To kick off our series of legal FAQs on the Polish real estate market, in which we will address questions often raised by investors, we begin with a popular topic – the private rented sector (PRS). Counsel Jan Wszołek, PhD, from our Warsaw real estate team comments on the most relevant market and legal issues.
How is the PRS developing in Poland and what is the current market situation?
The PRS is a relatively new phenomenon in the Polish residential market - it does not have a long business tradition. The sector developed a few years ago, initially through the activity of a domestic, state-controlled fund which created the first PRS portfolio that is currently in operation. We participated in these early PRS deals, which were quite new to the market at the time. After a couple of years, foreign investors became interested in acquiring residential projects and about 8,000 units have been acquired in recent years. Several funds - from Scandinavia, the Benelux countries, Germany and Israel - are already present in the market and have expansion plans. Some developers have also set up their own PRS platforms.
The most popular cities for PRS projects are Warsaw, Kraków, Wrocław, and Gdańsk. However, some investors are also considering Poznań, Łódź and Katowice as potential locations. International broker agencies have been present in Poland for many years and they have qualified teams specifically dedicated to the PRS. The legal and business framework for the PRS is already established and relatively stable. There is not much sector-specific legislation and, in general, the acquisition or development of a PRS project does not differ much from a transaction or development in other sectors of the real estate market.
In Poland, for historical reasons and in contrast to some Western EU markets, ownership of residential property is much more popular than renting. However, due to rising property prices, renting is becoming more popular, especially in Warsaw and other large cities. At the moment, due to high interest rates in Poland, individual buyers face difficulties in obtaining bank finance and thus the sale of a residential project to a fund has become more common.
How is a PRS project acquisition completed? What are the most popular types of transactions?
There are no turnkey PRS projects for sale in the market. Most transactions are either forward purchase or forward funding structures. In the case of a forward purchase transaction, a preliminary sale agreement is concluded (in the form of a notarial deed) and upon the completion of the development (which is financed by the developer through equity or bank loans), the property is sold to the buyer. In this model, the price is usually paid after completion, although an advance payment is often agreed. In the case of a forward funding transaction, the buyer acquires the land and the developer completes the development on the basis of an agreement (called a forward funding agreement or development management agreement). The developer hires the general contractor and manages the construction process. Payment is made in tranches based on agreed milestones and upon completion the property is handed over to the owner. There are, of course, many versions of both schemes. It should also be mentioned that very often a PRS project is delivered on a turnkey basis, i.e. fully equipped.
When it comes to buying, a distinction can be made between share deals and asset deals, both of which are also possible in the PRS. However, there is a more important distinction between buying an entire building and buying a package of residential units. In the former case, the fund has full control over the property and can divide and merge units, redevelop the building, demolish it or change its function in the future. In the case of the acquisition of a package of units, the fund becomes the owner of the units and the common areas of the building are owned jointly by all unit owners. The fund and other unit owners form a housing cooperative, which manages the common areas of the property. Therefore, the management of the building in such a scenario also involves third parties, which gives the fund less flexibility and legal certainty. Nevertheless, packaged unit deals are popular in the premium sector.
What regulations govern leases?
Poland has specific legislation dedicated to the protection of tenants. However, a special type of lease – a so-called “institutional lease” - has been introduced for the purpose of the PRS market. Such leases must be concluded in writing, must be concluded for a fixed term (up to 10 years) and may include flexible termination clauses. The procedure for eviction is simplified, as the tenant must provide a notarial deed in which he submits to eviction if the unit is not handed over to the landlord at the end of the lease. The tenant is obliged to provide a deposit, the maximum amount of which is equal to 6 months’ rent.
In general, the institutional lease regime seems to reflect market expectations and is not controversial among investors. One issue that is currently being discussed is the possibility of setting rent in EUR, which is desirable if the project is financed in EUR. This is not clearly regulated and some funds have already implemented this policy in their buildings.
Are there any specific market regulations?
There are currently no market-specific regulations which apply to the PRS. There is general legislation covering the acquisition of real estate by foreigners. However, foreigners residing in the EEA are free to acquire real estate in Poland, including residential projects. According to court rulings, an SPV set up within the EEA but controlled by a non-EEA foreigner (e.g. from the US or China) is considered to be an EEA entity and may acquire real estate in Poland without restrictions. The government is currently working on a regulation targeting the PRS market, which may introduce an obligation to pay stamp duty on the acquisition of a certain number of residential units. However, it is still unclear whether such a requirement will be introduced. The draft of the regulation is not yet ready and there is a lot of discussion on the issue. The market is monitoring the legislative process but does not seem to be discouraged.
What does the construction process in the PRS market look like?
In general, the development of a PRS project does not differ much from the development of a typical residential project. In the case of larger projects, the first stage involves obtaining an environmental decision (EIA). Planning rules are usually set out in the local spatial development plan – a local planning law adopted for certain areas. If such a law has not been adopted, the owner can apply for a zoning decision for the project. Residential projects may also be sited on the basis of a regulation that allows for the adoption of a specific local planning law for such developments. Once the environmental and planning phase is completed, a construction permit must be obtained. The process of obtaining a full set of decisions takes from a few months (if no environmental decision is required and a local spatial development plan has been adopted) to 1-1.5 years (if an environmental decision and a zoning decision are required). After the completion of the development, an occupancy permit is issued.
