estate market. The lack of legal regulations in our country has for years blocked the real development of this segment and its accessibility for every investor.
Despite the pandemic, development and construction companies are recording excellent financial results and another sales record has just been set. According to the Central Statistical Office (CSO), as many as 222,000 flats were delivered to the market last year, the most since Edward Gierek’s boom 40 years ago, and there were 7 percent more than in 2019. Developers dominated the market, with 143,800 flats delivered in 2020 – a 9.4 percent year-on-year increase. On the other hand, the number of dwellings for which construction permits were issued or notifications with a construction project were made in 2020 increased by 2.8 per cent year-on-year to 275,938.
Even in such difficult and unpredictable times with the sudden lockdown of the economy, investments in real estate proved to be a safe haven. Low-interest bank deposits with no protection against impairment and inflation meant that the money deposited in banks began to shrink rapidly. Since the beginning of the pandemic, PLN 64 billion has already been lost from deposits. In 2020, both new and used premises rose in price, with prices on the primary market in the largest cities rising at a rate of 3-9 per cent. (6 percent in Warsaw) y/y. Poles peaked in redemptions of real estate and retail treasury bonds, where security and optimal returns were sought above all.
Investing in real estate is a stable and good business
According to various estimates, taking into account demographics and market trends, there is still a shortage of approximately 2.3 – 3 million residential units in Poland, and further prosperity is expected in the coming decade due to high demand. Housing prices are also rising. As analysed by Brokerage Michael Strom, considering the period Q4 2006 – Q4 2019, where we have data for all asset classes, gold recorded the highest rate of return. The second strongest growing asset was the price of housing plus rent. During the period under review, this combination generated a return of 135%. The result over the period as a whole is a component of the 53% increase in house prices and rental income, which added another 82 bps to the result. When analysed, house price growth alone beat consumer inflation by over 23pc, which has grown by 30% over 13 years.
Thus, it should not surprise us that for years there have been more and more developers on the market, fighting for lucrative profits – there are already over 2,000 of them. When investing in new projects, they need capital, which they acquire from various sources: bank loans, stock exchange, bonds, funds, etc. Raising capital generates significant costs, e.g. apart from interest and taxes, also fees related to the service or issue of bonds, advisors, brokerage houses, etc. Obtaining financing also requires appropriate collateral, e.g. building land banks. No wonder that development companies are looking for optimisation and “cheap money”.
In the West, REITs provide competitive and total returns based on high, stable dividend income and long-term capital appreciation. Their relatively low correlation with other assets also makes them an excellent diversifier, which can help reduce overall portfolio risk and enhance returns. In return for paying out the majority of their profits, REITs benefit from CIT exemption. Due to the lack of adequate regulations in our market concerning the operation of REITs, which are popular abroad, the market gap in raising capital from small private investors is being filled by other solutions, which are an attractive alternative to fund solutions, bond solutions and direct investment of money on the stock exchange, e.g. solutions of the private equity type, which are available to everyone.
There is plenty to invest in, as construction companies directly generate 7.4% of GDP, but through indirect effects they generate an additional 9.3% of GDP. In total, the construction sector contributes to the creation of 288 billion PLN of added value, i.e. 16.8% of GDP. The industry directly creates 6 percent of the number of jobs and indirectly creates a total of 15 percent, or 2 million 90 thousand employees.
Government goes back to work on REITs bill
The possibilities of investing in this type of funds, available to a wide range of investors, are limited to holding shares of listed developers and bonds listed on Catalyst. For this reason, many people decide to invest in real estate on their own, mainly by purchasing flats, condos and aparthotels, as well as smaller commercial premises. We still do not have an annuity investment product on the Polish securities market. Meanwhile, foreign REITs (especially in the commercial segment) own many top Polish properties. According to various estimates, around EUR 64 billion has been invested in this segment in Poland. Unfortunately, the share of domestic capital was less than 5 percent.
In the unanimous opinion of the REIT Poland Association and the Polish Chamber of Commercial Real Estate (PINK), the current state can only change through the introduction of systemic and proven solutions, to the great benefit of Polish individual investors and the Polish economy. Deputy Minister of Development, Labour and Technology Anna Kornecka, in the Ministry headed by Deputy Prime Minister Jarosław Gowin, announced that she and the Minister of Finance would return to the law on real estate investment companies. The information about preparations to pass the bill on Polish REITs appeared a day after the appeal of the Minister of Finance, who would like Poles to start trading their savings kept in “socks”.
Let us remember that the value of households’ net financial assets (assets minus liabilities) amounted to as much as PLN 1,398,874 million at the end of 2019. Current settlement deposits are the largest component of household financial assets. Nearly PLN 604 billion was accumulated in this item in the period indicated. Also demography is changing the assets of Poles and in 20 years the wealth of an average family will increase to over 860 thousand zlotys.
Individual investors want to make money on the real estate market
The market abhors a vacuum and business is looking for substitute solutions. In recent years, for example, crowdfunding websites and platforms dedicated to share-based projects have emerged. They specialise in investment projects in which the website users can invest their free capital by purchasing shares in special purpose vehicles that carry out development investments, investments in land and investments in the purchase of residential premises for rent. The minimum amount of capital to invest is only PLN 1,000.
On the market, we can even find companies that offer at the entry threshold of PLN 200,000 more than 12% profit per year, offering shares in a developer company realizing construction of houses and flats in Warsaw. However, it is difficult to verify them transparently, because there is no well-known brand behind them, on the other hand they have completed and settled projects in their portfolio and good customer feedback. As you can see, this form of investment is becoming more and more popular.
On the other hand, a new quality with full transparency on the market is given by the “Equity” product, behind which stands the creator of the successes of Murapol and HRE Investments – Michał Sapota, together with his team of professionals and experts. Recently they have prepared a special offer for investors interested in investing capital in real estate. They can purchase shares in the “Warszawska Sky” project and earn 6.88% per year. Depending on the project, it is possible to invest even several thousand PLN.
The mechanism of investment is quite simple: the investor accepts the offer to take up shares, pays for the declared share and confirms this fact with a notary. At the same time, HRE Investments signs an agreement for the repurchase of shares at a – predetermined price, which takes into account the profit expected by the investor. The investor receives his profit quarterly as an advance payment on the price of the subscribed shares. The developer is the majority shareholder, holding ultimately approx. 60% of shares in the special purpose vehicle contributing the land, and the entity responsible for organising the entire process of implementation and sale of the investment, having adequate resources, experience and know-how.
A developer who obtains financing from a cheaper source may achieve better sales results for its projects and has a greater margin, e.g. for advertising expenses or price promotions. Therefore, all available forms of raising capital or shortening the operating cycle (prefabrication) arouse great interest in the industry. On the other hand, investors can count on participation in high returns from these investments, which are competitive to other offers for invested capital. REITs could therefore have a positive impact on the development of development projects and the construction industry as a whole.
There are numerous examples of investment offers on our market, which prove large resources of free financial means, but which, however, to a small extent manage the investor demand in this sector.
Real Estate Investment Trust (REIT) conquer the world markets
REITs, which we are waiting for in Poland, are a type of investment funds, often listed on the stock exchange, allowing individual (small) investors to collectively invest funds in real estate. These financial entities, which are extremely popular, e.g. in the USA, act as companies or funds listed on the Warsaw Stock Exchange, thanks to which smaller (small) investors can invest their funds in real estate.
They are also available to other investors, including institutional investors. The purpose of this enterprise is to acquire ownership rights to various types of income-producing real estate, including commercial real estate – office space, hotels, retail space (especially large shopping centres), warehouses, as well as residential real estate for lease, and then manage and profit from it. The main source of income for REIT entities remains rents and not the increase in the value of properties, as transactions of sale and purchase of owned assets are executed only in order to adjust the composition of the property portfolio to the current market situation. REITs’ income is therefore derived primarily from real estate, other assets or other business ventures related to real estate.
REITs allow anyone to invest in a portfolio of real estate assets in the same way that one invests in other industries – by purchasing individual company shares or through a mutual fund or exchange-traded fund (ETF). REIT shareholders receive a share of the income earned from their real estate investments – without having to leave their homes to buy, manage or finance real estate. Approximately 145 million Americans invest in REIT shares through a type of retirement savings plan “401(k)”, which in the US is equivalent to the Polish Employee Equity Plan, or other investment funds. In total, all types of REITs collectively hold more than $3.5 trillion in gross assets across the United States, and listed REITs hold approximately $2.5 trillion in assets, representing more than 500,000 properties. US REITs were established by Congress in 1960 to provide all investors, especially small investors, with access to income-producing properties. Since then, the American approach to REITs has served as a model for the approximately 40 countries around the world in which they operate. They are successfully available in the Bulgarian and Hungarian markets, for example.
Currently, in the UK alone there are 56 of them with a total market capitalisation of USD 89.5 billion, and in Europe (excluding the UK) there are 151 REITs with a capitalisation of USD 420 billion. The first of these was established in 1995 in Belgium. Oljefondet, the Norwegian State Pension Fund, has also been investing in REITs since the 1990s. They are also gaining popularity among investors from other Western European countries, especially Great Britain, the Netherlands and France. By contrast, in Europe’s largest real estate market, Germany, where around half of the properties located are residential, special purpose funds and REITs take a majority share of all residential investments.
REITs invest in a wide range of properties, including offices, residential buildings, warehouses, shopping centres, medical facilities, data centres, cell towers, infrastructure and hotels. Most REITs focus on a particular type of property, but some have multiple types in their portfolios and also invest in foreign markets.
REIT assets listed on stock exchanges fall into one of 13 real estate sectors, such as residential, hotel (resorts), commercial (offices, shopping malls, logistics), healthcare, industrial or data centres (cloud). Growth potential comes with risks, which vary depending on the type of REIT. The largest REIT in 2020 is American Tower investing in telecoms sector properties, currently worth US$102.3 billion according to market capitalisation.
Returning history, or REITs in Polish
The Polish Association of Real Estate Developers (Polski Związek Firm Deweloperskich) saw the need to introduce regulations into the Polish legal system and argued in a position paper issued more than four years ago that the foreign popularity of similar solutions proves the legitimacy of implementing them in our country. The first memorable bill on Real Estate Rental Market Companies (SRWN) by the Ministry of Finance in 2016 was withdrawn, and another “bill on Polish REITs”, which were already to be called Companies Investing in Real Estate Rental (FINN), was sent to the Sejm, but got stuck at the stage of the first reading. The document assumed that they could be companies listed on the stock exchange with at least PLN 50 million of capital. As a result, there is still no legal formula for REITs, and open-ended investment funds cannot invest directly in real estate or in assets not listed on regulated markets. Time will tell whether the current next attempt to implement the expected legislation will be successful.
Author/Photo: Adam Białas – an independent market expert, business journalist, manager of Core PR – a marketing and communications agency specialising, among others, in the financial and real estate sectors.