For some time now, many indicators have pointed to investing in real estate. However, neither speculative purchases nor rental investments guarantee profits and are associated with significant risks. Entering this market unprepared will most likely lead to problems.
Poles hold over 800 billion PLN in banks. The problem is that since 2016, the average deposit interest rate has been lower than inflation, not to mention real earnings. In other words: the purchasing power of the funds invested in this way is decreasing.
Therefore, there is a need to find more profitable ways to grow capital. More and more people are deciding to withdraw money from banks and enter the real estate market. Is this a good decision?
Real estate prices are rising at double-digit rates
One certainly motivating factor is the rising property prices. According to data from the NBP, only in the past year, new apartments in provincial cities increased in price by an average of 9.75%, while used ones rose by 12.8%. In some centers, the annual growth rate approached (Bydgoszcz, Katowice, Szczecin, Wrocław) or exceeded (Zielona Góra) 20%.
Over a longer perspective, the price increase is even more pronounced. At the end of 2019, properties from the primary market cost about one-third more than at the beginning of the previous decade. Second-hand properties increased in price by an average of 20%.
On local markets, the growth rate was even higher. Rzeszów and Opole led the way, where over 10 years, new apartments increased in price by 60%, and used ones by 30%. Generally, the price dynamics of real estate in smaller provincial cities were twice as high as in the largest metropolitan areas.
Investing in rental apartments is profitable
Along with transaction prices, rental rates are also rising. Depending on the location, tenants pay owners an average of 35-45 PLN per square meter. This is the highest in history.
Data from Expander suggest that it is currently more profitable to take out a mortgage than to rent an apartment. The only exceptions are the largest properties (over 70 sqm) and only in selected cities.
All this means that investing in real estate remains profitable. Rental income covers the mortgage installment. According to Expander, the average return rate is between 6-8% net. For smaller units, investors can earn even 8-11%.
Good prospects for the real estate market
This year, further increases in property prices and rent rates are expected. Although the growth pace may slightly slow down, it will still be solid single-digit levels. Factors supporting this scenario include, among others, high inflation, which will remain above initial central bank forecasts, and the increase in minimum wages.
In the baseline scenario, interest rates— which have been at historic lows for five years— will remain unchanged. If there is a stronger economic slowdown, the cost of money might even decrease.
This means that, in case of financing investments with a loan, the costs of servicing it will stay stable or even decrease. However, it should be noted that banks have been increasing additional costs— such as commissions, insurance, and fees related to granting loans— for the past four years. Most of these are paid at the start of the financing.
Risks of investing in real estate
All of this sounds very encouraging, but investing in apartments does not guarantee any profit. Moreover, there can be periods when property values decline.
We experienced this in the early years of the last decade. Prices on the primary and secondary markets fell by 10-20% during that time. Even less certain are rental incomes, which depend on finding tenants and protecting your interests against non-payment of rent. The venture is not maintenance-free (e.g., renovations), and engaging an external company reduces the return rate.
The risk increases even more when we finance the project with a loan. Rising interest rates can cause rental income to no longer cover the installments. Additionally, the difficult macroeconomic situation (rising unemployment, low GDP growth, soaring inflation, global crisis) can hinder adequate rent increases.
Therefore, when investing in real estate, caution is advised, and all calculations should be carefully made. It’s also good to have substantive knowledge. Entering this market unprepared can be very painful.
