Why Poland will be home to the next build-to-rent boom

Posted: 7th May 2024   |   Share

By Anya Stanislawczyk and Yair Grimberg

Anya and Yair

It’s only been a decade or so since build-to-rent (BTR) started to emerge as an institutionally backed residential asset class in the UK. Over that time the sector has seen tremendous growth. Few people would have predicted the volume of investment into the BTR and PRS (Private Rented Sector) – and the ongoing demand continues today with strong income growth being a significant investment driver.

There are now 263,694 BTR homes in the UK, including both London and the regions, of which 92,140 are complete, according to trade body BPF – arguably sign of a mature sector. The same can’t be said of Poland, where the number of total units have only recently hit 10,000.

However, many of the same long-term structural fundamentals that drove the rise of BTR in the UK are present in Poland, which is already a strongly emerging market for the residential rental sector.

Driving Poland’s potential BTR boom is a supply and demand imbalance in the overall housing market that is not meeting the needs of its upwardly mobile younger generations, creating opportunities for savvy developers and lenders to be first movers in this market.

According to an investment briefing by Garbe Institutional Capital, only 13 percent of Polish residential stock is available for rent, far below the EU average of 30 percent.

Clearly, given the supply demand imbalance, the conditions for a development boom to meet that demand for Polish BTR exists.

The need for more development is shown quite starkly in data from Garbe, which finds that Poland’s rental market is currently being massively undersupplied.

For example, Warsaw has 5,000 existing operating rental units and 15,000 being developed. However, the estimated market need is 200,000. The demand is not restricted to the capital city. Krakow has 1,000 units and a pipeline of 5,000, but 80,000 units are needed, and the picture is similar in other Polish cities like Wroclaw or Tri-City, which includes the northern coastal city of Gdansk.

This undersupply of rental units is matched by the relatively unaffordability of homes for purchase, supporting BTR’s core investment thesis that the asset class will perform well when there is an overall shortage of housing stock – and thus a demand/supply imbalance. The volume of housing loans dropped by three-quarters between 2021 and 2023 as interest rates increased, according to National Bank of Poland data, and it seems unlikely that an upcoming government-subsidised credit scheme will do much to move the dial.

Overall, affordability has been steadily declining in Poland’s biggest cities since 2015, according to PwC – and this problem is not going away, with asking prices for apartments having surged by 17 percent between 2022 and 2023, as Savills reports.

As it stands, the BTR market opportunities in Poland are characterised by a diverse range of projects, including greenfield developments, the renovation of existing properties for rental purposes, and large-scale urban regeneration initiatives. Fundamentally, that should make the market attractive to a wide array of investors and developers across the risk curve.

But the market still needs further investment to reach its full potential. Specifically, through greater institutional investment, which at the moment only accounts for two or three percent of Polish BTR.

In this context, lenders have a crucial role to role to play in turbocharging Poland’s BTR sector by providing the necessary capital to get projects off the ground. And those lenders with existing exposure and experience in navigating the complexities of the Polish market are best placed to act as the financial partner to would-be investors.

For example, Leumi UK's facilitation of a €50 million deal with AFI Home, a subsidiary of listed real estate investor AFI Properties, is helping fund a portfolio of 746 privately rented apartments across Warsaw and Krakow. Much as investors should look for experienced and knowledgeable financial partners, the reverse is also true – AFI’s consistent track record of investment, strong reputation as a sponsor, and history in the Polish PRS dating back to 2021 was vital in guiding our lending decision.

Leumi UK's facilitation of a €50 million deal with AFI Home, a subsidiary of listed real estate investor AFI Properties.

There are, however, challenges to be overcome. One is that lenders and developers who have to report ESG metrics may only wish to build new developments in Poland given that many of the assets that are currently on the market are old, Soviet-era buildings that do not meet today’s environmental or quality requirements.

Another is that operating in a comparatively new market such as Poland carries with it a higher risk profile than the UK. Assessing various risk factors associated with BTR projects, such as location, project viability, market demand, and developer experience is crucial to the success of the deal. Through thorough due diligence and risk assessment, we were able to ensure that our recent Polish deal was appropriately structured to provide the right risk reward structure but also contributed positively to the urban landscape and community. Working in a new market and environment was certainly a challenge, and as such choosing partners carefully is a critical part of the process to ensure investors are bringing the right expertise to the table.

Poland's economic stability and the growing demand for rental will likely accelerate development over the short to medium term. As the market matures, continued interest from both local and international investors can be expected, drawn by Poland's economic stability and the growing demand for rental housing. Lenders, both at home and from outside Poland have an opportunity to be part of the growth – but must ensure that they take a considered and prudent approach to backing the right people and the right assets.