27.01.2007    The Panalyst Perspective

Panalyst view on the current Krakow market

We speak to Tej Panesar, CEO of Panalyst, a Polish real estate research and development firm, about his thoughts on the Nordic House development and the general Krakow property market

What do you think of prices in Poland right now? Have price rises in Krakow slowed down? After a rapid increase of as much as 70% in 2006, when Krakow was one of the hottest property spots in Europe, prices rises slowed down in the first half of 2007 and flattened of in the second half. In some city centre areas such as the old town where prices were pushed beyond market fundamentals a slight drop has even been observed. A similar pattern has been observed in Warsaw and other major cities.

` Is this a cause for concern when considering Krakow? I dont believe so. It is important to distinguish between the city centre and Krakow's suburbs and I like to describe it with something I call "the droplet effect".

The droplet: In 2006 the boom that occurred in Krakow, was driven largely by overseas investors buying speculatively. Large and small investors from the UK, Ireland and Germany pumped a great deal of money into the beautiful city centre (Old town and Jewish quarter) pushing prices beyond what could reasonably be justified by rents, local incomes and even future foreign demand. Then the credit crunch and the opening up of new markets in Romania and Bulgaria saw foreign demand reduce. What we have seen is therefore a reasonably painless and stable deceleration of price growth to a level that equates long term, local and foreign demand, with availability.

The ripple: What local Polish people therefore saw during 2006 and 2007 were prices rising in the city centre beyond a level they could afford, even with the expanding mortgage market. Local incomes were rising and locals who had sold their city centre apartments and buildings had significant cash in the bank, but could not afford and therefore did not wish to buy in the centre. They therefore began to push out into the suburbs, buying apartments in the suburbs that matched their income levels reasonably, or even buying up plots of land to build houses, pushing up land prices. Suburban prices were pushed forward by outward flow from the city centre and inward flow from local first time buyers moving into the highly desirable location for families, of Krakow's suburbs, funded by new jobs and rising incomes from home and abroad. Suburban prices therefore also grew impressively, but in a more stable way, based on fundamental demand.

The reverse droplet: I believe the final stage in the process, that might occur, is illustrated by the above photo. In the first half of 2008 a burgeoning economy in Poland coupled with money from Polish people working abroad will continue to fuel stable, affordable suburban price growth. As some existing owners in the suburbs see prices in the centre beginning to stabilize or fall slightly, they will be interested in selling or refinancing and renting their suburban apartments and moving into the center to pick up better value yet still highly desirable purchases in the old town. Prices won't get pushed as fast as they were by the foreign speculators, but instead will rise stably in line with Polish incomes, the mortgage market and economic growth, in other words by fundamentals. A market driven by speculators was never going to be sustainable and we are now in a much healthier situation.

So would you invest in Krakow suburban real estate like Nordic House right now?

Yes.

I am personally a simple investor, so I have 3 simple reasons:

1) Long term price growth potential: I have witnessed first hand the growth in the Polish economy, which despite a somewhat strange previous government has continued to grow at a rate of x% per annum. Local graduates are walking into jobs locally, with international groups like Cap Gemini, IBM, KPMG and PriceWaterhouse who have packed out the local office market. The potential supply of first time buyers to the market is huge, and suburban prices equate to their income levels combined with mortgages.

Krakow is still the most desirable place to live in Poland. Despite the growth of other cities, young Polish professionals and families still rate Krakow at the top. Comparing Warsaw and Krakow in this regard, the trend will not change for many years.

Nordic House fits the profile of the type of development that would attract these buyers (Suburban, affordable, good transportation links, underground parking, playground, modern).

2) Price and rent: I like mid price range real estate investments with stable strong rental yields. Suburban Krakow developments such as Nordic House represent a reasonable and accessible price per apartment unit. They are not far from the city centre with good rent affordability and transportation links, making the apartments attractive to potential young professional and student tenants.

3) The Polish zloty: I am a pound investor and the Polish currency, the zloty, has appreciated from around 6 zloty per pound in mid 2005 to around 4.8 zloty today. Given the level of funds flows into Poland from EU funds, investors and Poles working abroad repatriating their wages, I expect this trend to continue steadily. This alone, ignoring any property price movements, has meant an increase in value of investments over that period by 20%.
http://www.abcmoney.co.uk/news/162007145924.htm

Do you feel investors in Nordic House should be concerned about the global credit crunch?

2 main points: The credit tightening will certainly affect the number of foreign buyers purchasing apartments in Eastern Europe and Poland. A possible softening of the UK and Irish property markets coupled with increasing caution by banks in those countries allowing release of equity through refinancing will result in a reduction in the number of foreign individuals buyers.

So the global credit crisis obviously affected those markets such as the US and UK which were highly leveraged, due to easy access to cheap credit.

Poland however is an entirely different market. It is an emerging market and as such a significantly lower percentage of the population have mortgages. Also the mortgage banks in Poland are much more conservative with each application and this meant a much lower exposure to sub-prime risk taking by the banks. Poland has also started from a lower level in terms of earnings and property prices and has moved steadily upwards to a European standard. Hence the property market has been moved forward primarily by fundamentals, as opposed to access to cheap credit fuelling a boom.

So in my opinion the fundamentals of Poland continue, and the credit crunch has helped to reduce excess speculative buying in city centres like Krakow and Warsaw.

This view is confirmed by an article in the Financial Times, by Martin Majdaniuk, published January 3rd, 2008.

"The strategic investment case for Europe's emerging markets remains solid in spite of the deterioration of the global picture, says Martin Majdaniuk, manager of the Baring Emerging Europe trust.

The macro economic outlook across the region remains favourable with strong growth outlook leading to positive earnings momentum in Poland and the Czech Republic."

How do you feel the Wola Duchacka area rates compared to other parts of Krakow? As an established suburban location Wola Duchacka rates well when compared to the city centre and is poised to continue to take advantage of steady local demand. Average prices are significantly lower at 7,200 PLN /sqm compared to up to 25,000 PLN /sqm in the centre.

In general the area seems very vibrant. An in demand suburb, it contains a mix of upper end residential houses, large green spaces and older style blocks, which have developed over a longer period of time than new areas further south that have more efficiently used up available land. As such trees, light and green space are evident throughout the area and consequently it has a good reputation among locals.

The local community were previously well served by Tesco and Castorama (DIY and housewares) . This year the large new Bonarka shopping mall will open in the centre of Wola Duchacka and this was important news for the area. Developed by TriGranit a well known firm, it promises to make the area increasingly desirable, with shopping, cinema and other retail facilities. The area itself is 10 minutes drive from the city centre (As timed by myself). It benefits from new bypass roads directly to the area and a newly constructed high speed tram link. This is particularly important when considering the rental potential of apartments in the area.

What about the Nordic House Development? Does it fit the profile of local buyers and renters in the area?

It's a good development. The Nordic House building on Macedonska street is well located in Wola Duchacka. It's close to the roads and new tram links, underground parking and has a modern attractive design. The apartments are ideally sized when considering affordability for locals (Rent and purchase). As an investment they are also well placed. Young professionals and students will pay up to 1,000 PLN per month for a typical 40m2 apartment and this will cover mortgage payments.

Purchase prices at 7200 PLN/m2 match the average for that area and as such represent a good opportunity to buy into the core economic growth of Poland and Krakow and the continuing strength of the suburban markets.