The Polish private rental sector is about to enter a period of intensive development. Unlike the western EU Member States, where the share of rented apartments often significantly exceeds 50%, in Poland, only approximately 15% of apartments are rented out (about 2.3 million out of a total of 14.8 million apartments existing in Poland).
What is more, the market is currently highly fragmented, full of individual and small investors who hold a few apartments at most. Investors with a portfolio of several hundred or several thousand apartments for rent are still a new phenomenon in Poland. However, the recent transactions carried out in Poland by TAG Immobilien, Zeitgeist, Catella RE, the LRC Group, and Heimstaden Bostad are a signal that big player are entering the Polish market. Over the upcoming few months, property developers are planning to sell at least 35,000 apartments intended for the rental market; some of them should be ready in the next 12 months. Experts predict that Poland still needs nearly two million apartments to accommodate residential needs. Some of this demand may be satisfied through rental. This means that investors have a large cake to share between them.
However, on this young market, a certain standard of purchase of apartments by institutional investors has already been developed. In certain aspects, this standard differs from regular apartment sale agreements. Some of these differences are described below alongside an approach to such transactions in Poland.
Purchasing an apartment in Poland
In Poland, the regular procedure of an individual consumer purchasing an apartment from the primary market is strictly regulated. The Law on the Protection of the Rights of a Buyer of an Apartment or a Single-Family House has introduced a new type of an agreement: the property development agreement. In that Law, the contents of this agreement, the rights and obligations of the parties, the options in terms of its rescission, and the methods of securing the money paid (through escrow accounts and bank guarantees) are regulated. The sale of all new apartments to customers in Poland takes place in accordance with the said Law. Additionally, the agreement has to be executed in the form of a notarial deed and has to be in compliance with the extensive body of rulings of the Polish Office of Competition and Consumer Protection, which guards the collective rights of consumers and which is highly active in this regard.
However, the purchase of an entire package of apartments by an institutional investor is not governed by the above regulations. Considering the differences in the legal and economic standing of the parties, this has allowed for a completely different practice and standard to be developed for such agreements.
The standard market procedure every investor goes through usually begins with a letter of intent signed for a period of between several weeks and 3–4 months. In that period, the investor carries out a detailed due diligence review of the real property and the planned project, identifying potential problems that could delay or hinder project completion and investigating the standard of the future building. Although some of the property developers may be unwilling to agree for the investors to examine the project, this stage should definitely not be skipped since the due diligence review may save the investor from getting stuck in an uncompleted project, with funds engaged. An uncompleted project (e.g. without an occupancy permit, which is mandatory in Poland) will be difficult to sell and frequently the potential claims of the investor may be secondary to the potential claims of the banks providing financing (if the investor is not the only buyer of the new project and the construction is co-financed by banks), which means that recovering all of the invested amounts will be time-consuming (if at all possible—unless the collateral is not the property development project itself).
A positive outcome of the due diligence review opens up space for negotiations concerning the preliminary agreement, which is one of the key elements of a real property transaction in the private rental sector in Poland.
Preliminary agreements in the private rental sector
In the preliminary agreement, the parties specify all of the rights and obligations they will have until the closing of the project (i.e. the purchase of finished apartments that are covered with an occupancy permit). In certain aspects, this agreement differs from a classic preliminary agreement of purchase of real property. First of all, it describes the dates and the method of completion of the project, including a detailed specification of the standard, and introduces special forms of securing the investor’s engagement in the project. The main elements of a preliminary agreement of purchase of apartments in the private rental sector in Poland are as follows:
– Specification of the procedure of paying the price for the apartments and tying this process to the progress in the construction process. In Poland, when settling the purchase of apartments in a building erected by a property developer, both under property development agreements with consumers and under the agreements used in the private rental sector, the buyers participate in the ongoing costs of the construction process. This means that the price of the apartments is broken down into smaller portions that are paid to the property developer as the project progresses (with a small final payment made when the agreement of sale is executed; this is usually 10% to 15% of the price). On the consumer market, this is usually done through open escrow accounts from which banks disburse funds once the specific milestones of the project have been reached. On the commercial market, consecutive payments are usually made, once the investor’s technical advisors have confirmed that the particular scope of works has been completed. Relatively rare solutions include making the payment of the entire price (or most of it) only after the execution of the final agreement or in smaller portions, but into a closed escrow account from which the funds are disbursed only after the execution of the final agreement of sale. However, they are used sometimes, especially if the property developer is unable to provide sufficient collaterals for the payments made by the investor.
– Securing the money paid by the investor. Unlike in the case of the consumer market, institutional investors are able to negotiate comprehensive or partial collaterals for the funds paid by them to the property developer. The degree of the required security usually depends on the size of the project, the extent of the investor’s engagement (purchasing all of the apartments in investment or only some of them), and the method of financing (by a bank or exclusively through the payments made by the investor). Depending on the situation, the solutions used in this respect include mortgage on the real property that is the object of the project (unless another financing bank has already established a mortgage), bank and insurance guarantees from property developers, guarantees from parent companies (in the case of large multinational property developers), and the payment of the entire price or a portion of it to an escrow account (from which funds are disbursed only at the moment of execution of the final agreement of sale).
– Supervision over the progress of the construction process. As a standard, an institutional investor reserves, in the preliminary agreement, the right to inspect, on an ongoing basis, both the progress and the quality of the works carried out by the property developer. This way, the investor is able to both monitor the progress at the construction site in view of the consecutive payments to be made and exercises regular supervision over the quality of the works, in particular with respect to works that will be covered up with other elements, meaning that defects may manifest themselves only after years of use.
– Statutory warranty and guarantee granted by the property developer. In Poland, as a standard, the buyer of a real property, including an apartment, is entitled to a 5-year statutory warranty from the property developer under which all defects and faults that manifest themselves within that period have to be repaired. An institutional investor in the private rental sector may ensure that he is granted, in addition to the said statutory warranty, a detailed guarantee, which extends the scope of liability of the property developer and forces him to make the repairs by shorter deadlines. What is more, the investor may also negotiate for the guarantee period to be extended beyond the five years. However, the key difference between the consumer market and the commercial market is the standard collateral established by the property developer with respect to claims under the statutory warranty and the guarantee, which is either a guarantee deposit or a bank or insurance guarantee—this secures the investor’s potential claims to the property developer on account of the costs of removal of defects and faults of the real property. The market standard in this respect is 3% to 6% of the purchase price of the project, which is maintained for the period of the statutory warranty and the guarantee. In the case of large property developers, the bank/insurance guarantee may be replaced by submission to enforcement with respect to covering the costs of the removal of the defects or by a guarantee from the parent company (in the case of branches of large multinational property developers).
Completing the project
The last step, which closes the project, is the agreement of sale of apartments. It is executed in performance of the preliminary agreement, after the completion of the construction process and after receiving the final occupancy permit. In that agreement, the parties finalize the obligations described in the preliminary agreement and transfer the ownership of the apartments. This is a relatively simple element compared to the preliminary agreement, which specifies all of the obligations of the parties for the future. The agreement of sale is usually just the performance of the provisions of the preliminary agreement.
Years of plenty are coming for institutional investors in the Polish private rental sector. It is vital that when planning and carrying out their investment projects, they remember about the significance of a due diligence review and the negotiations concerning the preliminary agreement, considering the prevailing market standards. This will allow them to safely invest money on this attractive market.
By Lukasz Lanoszka, Partner, Konieczny Wierzbicki