The Polish housing market is diversifying - classic real estate development projects offering apartment sales have been joined in recent years by facilities (and the entities behind them) that offer units made available through institutional leasing. The new formula can provide an alternative to apartments rented from private owners, and is also attractive to investors. However, this is not the whole picture, as the development of the institutional rental market also has its dark side.
The real estate market is changing dynamically. Where some time ago it was profitable to put up apartments for sale, office buildings or hotels, today apartments are being built for rent under the institutional rental formula, also known as PRS or BtR. PRS stands for Private Rental Sector, which is an institutionalized form of rental, usually apartments or micro-apartments, sometimes also commercial premises. The operation of the facilities is carried out by a specialized, by definition, private business entity. From the point of view of the law, the operation of institutional rental is therefore a certain equivalent of occasional rental, reserved for private entities. What are the practical characteristics of this type of investment and what consequences can the development of this market have for urban governance?
PRS apartments are often offered to a high standard, but not always with high square meters and adequate infrastructure
Photo: Aaron Huber © Unsplash Free
institutional boom
The relatively new institutional lease formula has caught on very well in the Polish market. According to a report prepared by JLL Poland, the PRS sector in Poland in 2023 offered 16,000 units to tenants. In the next three years, it is expected to reach 40 thousand units. A report published by ThinkCO, on the other hand, predicts that by 2028 more than 92,000 apartments in this formula will be completed and planned. Most of this type of investment is located in large cities - almost half of them are or will be located in Warsaw. Despite higher prices compared to private rental, apartments in the BTR formula quite quickly find new tenants, forecasting good profitability of such solution.
How does the PRS affect residential architecture?
Photo: Kyle Glenn © Unsplash Free
PRS worth the price?
The authors of the "Guide to the PRS," published by ThinkCO, point to a number of advantages that buildings developed in the built-to-rent format can have for both investors and tenants. In the narrative presented by the report, built-to-rent buildings are designed with less emphasis on achieving as much usable space as possible, and offer more commercial and common spaces given over for use by residents. In their favor is also the necessity to furnish interiors beforehand, so the problem of "developer condition" disappears. Investors, on the other hand, can benefit from the steady income generated by rented apartments and the ability to dynamically adjust their housing portfolio to market conditions. Unlike renting from private entities, institutional leasing can additionally offer a certain sense of security - tenants are not threatened by the prospect of a sudden change in the form of use of the premises, for example, by a landlord who decides to move there.
The location of PRS buildings is unclear from the point of view of urban planning law
Photo: Scott Graham © Unsplash Free
PRS vs. local zoning plans
While Polish legislation has taken care to regulate relations between landlords and tenants, the situation with regard to urban planning law is still unclear. Such facilities are not infrequently built on plots of land that are listed in urban planning documents as areas designated for service development with a communal residential function. We wrote some time ago about this type of project in Poznań, but similar projects are appearing all over Poland.
[...] the relative newness of the institutional model of the housing market on the Polish market manifests itself in the lack of appropriate legal qualifications for such investments, and thus there is an uneven market practice. In view of the significant growth of this sector in the Polish real estate market, it seems important and necessary to correctly define the qualification of investments in the institutional housing market, in particular in MPZP. The qualification discrepancies are primarily due to the location of this model on the border of the two basic purposes with which the institutional housing market is associated, i.e., housing purposes and service purposes.
[1].
Uncontrolled by law, the process of building up cities with facilities designed for use in the PRS formula can negatively affect the spatial order in cities. We asked Piotr Chuchacz, a member of the ArchiPravo Foundation, for his opinion on the subject.
This issue is a fundamental problem posed by the emergence of the institutional rental sector, under current legal conditions. In particular, in view of the spatial policies (not) implemented in our country. We are suffering the consequences of modernist principles of city shaping, according to which local plans often designate development areas with more or less hermetically defined functions. There are few mixed zones, planned in such a way that the principle: "where you live, you work, and around this place you live," is reflected in reality and space.
The emergence, under the legal and market conditions discussed above, of an institutional rental sector with a high growth trend, poses a threat to urban space. This is due to the fact that local plans are largely unprepared in terms of infrastructure, including communications, for the high intensity of de facto residential development, in areas not envisaged for "classic" housing,.
- Piotr Chuchacz writes.
How to build a PRS
It turns out, however, that the emergence of the institutional rental formula on the Polish market is not only an alternative form of developer investment and a threat to urban order, but also, a certain type of building, the characteristics of which result from the specifics of Polish law.
Purely theoretically, the design of a traditional "apartment building" should not fundamentally differ from the design of buildings for the Private Rented Sector (PRS).
For the Polish real estate market, however, this is a new business model. Regulations do not yet provide uniform rules for the design of these two types of residential development. Hence, residential buildings representing both types, as well as their surroundings, may differ on many levels.
The basic differences between the two types of development are determined by the definitions and rules contained in the Construction Law and the ordinance on technical conditions to be met by buildings and their location. A building with apartments for rent, after meeting several additional requirements under other regulations (the Regulation on hotel facilities and other facilities where hotel services are provided), falls within the definition of a collective residence building, and not a residential building. Thus, we are dealing with a building that is, in a way, a service building. Meanwhile, a "classic" building with apartments, without the additional caveat that "for rent", is a multi-family residential building. And such a qualification entails additional design and implementation responsibilities.
- explains Piotr Chuchacz of the ArchiPravo Foundation.
From the outside, PRS buildings are basically no different from a typical residential building. However, the devil is in the details:
Qualifying a building in the appropriate definition group brings with it benefits that often allow for a much faster return on investment and profit generation. For a non-residential building (including a hotel):
- there is no distance of 5.0 m from the plot boundary, as for a multi-family residential building with more than four floors above ground;
- there is no requirement to design a playground or locate the planned development in its vicinity;
- there is no requirement to meet the ratio of the number of parking spaces per unit, which is fundamentally different in local plans for residential and service buildings - including hotel services;
- there is no minimum distance at which parking spaces for cars must be moved away from the windows of rooms intended for permanent human residence; there is also no quantitative limit for "moving" parking spaces for the disabled to the windows of the building;
- there is no need to separate rooms for wheelchairs and bicycles;
- there is no requirement to allocate a minimum of 25% of the area of the project site for greenery (if the local plan does not contain any indication in this regard);
- there is no requirement to meet the sunlight conditions for apartments / units (which is the "icing on the cake");
These differences, despite the stricter fire protection rules for commercial buildings compared to multi-family residential, provide a lure attractive enough in business terms for an investor to decide to change the nature of the development, within the existing definitions of buildings. The buildings being constructed under the PRS system are a lucrative way for real estate investors to round out their investment portfolios, through regular income derived from the rental of residential units.
What's more - the form of ownership of the premises also carries different, less severe, consequences, regarding the investor's liability to future residents. This is because there is no threat of a claim for damages related to the purchase of an apartment burdened with design or construction errors, since the user of the premises does not purchase, but only uses it under a rental agreement. In this formula, often the investor is at the same time the designer, the construction contractor and then even the manager of the completed building.
so as not to throw the baby out with the bathwater
Favorable legal conditions for developers mean that the PRS market in Poland has recently exploded. Although at this point institutional rental apartments account for only 0.1% of Poland's housing stock, projections show that the market will grow at an almost exponential rate. In the face of such intensive growth, the problems signaled by lawyers, architects and urban planners are of extraordinary importance, and the emergence of similar developments in places such as Lake Malta in Poznań is the best proof of this. Will Polish legislation keep up with investors' ideas before cityscapes are irretrievably filled with development complexes unforeseen by urban planners?
Przemysław Ciępka
[1] Real Estate 2023; 4th Electronic Edition; pp. 309-325
