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edition 12 (236)
December 2018
Investment & finance

REIT here, REIT now

After what seems an interminable wait, Polish REITs are soon to be enshrined in law

Tomasz Cudowski

REIT here, REIT now
“REITs are a unique way of raising domestic capital for developers. It’s no exaggeration to say that the entire sector has been waiting for this bill,” claims Małgorzata Kosińska of the REIT Poland Association

The institutions that are to set up the first residential REITs in Poland face a daunting task – They will have to learn from scratch how to raise capital from individuals and invest it responsibly

At the end of September this year, after two years of preparations and discussions, the Council of Ministers was again presented with another draft bill governing the creation of FINNs (Firma Inwestująca w Najem Nieruchomości) or the Polish version of REITs. Under this draft legislation, which the government accepted, Polish REITs will be allowed to invest in the residential rental sector. At the end of October, the bill was read in the Sejm and is expected to be be passed this year (by Q1 2019 at the latest). And now a huge economic experiment is about to begin.

Down to the nitty gritty

The first legislation was proposed about two and a half years ago, although discussions about ‘Polish REITs’ had begun well before. But what is it that might make such an instrument attractive to Polish investors and do they really need it? “Firstly, we are probably the only country in our region that does not have such a law. Secondly, it’s a unique way to raise domestic capital for developers that are relatively small on a European scale and do not have access to other, more expensive instruments to finance their projects. It’s no exaggeration to say that the entire sector has been waiting for this bill,” claims Małgorzata Kosińska, the president of the REIT Poland Association [Stowarzyszenie REIT Polska].

The bill that was originally proposed only covered commercial real estate, so the association campaigned for the inclusion of the residential sector in the legislation as they believed in the future development of the rental market. Now they joke that they were a little bit too good at what they were doing as it turned out that the next draft limited Polish REITs exclusively to the residential rental market. Why introduce such a major change? “We can only guess but we keep on hearing that the commercial real estate market will soon be hit by a crisis and – according to the National Bank of Poland – the residential market remains stable and more scattered, making it more resilient to upheavals in the economy,” says Małgorzata Kosińska.

However, the bill which is currently being debated by the Seym suggests that REITs could eventually invest in such residential market sectors as nursing homes and student residences. The members of the REIT Poland Association believe that this is just the beginning and – incrementally – further market segments are to be included in this form real estate investment. “All you need to do is look at Hungary, where the law governing REITs was passed around ten years ago but only covered a narrow segment of the market, so it was in practice almost non-existent until recently and it was only when it was broadened that capital began to flow in. Now the first REITs have already listed on the Hungarian stock exchange,” says Małgorzata Kosińska.

A long and winding road

One thing is certain: those who set up the first few residential REITs in Poland are not going to have an easy time. There’s no formalised good practice for raising capital and investing it, and more importantly there are almost no companies that have experience of managing such funds. “I would warn all those who are excited about residential REITs that they are neither going to be a cheap nor a mass form of financing for the residential market; in any case certainly not immediately and they won’t cover all of Poland,” says Kazimierz Kirejczyk, the CEO of Reas, pouring on the cold water. “It is going to take years before we see any effects of this new law. The key question is whether such funds will be a secure investment with stable investment returns. Before we can make a judgement we need a few years to see how residential portfolios behave and what the standard of the management is. Privately financed portfolios of new apartments simply do not exist today. The largest rental property portfolio that does exist is the Apartments for Rent Fund [Funduszu Mieszkań na Wynajem] set up by BGKN, with around 1,500 units. One can easily imagine, of course, a portfolio put together higgledy-piggledy with individual apartments scattered in various buildings, both old and new – but for such investments the market needs even more time to assess the investment risk. And if the investment proves to be unpredictable, the returns will probably have to reflect this,” says Kazimierz Kirejczyk.

Not just apartments

Many agree that if REITs prove successful in the Polish residential sector, it will be easier to extend them to other segments. In Western Europe and the USA, where REITs are already well established, the residential sector makes up a large percentage stake of their structure, which shows their dormant potential in the commercial real estate market. “REITs are a good way to raise capital on the domestic market because they pool together scattered investors. Besides, they don’t force developers to sell commercial real estate – 95 pct of which in Poland goes to foreign investors,” points out Małgorzata Kosińska. “Real estate sales are often a prerequisite for a company to continue to develop, but with REITs a commercial real estate developer can retain partial ownership, which is beneficial as it can apply its knowledge of a property in its maintenance and management and thus increase its value. More than 90 pct of commercial real estate in Poland is owned by foreign investors – including foreign REITs – whereas in Hungary and the Czech Republic this share is 60–80 pct, which seems a much better proportion,” she adds.

REITs might also prove to be a good instrument for financing projects in regional towns. Foreign capital has effectively reached Poland’s regional cities, but this is not the case for provincial towns, and this is proving an impediment to the development of stable and prosperous centres. Private investors in Poland are also taking a greater interest in REITs. Out of necessity they have been investing in foreign funds, since the managers of these funds have proven more effective at investing Polish capital. The market abhors a void and money knows no borders, so if Polish REITs fail to meet this demand, it will be met by REITs based outside the country.

“I’m optimistic and think that one or two years will be enough for legislators to be convinced of the utility of this instrument in Poland and for them to broaden its scope to other commercial real estate sectors,” predicts Małgorzata Kosińska. “I suggest you go and stand in the middle of the ONZ roundabout in Warsaw and have look around. What you will see from there is rapidly developing businesses and a great number of beautiful, modern office buildings. Now think who they belong to. Mostly it’s pensioners, through retirement funds that have invested in REITs. But we can be sure of one thing: there are no Polish funds among them,” she says. ν

When is a Reit a Reit?

A REIT (Real Estate Investment Trust) is a dividend paying fund or company that invests in real estate. Company statutes require this dividend to be paid on a regular basis and it is paid from a fixed rental or leasing income. REIT investment vehicles are tailored specifically for individual investors, whose private savings would normally not allow them to invest directly in the most attractive real estate assets, such as office buildings and shopping centres. Only by pooling such investors as part of a joint investment fund, is the purchase of such properties possible as their price would otherwise make them prohibitively expensive. Income from a REIT is only taxed once, as it is considered to be a direct investment in real estate and, as a result, one of the defining features of a REIT is that is exempted from corporate income tax.

Source: REIT Poland Association [Stowarzyszenie REIT Polska]

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