Is the PRS market the future?

How does it work?

Investment funds are responding to society’s demand for new rental flats finished to a high standard. In a typical construction process we can distinguish two key parties involved in building residential buildings – the developer and the general contractor. In PRS investments a third party comes into play: the investment fund, which provides the funds for the project and then takes over the building once construction is complete.

Source: Overview of the PRS market in Poland – H1 2022

What do the data say?

According to Dr Damian Kaźmierczak, chief economist of the Polish Association of Construction Employers (PZPB), private developers in Poland started construction of more than 400,000 flats over the past two years, while investments by investment funds account for only around 10,000 units nationwide. Another 12,000 flats are currently under construction, and according to an analysis by PwC experts , this number will grow to as many as 63,000 units over the next 5 years.

Why such growth? The drastic rise in interest rates has directly reduced the borrowing capacity of many potential buyers. Stricter creditworthiness requirements have significantly narrowed the pool of people interested in mortgages, which translates into falling flat sales. Another factor is the changes taking place in society. Fewer and fewer people are choosing to buy a flat outright.

In the past, the goal of most people was to own their home, but in recent years interest in long-term mortgage commitments has declined. Owning a flat is not as important any more, and more and more people are choosing to rent.

…all sunshine and rainbows?

Above all, PRS investments make renting convenient. Each development has a team managing the building, and tenants’ problems are solved much faster than with traditional renting from private landlords. Besides the obvious benefits for tenants, there are also large cash injections for the general contractors building such projects, which will help accelerate the growth of large players in the domestic market, especially in the current economic situation.

Unfortunately, the vast majority of investment funds investing in this type of property are 100% foreign-owned. This is linked to Polish investors lacking sufficient capital. Admittedly, a few Polish developers have started working on institutional rental projects, but on a much smaller scale than their foreign competitors, who have funds in euros rather than złoty. This is one of the reasons why the Polish market is such an attractive target for foreign investors. The legal framework is also a contentious issue. There is no single piece of legislation covering PRS investments, and appropriate regulations are key to protecting tenants’ rights under such specific rental conditions.

Summary

The introduction of PRS investments to the Polish market is an opportunity to accelerate the growth of the construction industry through a large cash injection, while at the same time responding to the market’s demand for rental housing. PRS investments are a great alternative to traditional renting and to buying property outright.

Legal issues may prove problematic, as at present they are not defined by the necessary regulations at all. Despite the large amount of capital brought into Poland during construction, a significant part of the money will at the same time be taken out of the country.

Institutional rental will undoubtedly help kick-start the residential investment market, which is currently in decline, but state support is essential – the state should not only regulate this type of investment but also make it easier for Polish businesses to invest in the institutional rental market.