Residential Property market overview

Supply and demand

Supply of property remains low, particularly in the city centre where there are currently very few new residential developments. However demand remains high with continued interest from foreign investors and rising domestic demand.

Some of the reasons for the shortage of new residential developments in the city centre are as follows:

• Few brown field sites.
• Problematic building ownership issues (e.g. missing owners, multiple and sometimes disputed ownership).
• Condensed city centre relative to overall city size therefore few opportunities relative to market size.
• Relocation of administrative tenants can cause delays to construction.
• A number of buildings have historical “protected” status.
• Only 3% of city has been “zoned”. This means every development planning application is considered on its own individual merits. This results in a long and time consuming process for obtaining planning consents.
• Local sellers with property in the city centre have started asking ludicrously high prices and fluidity in the market has suffered.
• Neighbour objections.

As a result of this supply shortage, central new developments are generally sold in their entirety, off plan, before construction even begins. Typically sales are completed in extremely short time frames with payment structures favouring the developer. This often requires the buyer to pay the majority of the purchase price before completion. This allows construction costs to be self-financed by advance stage payments on development unit sales.

Another feature of Krakow’s property market is the Soviet built Nowa Huta region of the city. Over 200,000 people live there in sub standard “Panalak” buildings. It is likely that much of this housing stock will need to be replaced in the forthcoming years to improve the general quality of the housing stock in Krakow.

Prices

Since shortly prior to EU accession, property prices in Krakow city centre (within a 5 to 10 minute walk from the Main Market Square) have more than doubled. Top end residential developments are now priced at up to 10,000 PLN/sqm (approximately 2,658 Euros/sqm and 1,804 GBP/sqm) and out of town new build developments at 4,000 to 5,500 PLN/sqm (approximately 992 Euros/sqm and 722 GBP/sqm) (e.g. Salwator Tower - 5,450 PLN/sqm). These price rises have been driven by a combination of foreign investors and wealthy locals who are now starting to look for alternative locations. There is still considerable momentum in the Krakow property market, which is likely to continue to push prices up in the short to medium term.

It is unlikely that the overnight returns seen in the past two years are to be repeated. That said the ingredients are certainly present for consistent long term capital growth to remain in place for the next 5 to 10 years.

Buyer profiles

The price bracket in most demand amongst the majority of foreign investors and wealthier locals is from 300,000 PLN to 500,000 PLN (approximately 70,000 to 130,000 Euros or 50,000 to 90,000 GBP). Investors expect to afford a two bedroom apartment at the upper end of this scale. With city centre prices now in the region of 10,000 PLN/sqm (approximately 2,658 Euros/sqm and 1,804 GBP/sqm), this is no longer achievable in the core city centre locations.

Much of the demand from the local market is being created by the emerging middle class that includes families, young couples and young professionals. This has meant demand is not just speculative.

Price sensitivity amongst locals is driven by affordability with a general consensus that exposure to the property market is essential before prices rise too high.

For foreign investors, price sensitivity is being generated more by rental yields and perceived value for money relative to their home market, as well as budget limits for an overseas investment. The average foreign investor will typically expect to borrow up to 70% “loan-to-value” from a local lender, and expect the rental yield to cover his mortgage repayments. The typical foreign investor usually resides in a mature “buy-to-let” environment and is therefore highly sensitive to the ability to rent the property and the risks of not renting it.

Rental market

An important consideration for the foreign investor is the rental potential of a property. As a sense check, a centrally located, renovated one bedroom 50sqm apartment would rent for approximately 400 Euros (approximately 270 GBP) per month. This provides an approximate gross yield to the investor of 5.5%. 400 Euros per month is an affordable rent for locals based on two sharing.

New locations

Foreign investors and locals are beginning to look more closely at secondary city centre locations. Locations benefiting in particular from the “overspill” from the core city centre are those areas that have good transport links to the city centre and independent infrastructures. Such areas include Podgorze and the Krowodza district, located on the outer side of the second ring road to the west of the city. Prices here are still considered to be reasonable, and respectable rental yields can still be achieved.

Car parking

Lack of car parking is becoming a serious problem in Krakow’s city centre. Most old buildings offer no parking or only “on street” parking, making it difficult to find a parking space in the centre. The lack of car parks is compounded by the fact many of the Kamienca buildings in the Old Town contain basements which are difficult to adapt into underground car parks.

Despite relatively low levels of current car ownership, the emerging middle class will increase levels of car ownership. This has lead to new build developments with secure parking becoming especially popular, with some locals purchasing only a car parking space within a new development.