Prospects of the individual residential rental market

One-quarter period of restrictions related with the pandemic turned out to be too short to change residential market trends in a meaningful and lasting way. Contrary to some market observers expectations, there was no downturn of the trend and no decline in home prices. Moreover, the activity of market participants, after a short break, returned to the level close to the pre-pandemic level, and even, in case of developers, clearly exceeded it. At the same time, however, situation on the residential rental market developed differently. Restrictions and changes introduced as a consequence of the pandemic resulted in reductions of rent rates that had not been recorded for a long time. The upward trend changed already in the second quarter of this year, but at that time we witnessed only slight adjustments. The average rent in Wroclaw decreased by 1.50% compared to the first quarter of 2020, while in Warsaw and Cracow by approx. 1% In Gdansk, Poznan, Lodz and in Katowice, quarterly changes were minimal and did not exceed 0.5%. In the third quarter, however, the reductions definitely accelerated in all major Polish cities. The deepest drops were recorded on two largest markets – Warsaw and Cracow. The average rent rate for a flat in Warsaw in the third quarter of 2020 amounted to PLN 1 714 and was lower than quarter earlier by 8.43%. Even deeper decline was recorded in Cracow, where the average rent rate in the third quarter of this year amounted to PLN 1 324, which was 9.56% less comparing to the previous quarter. In Wroclaw, the average rent rate recorded in the third quarter was lower by 6.88%. Much lower drops of rent rates were recorded in Poznan and Gdansk – by 1.63% and 1.91%, respectively. In other cities, there were drops not exceeding 2.5%.

CHART 1. AVERAGE MONTHLY RENT RATES OF A HOUSING UNIT IN SELECTED CITIES

source: AMRON-SARFiN Report 3/2020

Recorded changes of the average rent rates, very significant in some locations, do not result only from simple rent reductions. The demand for flats for rent reacted in a very dynamic way to changes in the market environment, clearly changing its structure. Basic phenomena in the market environment and factors of structural changes in the demand for flats for rent were:

• Decision to conduct remote classes at universities in the winter semester. Its natural effect was the reduction or total lack of demand for flats and rooms for rent from students.
• A clear reduction of number of foreigners working in Poland in the second quarter of this year. According to NBP estimations (from March to September this year), the number of Ukrainians working in Poland decreased by approx. 200 000 as a result of the pandemic. However, Social Insurance Institution (ZUS) data shows that foreigners working in Poland returned to work as soon as it was possible, probably already in July. Therefore, it can be concluded that expected significant impact of the reduction in number of foreign employees on rental market has actually materialized to a limited extent.
• Restrictions in tourist traffic and reduction of demand for short-term rental, resulting in transfer of a significant part of apartments from this segment to the long-term rental market.
• Introduction of remote work system by a significant number of companies.
• Decline in social confidence associated with the sense of threat related to the epidemic and, consequently, a decline in demand for rooms for rent.

Considering the possible development of the situation on individual rental market, the durability of changes that have recently occurred should primarily be analysed. The question about students returning to universities seems to be the simplest and the most obvious to answer. Return to full-time studies seems indisputable and most desirable, and in the light of the epidemiologists opinions and decisions taken by universities’ authorities, it is likely that stationary studies will be possible already in the summer semester of the current academic year. Therefore, it seems quite possible that already in January we will observe an increased demand for apartments for rent and its obvious impact on the level of rent rates.

It is slightly more difficult to answer the question about the prospects of demand for flats from foreign workers. Extrapolating from the data of the Social Insurance Institution (ZUS), which confirmed registration of the previously unlisted number of 689 thousand of foreigners at the end of September, it can be optimistically assumed that the interest in working and renting flats in Poland among foreigners at least does not decrease. However, the question remains as to what are the prospects of the Polish economy and its demand for foreigners’ work. For now, it must be emphasized that economic forecasts both for Poland and entire European Union assume a solid rebound next year and further growth in the following years. Additionally, despite the pandemic and the consequent recession, Central Statistical Office data shows no significant deterioration in the labour market. The unemployment rate in Poland increased only slightly – from 6% in the second to 6.1% in the third quarter. Thus, as in case of students, the prospects for maintaining demand for flats for rent from foreign workers are quite optimistic.

However, the prospects for the short-term rental segment may be much more pessimistic. The pace of the tourist traffic reconstruction will depend not only on the epidemiological situation and economic opportunities, but also on the level of consumer optimism. Experts’ opinions on this issue are divided. More pessimistic forecasts assume a very slow, several-year-long process of returning to normality understood as the pre-pandemic reality, in addition, started in 2021 from a very low level of approx. 50% of tourist traffic in 2019. There are, admittedly, more optimistic forecasts referring to tourism as one of the main ways of psychological recovery after the pandemic, but the key factor for the continued existence and development of this market segment, apart from the scale of the demand itself, will be the future regulations, which should be expected after September CJEU ruling. At the moment, we do not know the details of the solutions that can be adopted, however, knowing objections raised by both the government and local authorities towards short-term rental, it can be expected that they will significantly limit the scale of this market segment. As a consequence, apartments previously rented per days will probably remain on the long-term rental market.

It also seems that the demand for rental rooms will remain at a reduced level for at least as long as the fear of the coronavirus persists. In view of reduced rental rates, it should rather be expected a flow of demand from this market segment to the segment of one-room apartments, guaranteeing some independence from using the “common areas”.

The most interesting phenomenon, that is currently taking place on the rental market, mainly as a result of switching to remote work, is the change in weights of rent-forming features, including the most significant of them, affecting the rent rate amount. One of the basic and the most important factors, determining attractiveness of the real estate location – transport accessibility, understood as commuting time, seems to lose its importance to some extent. In our new reality, it turns out that tenants are able to give up locations previously considered the best or the most advantageous, if in other, sometimes peripheral and previously not even considered, they can meet their housing needs better for the same or even less money. At the same time, larger flat area, extra space for work, a terrace, garden or balcony or proximity of green areas seem to gain in importance. Durability of these changes will depend on the decisions of managers in individual companies, and therefore is difficult to assess. However, it can already be said today that after nine months of experience, remote (or partially remote) work on a really large scale is becoming our new normality and many companies will definitely stick to this solution permanently. Moreover, for some employees it also opens up the possibility to work in their place of residence, with no need to relocate and rent an apartment. This is a completely new situation with great potential for social and economic changes, the possible consequences of which extend far beyond the real estate market.

Year 2020 is a time of extremely dynamic changes in the real estate market environment, including in particular the residential rental market. Forecasting the development of the market situation in such a volatile environment is obviously a risky task with an increased risk of a mistake. However, if we assume that there are no further factors in the market environment that could contribute to its further deterioration, we can conclude that the perspective of the most important segments of the private rental market are moderately optimistic.

Jerzy Ptaszyński
Research and Market Service Director