Poland on stable ground

Although the foundations of the Polish real-estate market are strong and demand for property remains high, the lack of financing for new investments is a major headache for developers. "No developer has launched investments for a month," said Jacek Bielecki, a member of the board at the Association of Polish Developers (PZFD).

The value of commercial investments so far this year is 64 percent lower than in the previous year, according to Grzegorz Trawiński, head of Eurohypo AG's Polish office.

The restriction or suspension of bank loans has brought about a radical decrease in investments, Trawiński said. "Transactions are made only by companies with their own capital or using investment funds to a small extent," he said, noting that German investment funds have so far been most active in these areas. Investors will limit their activities even further in the near future, Trawiński forecast.

"We expect the realization of postponed or suspended projects to resume as late as Q1 or Q2 of 2009," he said.

PZFD's Bielecki said that financing in the Polish real estate market was characterized by a very short business cycle - two to three years - as compared with more mature markets, where the cycle spans over 10 years. "Our market is reminiscent of a pendulum," Bielecki said, adding that this made it difficult for investors to adjust to sudden changes.

Price pressure

Some sectors of the market remain in good condition, such as the office market - in Warsaw, for example, the vacancy rate reached a record low of 2.11 percent after H1 2008, Eurohypo's Trawiński said. Although the market will remain healthy and balanced, demand is expected to level off.

Trawiński said that a stabilization of prices in the office-space market is expected in the near future. He added that pressure from tenants for lower prices would ensue, and current prices in Warsaw - reaching up to €30 per sqm - would fall to €25 or even €18.

Strong demand, no financing

The experts agreed that the Polish real estate market has a strong foundation and that demand remains high. "We have a totally different situation in our residential market than Spain and Great Britain," Bielecki explained, pointing to a huge scarcity of residential space in Poland. "We are the only country in the EU where the number of [housing units] per family is below one, amounting to 0.93."

The potential for development is further boosted by the fact that mortgage debt is still relatively low in Poland compared with the EU average. Additionally, Poles' creditworthiness has increased by over 10 percent over the past year, according to the Polish Banking Association.

"All the hard data shows that the Polish real estate market should be thriving," Bielecki said.

Yet the drastic reduction of the availability of mortgage loans poses a significant hindrance for individuals seeking to buy real estate. "For example, a client in Warsaw is required to furnish a 20-30 percent down payment, which averages zł.100,000," PZFD's Bielecki said.

The long wait

Bielecki stressed that the state should pitch in to fight the crisis. "Generally speaking, we await more active cooperation to create better conditions to buy apartments and support demand." Instruments of aid could include a tax reliefs, for example. Yet, Bielecki added, "There is nothing going on in that area."

"We see how various states are spending hundreds of billion of euros to save their economies," Bielecki noted. "In turn, our government keeps saying that there are no problems and there is no reason to worry. [But] the problem does exist and there is a reason to worry."

Przemysław Kastyak, an attorney at law and construction law expert at Magnusson law firm, added that investors' lives could also be made easier by a series of legal reforms. There are plenty of hindrances to investment, including complicated spatial planning procedures and rulings on conditions for development, he said.

"One of our clients waited four years for a ruling on conditions for development to be decided upon," Kastyak said.

Another problem, he pointed out, is the fact that Polish law allows for construction permit applications to be challenged at four different levels [of the judicial system], which further complicates the process of obtaining one. "In effect, some investors put the launch of construction on hold for about a year."

First come, first served

Although it remains stable, the Polish real estate market is waiting for financing opportunities to return, the experts agreed. "The first brave [investors] will gain the most. And the ones who are bravest will get the best deal out of it," PZFD's Bielecki concluded.

Jacek Bielecki Member of the board, Association of Polish Developers "[Earlier this year] there was a widespread expectation that prices in the residential sector would decrease. There is nothing worse in the real estate market than such expectations, however, since buyers stop purchasing. We would meet potential clients at various real estate fairs who said, 'If you lower the prices by 20 percent we will buy the apartment.' Obviously we did not want to and we could not do that since costs kept rising. A decrease in prices did follow but it was not as high as what the clients expected. In Warsaw, for example, it was about five percent. The situation changed in September, and especially in October, when people again wanted to buy apartments. However, many people who had kept waiting for prices to decrease suddenly discovered that mortgage loan [conditions] were no longer acceptable."

Grzegorz Trawiński Head of representative office, Poland Eurohypo AG "This year the majority of projects purchased have come from the office sector - 63 percent of all transactions. This is followed by real estate from the commercial space sector, which represented 22 percent of the total turnover. In next place is the warehouse sector, with eight percent, and the hotel sector, which made up seven percent of the total turnover. In order to stress the immensity of the drop in the investment market, I want to emphasize that about 35 percent of all transactions signed in the office rental market [recently] have been the result of negotiations completed as long ago as last year. And all transactions in commercial space in the first eight months of this year … are the result of 2007 negotiations. No commercial leases have been signed as the result of negotiations that were begun this year."

Przemysław Kastyak Associate, Magnusson law firm "Attempts were made to introduce regulations on who can take part in [construction-permit-granting] proceedings … But the regulations that have been brought into force are so ambiguous that the investor does not know if the [adjudicating] body has specified participants of the proceedings, and thus the investor does have any certainty about whether any of its neighbors will suddenly file a complaint. In addition, we have seen several cases where administrative courts have ruled in opposition to the law. While construction law says that the majority of [a project's] neighbors should not be able to take part in proceedings, the courts give these neighbors the status of participants in the process, stating that the construction does have some influence on them. Such a ruling causes the construction permit to be withdrawn and the whole process has to start over again."