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Yield advantage gives Poland’s residential sector an edge

Cross-border investors are paying increasing attention to Poland’s residential real estate market and one of the chief attractions is that the yields are higher than those of similar property in Western Europe, but the risks are not materially different as attendees heard at an online conference, Poland’s Residential Real Estate Market – Mature Enough for Foreign Institutional Investors?

Speakers at the event included: Maximilian Mendel, head of living investment, JLL Poland; Pepijn Morshuis, CEO, Trei Real Estate; Dariusz Węglicki, country manager Poland, Catella Residential Investment Management; Jarosław Bator, head of new business, Echo Investment; and Jacek Wesołowski, CEO, Trei Real Estate Poland.

Prospects for Poland’s private rented sector are promising. One important trend is that Poland’s younger generation currently prefers the flexibility of renting rather than purchasing their home and demand for apartments for rent that meet current standards is substantial and expected to increase but supply is restricted.

Prospect of yield compression attracts foreign investors

Cross-border investment interest currently emanates primarily from the United States, Western Europe and Germany and from investors searching for yield advantage with the prospect of yield compression.

JLL’s Mendel said yield rates are currently 1.5% to 2.5% points higher than in Western Europe. However, residential property is still a small proportion of Poland’s investment transaction volume – in H1 2020 its share of investment volume was 4%. In 2019, Polish residential real estate transaction volume was about €330 million, up from €125 million in 2018.

The high yields are one of the key attractions of the market for cross-border investors: “Cap rates in many European metropolises are very low. They are down to 2.5% in Paris, down to 3.75% in London, and below 3% in German metropolises, too. In Warsaw, by contrast, prime yields equal 5.25% at present and go up to even 6% in sub-central Warsaw and regional cities,” Mendel said.

However, growth in rental income can be expected providing upside potential for capital values too.

Pepijn Morshuis, CEO of Trei Real Estate said that all of the key ratios point to out-performance of Poland’s private rental market in the near term. “The bulk of the rental apartments on the market is no longer up to date and fails to meet the requirements on the tenant side. A free rental market is only now beginning to evolve,” he said. And he added that the fact that Poland’s rental market is largely unregulated is one of its major advantages.