PRS in Poland: Local plans and investment implications

Due to the increasing scarcity of residential land in large cities, investors are more often deciding to build PRS facilities on attractively located plots of land with commercial uses. What decisions and their consequences do investors have to face?

Location of PRS projects vs. local spatial development plans (MPZP)

By mid-2024, the number of PRS developments in Poland exceeded 120 projects, of which 73% are completed and the remaining 27% are under construction. Nearly ¾ of the analysed projects are located in areas covered by valid MPZPs.

The majority of investors choose to locate institutional rental properties in areas that are designated in the local plan for residential and commercial (MW/U) development. So far, 40 investments have been or are being developed on plots with this designation, which accounts for 45% of all projects located in areas covered by the MPZP.

Due to the scarce availability of land in the largest Polish cities earmarked exclusively for multifamily residential development (MW), such projects constitute a definite minority (less than 20%) in the overall structure of the analysed investments. The situation is slightly different in the areas designated in the local plan for tertiary development (U), where almost 40% of PRS investments are currently located.

"The low percentage of PRS investments carried out on land without a Local Development Plan may be largely due to the fact that such construction is then based on development conditions (WZ), where the development of a project with rental units is not usually the landowner's first choice. As a rule of thumb, in the case of metropolitan locations, most investors and landowners prefer to first try to obtain a WZ for a multi-family residential development with a view to the subsequent sale of individual units. Only when they are unsuccessful in agreeing a GMO for residential development do they opt for an alternative in the form of, for example, a commercial building of collective residence/hotel building." - comments Patryk Błach, Senior Consultant, Investment at Avison Young.

The portfolios of the leading players in the PRS sector in Poland are dominated by projects located in areas earmarked for residential-service or residential development. However, the largest of them locates more than half of its investments in areas designated for service development, which gives it an advantage not only in this aspect, but also in general - this investor boasts the largest market share (20%) in terms of the number of existing projects and those under construction.

Visible differences from a city perspective

Structural differences in the share of a given zoning in the local plan on which PRS projects are located can be seen in the analysis of individual cities. Poznań, Wrocław and Kraków have the largest share of projects on plans with residential designation, at around 20%. The Tricity is characterised by the largest, almost 40%, share of PRS projects located on a plan intended for services, while in Warsaw, Łódź and Kraków approx. 25% of PRS projects are located in the area for which an LSDP is being developed. Interestingly, in Poznań, more than 30% of investments are located in areas not covered by an MPZP. This is due to the fact that in the central part of the city many areas still do not have a local plan.

Less land, more projects on service development plans

Due to the increasing scarcity of residential land in large cities, investors are more often opting to build PRS developments on service-oriented plots whose location is attractive for housing.

"The purchase prices of service-oriented plots are lower than those of residential plots, which makes them an interesting alternative for PRS investors. Additionally, when acquiring such land, they do not have to compete with typically residential developers," comments Blach.

"However, a PRS investment on serviced land, despite cheaper land, once the facility is developed and commercialised, involves a VAT charge on rental income, which affects the return on investment," points out Marta Marat, Valuer at Avison Young.

The issue of separation of premises and taxes

An important difference in PRS projects developed on residential or commercial land is the issue of separating independent premises. In the former case, the residential units must not be smaller than 25 sqm according to the current building law. For them, certificates of independence can be issued and land registers established. And dwellings with an established land and mortgage register can be marketed both as a target product for an investment fund and for individual customers. The sale of such premises is subject to VAT at 8%.

On the other hand, if the project is built on land zoned for commercial purposes, the separation of commercial premises (as such may be referred to here) is characterised by the lack of limitation of the minimum area and the VAT on sale is higher and amounts to 23%. In practice, units with PRS designation range in size from 15 sq m upwards, with the smaller size of the units being offset by more extensive common areas, such as shared work and leisure spaces, laundry facilities and workout rooms.
In the banks' assessment

In the case of bank financing of PRS developments, from a risk perspective, it seems to be more advantageous for banks to finance projects built on land with residential use. The possibility of separating individual flats and their eventual resale is a more secure security for banks for the financed project. On the other hand, restrictions on the separation of units for services, hinder the potential sale of individual units to private customers in the event that the operator resigns from renting units under the PRS formula. In such a situation, the object of the sale must be the entire property.

"Even at the valuation stage of a property under construction on a residential scheme, it happens that the bank financing the project asks us for a two-pronged approach - a valuation in an income approach after the rents generated by the property and in a comparative approach, assuming the future separation of individual residential units for sale," notes Marat.

Differences from an installation and construction perspective

"The Construction Law does not explicitly standardise the categories of buildings designated for PRS, and the current Regulation of the Minister of Infrastructure on the technical conditions to be met by buildings and their location and the Polish Classification of Building Objects define the aspect of residential and non-residential buildings differently, explains Kamil Olechniewicz, Project Manager, Technical Advisory at Avison Young - Therefore, the scope of installation technical solutions and fire protection is determined on a case-by-case basis."

In practice, the buildings located in the different areas differ slightly in their noise exposure - the daytime and nighttime maximum noise levels for the ‘U’ and ‘MWU’ areas are on average a few dB higher compared to the ‘MW’ areas. The same is true of the sound insulation of partitions - a value of ≥ 50 dB in the case of walls between flats and ≥ 45 dB between premises of other categories, although in the latter case sometimes the required insulation may even be higher than 50 dB, depending on the qualification of the premises.

There are, however, slight differences in terms of access to daylight and mechanical ventilation solutions. On the other hand, buildings located on the service plan are more likely to have fire alarm systems that also cover the interiors of the premises and stricter requirements regarding the flammability class of the furnishings, which directly translates into a higher investment outlay for construction and finishing. "Other issues such as a direct entrance from the lobby or individual metering of the utilities supplied to each unit is a common standard regardless of the use," Olechniewicz adds.

Authors: Paulina Brzeszkiewicz-Kuczyńska (Research and Data Manager), Marta Marat (Valuer, Valuation and Advisory), Kamil Olechniewicz (Project Manager, Technical Advisory and Project Management), Patryk Błach (Senior Consultant, Investment), Karolina Aleksandrowicz (Junior Research Analyst)