market in Poland - Q Kraków Łódź Poznań Tri-City Wrocław Warsaw

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2 2 Residential market in Poland - Q In comparison with the previous quarter, Q brought an increase of over 5% in sales of units, calculated as a total for the six largest urban markets (Warsaw, Kraków, Wrocław, Tri-City, Poznań and Łódź). In total, more than 15,000 units were sold during the second quarter, with almost 29,500 during the first six months of the year. However, a much stronger rise (almost 30%) was noted in the number of units introduced to the market. As expected, developers increased supply, particularly in the segment of the flats eligible for subsidies under the MdM (Housing for the Young) programme, in order to utilize the demand for such flats to the maximum extent before the programme is about to end. From April to June, the sale of over 17,700 new flats was launched, with almost 31,500 units during H Nonetheless, the most important events took place outside of the housing market. Results of the UK referendum forced a reflection on the possible impact of Brexit for Poland: changes in the EU budget; risk of economic slowdown in Germany and, therefore, also in Poland; and the possible return of hundreds of thousands of young Polish emigrants from the UK.

3 3 Residential market in Poland - Q June also brought an announcement of the Polish government on the objectives of the recently unveiled National Housing Programme (Narodowy Program Mieszkaniowy) and its opening for public consultations. This meant that analyses began in respect to the potential and actual impact of the new programme on the residential development industry. There was a clear increase in the level of uncertainty for both the Polish and European economy as well as the Polish and particularly European political situation; though, the level had been hardly low for a few months. Nevertheless, this did not prevent the Polish development market to break consecutive quarterly records. Supply and prices In Q based on the results of REAS observations, more than 17,700 units were introduced on the market in the six metropolitan areas with the largest scale of turnover. In total, during the four past quarters (from Q to Q2 2016), almost 58,900 new units were launched for sale on these markets, which meant another record was broken. Because the number of units introduced to the market in the analysed period exceeded the number of units sold by more than 2,600 units, the offer at the end of the quarter increased to slightly above 51,000 units. The Warsaw market had the largest share in this increase, with the size of the local offer rising by almost 2,000 units. A total of 1,000 units was the combined growth of offers on the Wrocław, Kraków and Poznań markets. On the other hand, the number of units available for sale decreased slightly in Tri-City and Łódź. This is not surprising in case of Tri- City: demand had been exceeding supply there for a long time. If the pace of sales from the last four quarters was maintained, the current offer would sell off in less than three quarters. Looking at the index of price changes for all the cities, taking into account differences in the number of units on individual markets, there was a drop in the average price of units introduced on the market. This was related to a high share of cheaper flats in the pool of new units, with the concurrent stabilisation or reduction of price limits applicable within the MdM programme. On the other hand, the average price of units in the offer did not change in comparison with the previous quarter, indicating a rapid sale of the newly introduced offer. In the next quarter, developers will probably still introduce a significant number of flats on the market that meet the MdM criteria; therefore, prices should not significantly change. Demand and impact of the MdM Programme In Q2 2016, the number of transactions calculated as a total for all the six markets once again reached a record-breaking level, exceeding 15,000 units sold. Sales have been growing almost continuously from the mid-term minimum of Q1

4 4 Residential market in Poland - Q when the transaction volume dropped to about 7,400 units. This was the first quarter after the end of the Rodzina na Swoim (Family s Own Home) programme and, at the same time, the first year for a long time when the market for owner-occupied flats was not supported by any subsidy programme. In comparison with this minimum, Q witnessed a more than double increase in sales. It is worth keeping this in mind when thinking what may happen after the end of the MdM programme. During the last four quarters, slightly more than 57,700 units were sold on the primary market. This is the highest sales volume recorded so far in 12 consecutive months. In 2012, the first year when developers forgot about the past crisis, slightly more than 30,600 units were sold on the same markets. In comparison, from Q to Q3 2009, during the period of the actual market collapse, less than 19,700 units were sold. Q was also the first quarter in the history of the MdM programme when the number of submitted subsidy applications dropped in all the cities analysed. According to BGK data, the decrease amounted to a total of over 20% q/q. From April to June, almost 2,800 applications were submitted in Warsaw, Kraków, Wrocław, Gdańsk, Poznań and Łódź, comprising 19% of all the flats sold on those markets. In comparison, in the previous quarter, this number amounted to 25%. In percentage terms, the biggest drop took place in Łódź (45.8%) where only 58 applications were submitted. However, in absolute terms, the highest decrease (by more than 350 applications) was reported in Warsaw. The decrease in the number of applications resulted from the fact that the pool of subsidies for units finished in 2016 was depleted already in the middle of March. Even though subsidies for the purchase of flats to be completed in 2017 and 2018 were still available in the second quarter, the pace of submission of applications slowed down slightly. REAS commentary The results of Q confirm that the bull market continues. Despite a slight decrease in the number of applications for subsidies under the MdM programme, the overall sales of flats were superb. The continuing decline in deposit rates discourages Poles from keeping their savings in banks, and the preliminary announcement of the government to develop social rental buildings with an option to buy did not make a significant impression on buyers. In the next few quarters, interest rates and the depletion of funds from the MdM programme will have the strongest impact on the situation on the market. As expected, in the first days of July, BGK announced that the first half of the pool of 2017 funds was already used up. Therefore, buyers can still use funds from the first half of the pool for flats to be completed in With the forecast rate of sales, these funds may run out by the end of December Funds from the second part of the 2017 pool will disappear in

5 5 Residential market in Poland - Q early 2017, so consequently in Q the MdM subsidies will no longer support sales. Then, there will be a clash in the last weeks of 2017 and in early 2018: a nervous competition for the last funds from the programme, with fights among customers who buy both new and used dwellings. This is how the MdM boost will end. If, in parallel, as forecast by NBP, the inflation rises from the current level of -1.0% to +1.5% by mid-2017, then, on the one hand, interest rates on loans will increase and, on the other hand, interest rates on deposits will also slowly begin to rise. This factor alone may reduce the scale of investment purchases. However, the impact on the market will also be exerted by the National Housing Programme (Narodowy Program Mieszkaniowy). The programme is to offer an option to buy flats for a 20% surcharge to the rent payment. In Warsaw, the assumed level of the rent is to be about PLN 20 per month per square meter of the flat, i.e. the surcharge for obtaining the ownership title is PLN 4 per square metre. The lease term necessary to use the option to buy is 30 years. It is easy to calculate that the difference between the lease rent and the price to buy a 50-metre flat finished in the basic standard will amount to PLN 72,000 in this system in Warsaw. It seems to be a very attractive proposal financial-wise but it is far from obvious that the amount to be spent by the future flat owner for 30 years (plus the rent) will be lower than the purchasing price of an equivalent flat from a developer with the use of a commercial loan. It will depend, on the one hand, on the initial price of a flat and the rent indexation rate, and, on the other hand, on the interest rate of the loan. One thing seems certain. For over twenty years, the housing policy in Poland focused on the support of the ownership sector: at first, through housing tax credits, then through the interest relief, in the following stage support of first-time buyers: the Family s Own Home programme, and now Housing for the Young (MdM). The new housing programme means a fundamental change in the direction of the stream of public aid: from the ownership sector and support to the 3 to 4 top deciles of households, towards the 50/60% of households who are less affluent and completely deprived of financial resources. In theory, the ownership market should continue to keep well without public aid. In practice, a part of potential buyers of owner-occupied flats may also queue for virtual flats promised in the programme, similarly as it was in case of Fiat 126p (buying a car one decade in advance). There are many hints that, as in the last several years in Poland, the government s policy will yet again strengthen (not weaken) the effect of the natural cycle of the market: reduce demand just when the downturn phase arrives. Paradoxically, this is the only sure thing when creating forecasts for our market today.

6 ABOUT REAS REAS is an advisory company specializing in issues relating to the residential market. Since 1997, we have been providing advisory services to developers, banks and investors and other entities operating in the residential market, effectively supporting them in planning and execution of their projects. Over the last 5 years we were engaged in more than 2.6 thousand of advisory projects for 253 different clients. Since the year 2000, REAS has been conducting continuous monitoring of the primary residential market, accumulating data on projects in a database based on the GIS system. This knowledge allows REAS to offer a broad range of market analysis services and to devise longterm market forecasts supporting the process of strategic planning. REAS provides advisory services at all stages of the investment process, supporting the developers in the process of designing and preparing a product with the best market potential and competitiveness. The implemented advisory projects feature the following services: location analysis, recommendations regarding the project-mix and functionality of residential units, opinion and recommendations regarding architectural designs, pricing strategies and units price lists, and recommendations regarding marketing and sales strategies. We also offer consultancy regarding the Developer Act, including preparation of information prospectuses. REAS specializes also in valuations of investment land and existing residential buildings. The valuations are conducted by certified property valuers with many years of experience allowing them to use both domestic and foreign valuation standards, i.e. British (RICS), European (TEGOVA), American (USPAP) and international (IVSC). Thanks to our long-term cooperation with institutions financing the residential market in Poland and the recognized reliability of our business plans, valuations and feasibility studies devised by the company, REAS is able to effectively support investors in the process of obtaining financing for new residential investments. We also provide transactional advisory and services regarding investment sites disposal and acquisition. Our key services include: Market research, analysis and forecasting; Competition monitoring and analysis; Highest and Best Use studies; Development consultancy; Property valuations (RICS, TEGOVA, USPAP, IVSC); Business plans and financial feasibility studies; Rental sector, senior housing, condo hotels and second homes market consultancy; Capital raising and search for equity partners; Investment sites disposal & acquisition; Market due diligence; Acquisition/disposal of assets, portfolios and companies Procurement of residential rental assets Joint venture partnerships and share deals Valuation of transaction objects Kazimierz Kirejczyk, FRICS Managing Partner, President of the Board kazimierz.kirejczyk@reas.pl Katarzyna Kuniewicz Partner, Market Analysis & Research katarzyna.kuniewicz@reas.pl Paweł Sztejter, MRICS Managing Partner, Vice President of the Board pawel.sztejter@reas.pl Maximilian Mendel, PhD, MRICS Partner, Transaction Advisory maximilian.mendel@reas.pl The information presented in this publication should not be construed as professional advice or services. You should consult REAS or other professional advisors familiar with your particular factual situation for advice before making any decision. REAS Spółka z ograniczoną odpowiedzialnością Spółka Komandytowa assumes no liability or responsibility for any errors or omissions in this publication. Except where noted otherwise, all publication contents are Copyright 2016 by REAS Spółka z ograniczoną odpowiedzialnością Spółka Komandytowa. All rights reserved. Cover picture: Mota-Engil Real Estate Management, Fajny Dom, Kraków. REAS 2016/07/02/W1