The fight for land

Record demand for new apartments has resulted in fierce competition between developers vying to secure attractive sites for future projects. Those are now becoming more and more difficult to find. by Adam Zdrodowski The residential property market in Poland has continued to put up a very strong performance in recent months with many of the country’s largest developers having achieved record apartment sales results in 2017. The supply of new projects has remained at a high level, too. Homebuilders have been trying to replenish their portfolios of plots to be able to maintain high development activity, but this has become increasingly challenging. With the pool of available sites shrinking, the prices of land for housing schemes have been going up. The fact that many of the biggest cities are not sufficiently zoned has been making the situation even worse. “The pace of passing new zoning plans is not satisfactory,” complained Jacek Putaj, a board member at Pro-Urba Invest. In his opinion, the prices of plots are likely to grow due to new  regulations restricting investment based on planning decisions in areas that are not covered by zoning plans. “Acquiring new plots, especially in city centers, is becoming more difficult,” Putaj argued. UPWARD PRESSURE The total value of transactions closed in the development land market in Poland in 2017 amounted to a record of more than PLN 5 billion, according to a recent report by Colliers International. Most of the demand seen in the period came from the residential sector. This resulted from Poland’s continuing housing boom. Reas data show that a record 72,700 new apartments were sold in the six largest residential markets in the country – Warsaw, Kraków, Wrocław, the Tri-City, Poznań and Łódź – last year, an increase of over 17 percent y/y. “Residential developers accounted for more than 70 percent of all the transactions closed in the first three quarters of 2017,” revealed Emil Domeracki, an associate director, investment services/land, at Colliers International. He added that when it comes to plots of land for residential projects, the market is now defined by a lack of balance between the big demand and the constantly dwindling supply, which has put upward pressure on transaction costs. The prices of residential sites have been rising. “In Warsaw, we can even speak of over 10-percent increases y/y with regard to the most attractive properties,” said Joanna Kieszczyńska, a senior consultant, land advisory services CEE, at JLL. The Tri-City, Wrocław and Kraków are following the trend, which is the result of the limited supply of plots and the high level of investor interest. The situation in the land market has not yet had a major impact on apartment prices, but that could change in the near future. In the opinion of Domeracki, some of the best sites which allow the buyer to launch construction work on a new residential investment relatively soon are now often even 20 percent or 30 percent more expensive than in 2016. Barbara Bugaj, an analyst at Cenatorium, said that due to the continued price hikes, and despite the huge demand, the number of transactions involving the sale of plots of land for multi-family housing projects has been decreasing. HOLDING GROUND Jarosław Szanajca, president of the management board at Warsaw Stock Exchange-listed Dom Development, admitted that securing sites in attractive locations is now often riskier than before. Apart from the fierce competition, legal issues make transactions more difficult. The shortage of prime plots has turned developers’ attention to sites which they did not even consider buying a few years ago, for reasons including a complicated legal status or a high price, Szanajca said. However, he stressed that Dom Development itself is in a comfortable situation as it already owns an attractive and diversified portfolio of plots, which was additionally enhanced due to the company’s acquisition last year of Tri-Citybased developer Euro Styl. Dom Development is therefore under no pressure to buy. In 2017, the company earmarked approximately PLN 400 million for land acquisitions. In previous years, it spent almost PLN 300 million annually for that purpose. Zbigniew Wojciech Okoński, management board president at Robyg, too claimed that the company does not need to urgently acquire more land as it already has one of the biggest site portfolios among Warsaw Stock Exchangelisted developers. Robyg now owns plots on which a total of almost 14,000 apartments can be built. The company is active in the Warsaw and Gdańsk markets and is planning further geographical expansion. The developer has already secured a site in Wrocław, Okoński revealed. In 2016, Robyg spent a record of more than PLN 260 million on the acquisition of new plots in Warsaw and Gdańsk. Last year, because of the significant land price increases, the figure was approximately PLN 100 million lower. Many large residential developers have accumulated enough sites in previous years to be unconcerned about the prospects for their businesses in the near future, but could the current situation in the development land market pose a serious problem for smaller companies? PRICE CONSCIOUSNESS Bugaj pointed out that developers currently have to cope with both growing land prices and rising construction costs. A combination of these two factors could lead to a decrease in homebuilders’ interest in acquiring more sites, she claimed. In her opinion, smaller developers who have not previously secured a sufficient amount of land will be hit the hardest. This could lead to the further consolidation of the market with a number of M&A transactions having already taken place in the sector last year. Will the hunt for land continue this year? Colliers International experts predict that while the transactions volume could slightly decrease in 2018, investors will remain active and will also be ready to buy plots for large, multi-phase schemes that can be built within six to eight years. The decreasing availability of residential sites in prime locations is expected to lead developers to buy plots of land for large projects in outlying neighborhoods. Also, they will continue to be interested in the revitalization of neglected post-industrial areas. Maximilian Mendel, partner in charge of transaction advisory at Reas, believes that demand for development land will stay at a high level, but the fact that it is now increasingly difficult to find reasonably priced plots will be a major challenge. “Prices are likely to continue to increase for certain types of land plots, especially those in prime locations and those suitable for small to medium-sized residential projects,” Mendel said. Meanwhile, many developers are hesitant about buying land at the current prices. The market fundamentals are still good, and most developers want to expand their business activities. However, some of them are worried that buyers will not be able to accept higher apartment prices, which the increases in land prices and construction costs will cause. “There is appetite for buying land – but not at any price. For now, many developers can still launch projects on land they bought in the past. But for entirely new developments, the big question is to what extent the market will accept higher apartment prices,” Mendel said.