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| Poland
Points the Way - or where to look for turbo-charged capital growth in any
property market |
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| July 2006 |
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| Big institutional
investors are now targeting Polish residential property - and we can learn
lots from them about how to time our investments and how we can apply this
knowledge to ANY property market... |
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| Plus,
how tax laws can help you to refinance your Polish investments. |
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| I want to
talk about why the Polish property market offers investors the very next
best thing to being able to refinance - the classic way to build a property
portfolio. |
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| But, first
it's worthwhile taking stock of the property market right now in Poland,
because it is becoming increasingly clear that, in order to maximise capital
growth, the timing of your investment is absolutely vital. |
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| And that really
translates into, not just when you should invest, but WHERE you
should invest in the country. |
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| What
is equally clear to me is that when I hear people talk about the risk of
investing in a country such as Poland, what they are missing is that the
risk lies not in the country itself, but in choosing the right location
at the right time. |
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| The real
risk is that you will miss the period of property hyper-growth in Poland's
key cities. Some of these cities have already experienced this kind
of turbo-charged growth, some are still experiencing it and - most important
of all - others are GOING TO EXPERIENCE it...and soon! |
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| What strikes
me is that there are very telling signs that the Polish residential property
market is maturing and growing up - fast! And one sign of a maturing
market is that institutional investors are starting to move into the residential
market in several of Poland's main cities, something they would certainly
have avoided in the recent past. |
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| So, what has
changed? |
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| Well, traditionally,
big funds don't like residential investments, unless they are big enough
to be economically efficient - simply because these funds are very expensive
beasts to maintain they need to make multi-multi million pound investments
to justify their fees... |
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| And,
in the past in Poland, individual residential developments of that size
have been rare. |
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| But because
the residential market is showing rapid growth and fabulous returns, it
is the funds themselves that are changing the scale of the development
landscape - in order to allow themselves a piece of the action. |
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| They are teaming
up with a developer who has the skills and the local knowledge, examining
the developer's projects, and then injecting a huge amount to cash to transform,
let's say, a £5 million project into a £20-£25 million
one. |
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| We are also
seeing funds offering a joint venture to developers - again, giving developers
far more financial muscle, and at the same time using the developer's skills
and market knowledge. In particular we are seeing funds from Poland, the
US, and the UK coming in - lots of pension funds. |
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| OK, interesting,
you might say, but what does this mean for the property market, AND, more
importantly, for the private investor? After all, funds can't achieve the
same leverage as private individuals. So, as an investment, buying into
a fund will remain the poor alternative to those with decent credit - but
a reasonable alternative for those without. |
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| Well,
what this tells us first of all is that the investment funds are targeting
the residential market because they see the exceptional returns on offer. |
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| It also indicates
that residential projects are moving up a gear, from being basically relatively
small scale to larger scale, or more ambitious and more strongly financed. |
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| What's more
it shows a maturing of the market. |
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| Where once
cash was the restriction on the scale of development, it's now land. And
right now there is a bidding war for prime building land taking place in
Poland. |
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| And, naturally,
this large cash inflow will drive up land and therefore property prices
- by a very large amount and at a very rapid rate. |
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| Fund manages
see a window of opportunity in Poland of some four or five years. |
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| Not simply
an opportunity for good, steady returns - no, that is something that will
continue long into the future. |
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| What we
are talking about here is the opportunity for hyper-growth. |
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| Let me explain
further... |
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| It took 14
years or so for Spain to rebuild after Franco. And that was without the
huge inflow of funds that we are seeing in Poland today. |
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| Poland's demand
for residential housing is immense. But it is going to take a lot less
time to rebuild than it took Spain. And we are now four years into the
Polish rebuilding programme. |
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| This doesn't
mean that the opportunity in Poland is running out - far from it. |
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| But it
does mean that in certain cities the opportunity for hyper-growth is entering
it last phase, at least for now. This is true of Krakow, certainly.
This makes right now, the last opportunity to plug into this phase in Krakow
and experience perhaps a year more of really extraordinary growth. Look
upon it as the growth spurt of the teenage years - it doesn't last long,
but it is spectacular! |
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| And,
if you're an investor, you really want to be in the market during the teenage
phase! |
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| The point
is that while an average of, let's assume a conservative 13% a year of
capital growth may be achieved in a Polish city's property market over
10 years or more, the growth will not be smooth. There will be under-average
years and way above average years. |
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| After the
hyper-growth we are going to see steady, more measured growth - just like
adulthood, if I may continue with the metaphor. |
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| Obviously,
the
opportunity for a property investor is to identify the next location to
experience that teenage growth spurt - and, in truth, there are only so
many cities in Poland that will experience this phenomenal price growth
over the next few years. |
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| We are talking
about the Berlin - Warsaw corridor. The north and east of the country do
not really offer investment opportunities at this time aside from Tri-cities. |
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| The string
of cities in the first wave included Warsaw and Krakow, of course. And
it has been Krakow that has experienced a short period of hyper-growth
whereas Warsaw (due to its larger size) is experiencing a longer
period of substantial growth. |
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| Both cities’
appeal will continue, with Warsaw likely to become the region's capital
as it grows exponentially. Imagine, one million people have been added
to Madrid's population in the last five years - that is 50% of the population
of Warsaw. Madrid is still growing at a staggering rate even after 20 years
of growth and hence illustrates how a city can boom for a long time. And
Warsaw has the same long term potential as Madrid. |
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| Poland is
a large enough country to support a second capital city and Krakow is clearly
that second city - even a kind of virtual capital. It has undoubted, enduring
appeal. |
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| The next string
of cities certainly includes Wroclaw, Poznan, Katowice and Lodz, as well
as the Tri City area in the north. |
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| This is where
we are next going to see periods of exceptional growth next. |
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| And these
growth spurts then open the possibility of two investment options. |
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| We can time
our investment correctly and ride the wave of initial super-charged capital
growth...and then take that gain and re-invest elsewhere. |
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| Or,
we can do exactly the same, but not sell and hold instead for the long
term. |
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| All the evidence
suggests that if we choose this route and we get our initial timing right,
we will experience super-charged growth, then a period of slower, steady
growth as the market cools, then another period of super-charged growth
as people's borrowing power starts to make property look very affordable
once again. |
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| That is
why timing is so important. If you miss one growth spurt and only manage
to exploit the second, it's not the end of the world. But imagine the difference
in ROI if you can plug into two phases of exceptional growth! |
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| So, you
can buy and hold. Or buy, then take your profits earlier and look for
the next location heading for a super-charged growth. When deciding on
your strategy, it's worth bearing in mind that those second super-growth
phases may come quicker in some locations than many people might imagine. |
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| This is because
salary stats coming out of Poland are misleading - salaries are actually
rising a whole lot faster than we're seeing in the data. |
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| Why? |
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| The reasons
are twofold. |
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| First,
data tends to reflect the national growth and it's important to remember
that this is distorted by the large rural population in Poland. Just under
40% of Poland's population is still classified as 'rural' and they are
much poorer than their urban counterparts and their wages are not rising
anything like as fast. |
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| The second
reason is that Poland's top rate of tax - 40% - kicks in at a relatively
low level (just over the equivalent of £13,000). So many higher
earners are now turning themselves into freelancers or setting up their
own companies and hiring themselves back to their former employers. Hence
they pay a lot less tax. This then distorts data relating to salaries paid
- these higher earners are no longer included as salary earners. And, remember:
salaries, plus mortgage availability and flexibility, plus interest rate
level = affordability. |
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| So, what this
means is that even in property markets that are entering the final stage
of their first period of hyper-growth - like Krakow (although this last
phase could actually last a year or more) - the next period of such
super-growth may be nearer than the figures might lead us to believe. |
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| But what
is this about re-financing? |
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| Well, for
property investors in Poland, this is key. |
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| One of the
limitations with investing in central and Eastern Europe is that because
the markets are relatively young, the finance packages available on the
domestic market tend to be limited - certainly when compared with a market
like the UK's. |
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| This means
there are two obvious drawbacks - one, no interest-only mortgages and two,
limited or no opportunity to re-finance. |
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| And, of
course, re-financing is the classic way to grow a portfolio - because
it only requires that initial deposit on your first investment property.
Buy one property, wait for price growth, refinance to use that profit as
a deposit for a mortgage on another property. Then do it again, and again. |
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| Right now,
there is no market in the CEE where this kind of refinancing is
possible. |
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| BUT,
one very attractive aspect of the Polish property market that makes a form
of refinancing possible is tax, as it relates to property. It's not quite
refinancing, as we would normally understand it, but it is as near as it
gets right now. And it certainly is as effective. |
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| Under Polish
tax law, the most you will ever pay on real estate profits is 10% - but
of the sale price. But, if you sell after five years of ownership, you
don't even pay that low rate. (Please bear in mind, with an off-plan
deal, your period of ownership starts only when the unit is completed -
prior to that you are technically only buying an undertaking from the developer,
not a piece of 'real estate'). |
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| However, there's
an even more important rule than the five-year one, at least for investors
looking to finance turbo-charged growth. |
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| Even if you
do sell within five years, so long as you undertake to reinvest your profits
into more property, you will pay no Polish tax on your gain. And this can
be applied indefinitely. |
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| So, this is
clearly a form of refinancing. And it allows an investor to get in at the
start of a market's hyper-growth phase, reap the big profits and then sell
and reuse the initial deposit, plus the profits, to expand a portfolio
in a new location that has still to experience the turbo-charged growth
phase. |
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| Obviously,
the associated costs will be a little higher than a simple re-mortgage
in, say, the UK and it has more risk (i.e. you might get the timing
wrong). |
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| But then that's
the price you pay if you want to gear your portfolio for multiple periods
of turbo-charged capital growth. |
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