Rental housing yields equate to inflation

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In recent years, demand in the housing market was significantly driven by people who wanted to invest in rentals. The yields on such purchases were much higher than the interest rates on deposits, and rapidly rising housing prices encouraged investment. However, the pandemic changed the situation in the market. Students and foreign workers left the market, short-term rentals disappeared and rental prices went down. In cities such as Warsaw or Krakow, in 2020, the decreases reached almost 10% y/y, indicate experts Emmerson Evaluation.

In their latest report “Evaluer Index 2021”, real estate valuation specialists from Emmerson Evaluation analyzed residential markets of major Polish agglomerations. In their analysis, they indicate that the pandemic has changed the rental market in Poland on many levels. Restrictions on movement resulted in a lack of business tenants and the disappearance of domestic and foreign tourism, which contributed to a reduction in the short-term rental market. The effects of this were particularly noticeable in the central districts of the largest agglomerations, which until now were mainly oriented towards tourists and business tenants. The city which suffered most from the lack of tourists willing to rent short-term was Krakow.

The long-term rental market also had to deal with a smaller number of tenants. Demand dropped due to the outflow of students and people who planned to move to larger cities for work purposes. Many people withheld the decision to move and stayed in the family home or returned to it because they work in home office mode. Foreigners, mainly foreign workers such as Ukrainians, have also declined among those willing to rent. The increase in the available supply of apartments for rent, while the demand decreased, had a negative impact on rental rates.

– At the beginning of the pandemic, many apartment owners did not decide to reduce rents, observing further developments in the situation. It was only after several months of rising vacancy rates that the market reacted by reducing rates. In the cities analysed by us, the largest drops were recorded in the Kraków market – by 9.6% on average and in Warsaw and Łódź, where reductions reached 9.5% year on year. The smallest fluctuations were noted in Poznań, where rental prices dropped by 5.7% on average in 2020 – notes Robert Korczyński, board member of Emmerson Evaluation.

Warsaw, Tricity and Wrocław with the most expensive rent

According to the report “Evaluer Index 2021”, the ranking of the highest rents in Poland is dominated by the capital city. In Warsaw, the authors of the report recorded the largest number of offers in downtown, Mokotów and Wola. For years, the most expensive district remains Śródmieście with median rents ranging from PLN 1,750/month for a one-room apartment to PLN 3,300/month for a three-room apartment.

The Tricity market for apartments for rent is on a par with the capital city. The most expensive in 2020 was in Sopot, where the median rent rates ranged from PLN 1,700/month for 1-room apartments to PLN 2,700/month for 3-room apartments. In Gdańsk, they were slightly lower. In the case of one-room flats, the median net rent rates amounted to PLN 1,400/month, 2-room ones – PLN 1,900/month and 3-room ones – PLN 2,300/month. Gdynia remained the cheapest, with median rents ranging from PLN 1,100/month for studios to PLN 2,000/month for 3-room units.

Wrocław closes the podium with the highest rents. In the capital of Lower Silesia, the most expensive apartments for rent could be found in the Old Town – with a median of 1,600 PLN/month for 1-rooms to 2,400 PLN/month for 3-rooms. High rates were also observed by Emmerson Evaluation analysts in the Krzyki district, especially in the area of Przedmieście Oławskie and in the western part of the South district.

Return rates are on par with inflation

Last year, the average return on investment in an apartment for rent was between 3% and 4.8%. The Emmerson Evaluation experts calculated it as a relation of annual income from rent to the transaction price of the apartment and its finishing or renovation. The model takes into account an 8.5% flat-rate tax on rental income and a loss in income related to a 2-month period spent looking for a tenant.

The highest profitability was obtained from renting apartments in Łódź and Wrocław. The respective figures were 4.8% and 4.7% for one-room apartments and 4.6% and 4% for two-room apartments.  The least profitable were the largest 3-room apartments (4% for Łódź and 3.8% for Wrocław). In the Tricity market some of the highest yields were achieved by apartments located in Sopot (from 4.1% for 3-room apartments to 4.5% for studios), and the lowest in Gdynia (from 3.6% to 4.4%).

The lowest rental yields among the largest cities were recorded in Warsaw and Krakow. In the capital city, it ranged from 3.4% (for 3-room apartments) to 4% (for 1-room apartments). The indicators for Kraków were slightly lower and amounted to 3.3% and 4% respectively. According to Emmerson Evaluation experts, the drop in profitability in the above mentioned cities was mainly caused by the increase of supply, which was boosted by apartments previously intended for short-term rental.

– During the pandemic, landlords faced not only lower demand from tenants and the associated rent declines, but also the highest inflation rate in eight years. It reached 3.4% at the end of 2020 and accelerated even more strongly in 2021, exceeding 4% in March. On the other hand, investing in an apartment for rent still offers the possibility of mitigating its impact, which cannot be provided by extremely low-interest bank deposits. This attracts those looking to protect their savings, especially as housing prices continue to rise and low interest rates give access to cheap credit. Nevertheless, a pandemic will leave its mark on this market. We think that in 2021, far fewer buyers will be purchasing apartments for short-term rentals. On the other hand, the share of buyers purchasing apartments for capital protection and for their own needs will increase – predicts the expert from Emmerson Evaluation.

New players on the market

The analysts of Emmerson Evaluation also pay attention to the increased activity in the institutional rental market (PRS – Private Rented Sector). In 2020, investors concluded several significant transactions and acquired facilities in the pre-construction phase or under construction. The resulting apartments will be for rent and the process will be managed by a company rather than an individual investor. At the same time, the units will have a uniform standard and rental rules, which also distinguishes them from the offer of private owners. This is a relatively new segment in the Polish rental market, with a very low share in its total. Institutional rental units currently in operation account for just 2% of all housing units delivered in 2020.

– We anticipate that institutional rental will grow dynamically, but it is starting from a very low base and it will take years before it competes with the currently dominant individual renting. Instead, it will contribute to strengthening demand and be another driver of market prosperity. In view of the growing PRS market, it may be expected that some developers, apart from the traditional apartment sales, will implement more facilities intended for rental to the needs of investment funds, concludes Robert Korczyński.

Source: Emmerson Evaluation