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‘Once upon a time in the Wild East’

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Whilst last month’s article focused on how Polish property developers have cleaned up their act, it is interesting to take a look back at darker times in the industry when the market was not so well regulated.

The recent history of property development in Krakow (i.e. since the collapse of the Berlin wall) tended to be carried out in its first manifestation on a fairly small scale. The key missing ingredient during the 1990s was finance – whether cash or credit to buy finished apartments or for developers to build the developments in the first place. Some of Poland’s largest residential real estate developers such as JW Construction and Dom Development only started functioning during this decade (in 1993 and 1996 respectively) whilst on an individual basis earnings were still pitifully low for potential end-buyers.

It was really only at the start of the 2000s that enough wealth had been created to expand operations and interest rates had fallen to levels reasonable enough to countenance any significant leverage. As recently as 2001 interest rates were still at 20% even if they did fall dramatically to a more manageable 5% by 2003.

Unfortunately it was not only the business-minded hard-working entrepreneurs who spotted a gap in the market at this point to start developing real estate – but also crafty buccaneers who took advantage of the unblinking desire from some individuals to get on the property ladder and hoodwinked them through various schemes.

By far the most dangerous facet of the property boom that started in 2004 was the imbalance between demand and supply. Such was the disparity between the two that prices were shooting up at 30% per year in Krakow over a several year period. Several narcissistic developers became so arrogant that they thought they could not fail and buyers often could only see the upside in a potential deal without considering potential pitfalls.

Krakow’s most fated case perhaps is that of the developer, Leopard, who borrowed approximately 10 million Euros from American Investor, Manchester Securities, at a very hefty interest rate of 25% per annum in order to grow their future development operations. Unfortunately for individual buyers who were in the process of purchasing apartments in several buildings that Leopard were already building at the time, the loan was secured against these very apartments even though buyers had signed notarized preliminary purchase contracts. An 8-year long deadlock ensued with only light at the end of the tunnel recently with the Polish courts finding in favour of the end-buyers. The American fund may have a feeling to feel hard done-by but the apartment buyers have also suffered with many having to continue paying loans without receiving possession of the apartments during this period.

Bad loans were not the only issue to impact on end-buyers during the property boom as there was very limited use of any mechanism such as an escrow account either to protect cash being paid over by buyers to developers during the purchase process. Supply was so scarce that in certain cases property developers were asking for a 50% up-front payment on a flat before construction had even started and of course there was no guarantee that these funds, once received, would be used solely towards the construction of that particular project.

Krakow developer, Bud-Mar, was one of the other infamous developers active during the boom period. Investors in their development on ul. Lwowska in Stare Podgorze were invited to pay several thousand PLN per square metre in addition to what was in the preliminary purchase agreements to pay off various debts that began appearing on the land & mortgage registry just before construction finished – or risk not being able to take over their apartments. At the same time Bud-Mar was in the process of half-building a housing estate near the International School in Lusina. Eventually building works there halted with the developer again loaded with debts. 5 years on several buyers have been able to finish off their half-built houses and start living there but the reality is still far away from the initial dream.

Thankfully these stories are unlikely to be repeated due to the protection offered by the recently instigated ‘Developers’ Act’ and also of course due to a much more stable and mature market.

Tuesday, 10 June, 2014

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