Residential market analysis

The times when whole residential schemes were sold in the blink of an eye, without any marketing effort, are definitely over.

Since H2 2007, the pace of sales by volume has been slowing. Despite an increase in the average remuneration rate, potential buyers' real purchasing power has shrunk. This is the effect of a combination of two factors - faster growth in prices than in incomes and successive hikes of the base interest rates, from four percent in Q1 2007 to six percent at present.

What we've seen

Caution on the part of lenders has led to a mismatch between the market's offer and the purchasing power of potential buyers. Investors are currently interested in developing units up to 60 sqm for young families, with a total price not exceeding zł.500,000. Larger properties now remain unsold for increasingly longer periods of time.

Apart from restrictions concerning creditworthiness, another important factor that has influenced the decline in demand is the pessimistic news emanating from foreign real estate markets - especially the US, British, Spanish and Irish markets.

The Polish residential market is also highly concentrated, and this has had an effect as well. Some two-thirds of buildings are concentrated in the metropolitan areas of Warsaw, Kraków, Poznań, Wrocław and Tri-city. A shift is thus increasingly visible in developers' activities towards new locations in less popular parts of major cities. At the same time, developers are starting to operate in smaller cities, such as Bydgoszcz, Szczecin and Rzeszów, where the stock of modern residential units is still low.

Developers have, in general, decelerated the pace of new investments in response to falling demand. As a result, many of the smaller, highly leveraged and less experienced companies are now struggling to finance their developments and are even being forced out of the market. Without a doubt, we can expect the trend of consolidation to continue in 2008.

It is also worth mentioning that some 50 percent of companies that went bankrupt in 2007 were from the construction sector, whereas H1 2008 brought about the bankruptcy of even more - 27 developers in all.

What to expect

Signs of price stabilization, first noted in 2007, will continue over 2008 as supply remains high on the market. In 2007, total residential production delivered to the market amounted to more than 130,000 units, whereas 67,000 units were delivered in the first half of 2008. Moreover, residential schemes currently under construction have to face fierce market competition from second-hand units bought by investors in 2006-2007.

In such circumstances, bonuses and attractive payment systems have begun to play an increasingly important role in the sales process. Offers including underground parking spaces or storage spaces within the sale price have become a market standard. Moreover, recently more sophisticated techniques for luring buyers, such as the inclusion of domestic appliances, cars or holiday trips, have also begun to appear.

An exception to the general trend of price corrections are high-quality residential schemes in prime locations, the value of which continues to gradually rise. At the moment, luxury apartments are appearing not only in Warsaw and Kraków, but also in regional markets such as Poznań, Wrocław and Tri-city.

For the near future we can expect a short-term slowdown on the residential market. Developers will have to wait at least until H2 2009 for signs of a market recovery. In the meantime, we can expect the majority of residential units to be sold at very advanced stages of construction.

Paweł Grząbka is the managing director of CEE Property Group