The ups and downs of real estate
The second annual "Real Estate Professional to Professional" conference, held on Wednesday, November 26, filled the hotel's second-floor meeting room by drawing together a panel to address the current real estate situation in Poland and to make some predictions for the sector's future. Organized jointly by the local offices of five international real estate firms, banks and legal practices, the theme of the conference was "The Polish real estate market following European Union Accession".
That subject elicited what could be described as cautious optimism from the participants, who predicted encouraging, if not overwhelmingly dramatic, growth in the real estate and construction sectors following Poland's May 1, 2004 accession to the EU. It also gave the speakers, who represented some of the most active firms in the sector, a chance to do what they do best: Brag a little about their accomplishments and try to drum up new business by making the case for their services.
Del Chandler, director of marketing and sales at ING Lease Polska, spelled out the financial advantages of leasing-rather than owning - existing property or projects under construction. ING Lease was one of only three main participants in Poland's zł.838 million real estate leasing market last year, prompting Chandler to say that the market needs more participants.
A new but growing trend in the country's real estate market is the participation of institutional investors. The recent launch of AIB Capital Markets' ?100 million Polonia Property Fund is only the most publicly talked-about example of financial investors sinking money into real estate projects that they have no intention of owning or operating.
"The resources of these funds are huge," said SALAN attorney Marek Grodek. And since the investor's interest is based solely on a property's potential profitability, an institutional investor is not usually limited to one type of property or another. "The type of real estate is really irrelevant for the institutional investor," Grodek said.
More important is a property's yield, and incomes of up to 9.5 percent in Poland - compared to yields closer to five percent in Western European capitals - make the country attractive for investment. And since institutional investors do not want to hold on to a property indefinitely, the probability of an investment's rise in value can entice them. Grodek said that Poland may be well-positioned here, too. "Real estate continues to be relatively cheap in Poland. So in addition to high income, institutional investors hope to take advantage of a price hike when they dispose of the property."
Not every part of the real estate investment picture is so rosy, however. Any investor, institutional or otherwise, should be wary of the hidden tax implications of certain real estate transactions. That according to Leszek Tokarski of Deloitte & Touche, who recounted nightmare-scenarios of investors who began projects expecting the VAT exemption due to fixed-asset acquisitions, only to be slapped by the Treasury Ministry with the 22 percent tax and, in some cases, heavy sanctions.
"These things are obvious to me because I've been a tax attorney for 14 years," Tokarski commented, but tax regulations have in some cases been obscure enough to lead to sanctions for companies which had contracted reputable law firms as advisors.
One trap a company can fall into as a primary investor, where a substitute investor is the land owner and plans to construct a building, is assuming that the primary investor qualifies for the VAT refund on fixed-asset acquisition. Tax authorities disagree. Since the primary investor has no title to the land, they say, no refund is due.
Another peril - one that has only existed since legislative changes that came into effect in January of this year - is when project plans are changed. One of Tokarski's clients decided to include a multiplex cinema in a development - a use that should not incur VAT - and tax regulators acting to enforce the new law reacted as if the investor was trying to dodge their responsibility.
SALAN's Grodek summed up the mood of the panel. "The tax authorities," he said, "should focus on those who are trying to cheat, not on those who make mistakes."
But Grodek was not alone in his critique of the government's role in the real estate sector. Colin Guerrini of Davis Langdon Polska challenged policymakers on a number of key points affecting the sector. An overly protected labor market, he said, makes hiring prohibitive and high personal income tax levels hamper investment in real estate. Moreover, the building permit approval process, especially for production facilities with non-toxic emissions, is often slow because local authorities do not fully understand the forms.
While European Union regulations, with which Poland's building permit laws are beginning to harmonize, set time limits for approval, the process here often moves much more slowly.
Nonetheless, Guerrini said that EU accession should provoke growth, but no boom, in the country's construction industry, mainly due to a large infusion of structural and cohesion funds over just a few years. But he advised patience.
"I do not see any construction tender price increases in the next year," he said. Instead, after six months that may see an even more competitive market, he predicts six months of stabilization and growth for the industry only in 2005. "I'm sorry to say that to the contractors."
CB Richard Ellis Managing Director, Nigel Wade called real estate portfolio management "the unsung hero of mergers and acquisitions." Wade did his best to rectify that, spelling out the advantages of third-party portfolio management for an increasingly global real estate industry. From lease and database administration to management of transactions, he said, portfolio management can increase operating efficiency and free up time and resources for the client's strategic initiatives.
Retired General Gromosław Czempiński, now speaking for Deloitte & Touche, closed the conference with a sobering outline of the need to incorporate security planning into real estate projects early in the development process. "No self-respecting company," he said, "can neglect to put the proper emphasis on the safety of their employees." He also saw buildings that incorporate security measures into the structural plan as wise investments. "These quality buildings are expensive, but they are recognized as more desirable by potential corporate clients."
The afternoon's other keynote speaker, however, had to pull out of the conference. Polish Minister for European Affairs, Danuta Hübner was still in Madrid for work on the Nice Treaty. It was perhaps one more reminder that there is much work to be done before Poland's real estate industry can begin reaping any benefits from accession.
That subject elicited what could be described as cautious optimism from the participants, who predicted encouraging, if not overwhelmingly dramatic, growth in the real estate and construction sectors following Poland's May 1, 2004 accession to the EU. It also gave the speakers, who represented some of the most active firms in the sector, a chance to do what they do best: Brag a little about their accomplishments and try to drum up new business by making the case for their services.
Del Chandler, director of marketing and sales at ING Lease Polska, spelled out the financial advantages of leasing-rather than owning - existing property or projects under construction. ING Lease was one of only three main participants in Poland's zł.838 million real estate leasing market last year, prompting Chandler to say that the market needs more participants.
A new but growing trend in the country's real estate market is the participation of institutional investors. The recent launch of AIB Capital Markets' ?100 million Polonia Property Fund is only the most publicly talked-about example of financial investors sinking money into real estate projects that they have no intention of owning or operating.
"The resources of these funds are huge," said SALAN attorney Marek Grodek. And since the investor's interest is based solely on a property's potential profitability, an institutional investor is not usually limited to one type of property or another. "The type of real estate is really irrelevant for the institutional investor," Grodek said.
More important is a property's yield, and incomes of up to 9.5 percent in Poland - compared to yields closer to five percent in Western European capitals - make the country attractive for investment. And since institutional investors do not want to hold on to a property indefinitely, the probability of an investment's rise in value can entice them. Grodek said that Poland may be well-positioned here, too. "Real estate continues to be relatively cheap in Poland. So in addition to high income, institutional investors hope to take advantage of a price hike when they dispose of the property."
Not every part of the real estate investment picture is so rosy, however. Any investor, institutional or otherwise, should be wary of the hidden tax implications of certain real estate transactions. That according to Leszek Tokarski of Deloitte & Touche, who recounted nightmare-scenarios of investors who began projects expecting the VAT exemption due to fixed-asset acquisitions, only to be slapped by the Treasury Ministry with the 22 percent tax and, in some cases, heavy sanctions.
"These things are obvious to me because I've been a tax attorney for 14 years," Tokarski commented, but tax regulations have in some cases been obscure enough to lead to sanctions for companies which had contracted reputable law firms as advisors.
One trap a company can fall into as a primary investor, where a substitute investor is the land owner and plans to construct a building, is assuming that the primary investor qualifies for the VAT refund on fixed-asset acquisition. Tax authorities disagree. Since the primary investor has no title to the land, they say, no refund is due.
Another peril - one that has only existed since legislative changes that came into effect in January of this year - is when project plans are changed. One of Tokarski's clients decided to include a multiplex cinema in a development - a use that should not incur VAT - and tax regulators acting to enforce the new law reacted as if the investor was trying to dodge their responsibility.
SALAN's Grodek summed up the mood of the panel. "The tax authorities," he said, "should focus on those who are trying to cheat, not on those who make mistakes."
But Grodek was not alone in his critique of the government's role in the real estate sector. Colin Guerrini of Davis Langdon Polska challenged policymakers on a number of key points affecting the sector. An overly protected labor market, he said, makes hiring prohibitive and high personal income tax levels hamper investment in real estate. Moreover, the building permit approval process, especially for production facilities with non-toxic emissions, is often slow because local authorities do not fully understand the forms.
While European Union regulations, with which Poland's building permit laws are beginning to harmonize, set time limits for approval, the process here often moves much more slowly.
Nonetheless, Guerrini said that EU accession should provoke growth, but no boom, in the country's construction industry, mainly due to a large infusion of structural and cohesion funds over just a few years. But he advised patience.
"I do not see any construction tender price increases in the next year," he said. Instead, after six months that may see an even more competitive market, he predicts six months of stabilization and growth for the industry only in 2005. "I'm sorry to say that to the contractors."
CB Richard Ellis Managing Director, Nigel Wade called real estate portfolio management "the unsung hero of mergers and acquisitions." Wade did his best to rectify that, spelling out the advantages of third-party portfolio management for an increasingly global real estate industry. From lease and database administration to management of transactions, he said, portfolio management can increase operating efficiency and free up time and resources for the client's strategic initiatives.
Retired General Gromosław Czempiński, now speaking for Deloitte & Touche, closed the conference with a sobering outline of the need to incorporate security planning into real estate projects early in the development process. "No self-respecting company," he said, "can neglect to put the proper emphasis on the safety of their employees." He also saw buildings that incorporate security measures into the structural plan as wise investments. "These quality buildings are expensive, but they are recognized as more desirable by potential corporate clients."
The afternoon's other keynote speaker, however, had to pull out of the conference. Polish Minister for European Affairs, Danuta Hübner was still in Madrid for work on the Nice Treaty. It was perhaps one more reminder that there is much work to be done before Poland's real estate industry can begin reaping any benefits from accession.
