Buyers beware
However, the way that developers finance their projects could leave homebuyers with an extra bill to pay when it comes time to pick up the keys to their new homes.
The low supply of apartments on the market and high demand for new developments make it a sellers' market in Warsaw. Developers can control and dictate the terms and conditions by which new projects are sold, and this leaves the market open to abuse.
One developer that has recently come under fire from some of its clients is Pirelli Pekao Real Estate. It signed reservation agreements with roughly 600 prospective residents for apartments being built on ul. Okopowa and ul. Banderii in December 2005. The would-be residents were told that the agreement would be changed to a proper contract when the building permit took effect. In April 2006, the developer signed an annex to the agreement, since the permit hadn't yet taken legal effect.
In June 2006, the residents had to sign another annex, extending the previous reservation agreement. By that time property prices in Warsaw had dramatically increased. According to Bartosz Cholawo, one of the future residents in the scheme and the founder of the Society for those Deceived by Developers (SOD), the last reservation agreement expired at the end of July and Pirelli Pekao Real Estate issued a notice to their customers stating that if there wasn't any progress with the permit by the end of September, a new price for the apartments would be announced.
Reserving judgment
According to Cholawo, the clients were informed that the schedule of the project had changed and construction work wouldn't be completed by December 31, 2007. That change raised another concern that the new VAT law would be introduced at the end of 2007, which means that the prices would be pushed up further.
Pirelli Pekao Real Estate's statement says that due to the long administrative procedures, reservation agreements have been extended several times, and the long-awaited decisions have been made. What now remains is the time before they become legally effective and valid. "For this reason, the company has decided to renew the reservation agreement," reads the statement.
However, residents are aware that they would not win the case if it went to court.
Developer not at fault
Jacek Bilecki, general director of the Polish Association of Developers (PZFD), says that in this case it is very difficult to point to any fault from the developer's side. The conditions of the final agreement can be found in the reservation agreement and depend on the final permission for the project's construction. "The time frame of the reservation agreement was also stated in the reservation agreement. It was only the developer's goodwill that meant reservations were extended three times and clients were informed about the reasons for complications. By accepting those annexes, clients had full knowledge of the current situation and it was their conscious choice," says Bilecki. PZFD will still examine the case and release its final opinion.
According to Łukasz Madej, managing director at Rednet Property Group, in a market situation such as this, when the number of sold apartments is high and customers are fighting for every unit that comes on the market, even if the developer doesn't have the building permit, the whole construction process can be financed from customers' payments. "In cities such as Warsaw, Wrocław and the Tri-city it is more and more common that reservation agreements are signed, the sale of apartments is launched and then the developer receives the building permit," says Madej.
Dror Dory Kerem, general director of Ronson Development Group, says that his company does not collect money from buyers before it starts any project and has the permit in hand. "We have waiting lists for various projects but we never agree to sign any binding agreement," he adds.
Developers book at least 30 percent of all apartments to be sold as soon as possible. "This is connected with the fact that in order to finance a development project, banks require that the company proves its ability to sell the apartments," says Kazimierz Kirejczyk, president of REAS Konsulting. "In that situation each bank is willing to finance the project now," says Madej and adds that at that point many companies frequently decide to stop selling their apartments and wait.
"This is a very effective way of financing because debt interest rates are very attractive for both developers and customers," says Jean-Claude Moustacakis, Orco Group's development director.
Price hikes
If the sale process is short the developing company decides to increase the price for the remaining apartments. According to Rednet, this situation happens in most cases. "Sometimes developers are allowed to dissolve the conditional reservation contract, such as in the case of Pirelli Pekao Real Estate, and raise the prices of the apartments. However, it's a new trend on the market. Usually, developers don't do that," says Madej.
Currently, developers already have a method to take advantage of growing prices even if they have sold some of the apartments. Current property prices can grow by 15 percent a year. This extra amount can be obtained by the so-called indexation of the unpaid price. "If a customer has paid 20 percent of the value of the apartment, then the remaining 80 percent is subject to an increase by 0.5 percent. This is based on the quotient calculated by the Central Statistics Office [GUS], which takes into account the prices of building materials or results from the contract between the customer and the developer," says Madej.
The financing systems also include deposit accounts. Customers pay their instalments to a bank account, and the developer is able to use the money under the bank's supervision and spend it on the completion of the project. According to Kazimierz Kirejczyk, most residential projects are now completed in this way and he is not familiar with any developers who would be selling apartments only upon completion of construction.
Calm after the storm
But there are exceptions, such as the 150 exclusive villas constructed near Warsaw by the Venessa-Westmark consortium. "Our future residents will not finance the construction of the project. The financing comes from us and the customers are safe," says Krzysztof Ruciński, president of Venessa. The consortium has its own funds to finance the investment.
Madej expects that a higher number of similar projects may appear when the situation on the residential market calms down in some 18 months. "Customers will definitely aim at safer investments, since they will not finance the construction works. Taking into account the consolidation and acquisitions on the market, more developers will finance their projects from their own funds," says Madej.
