It has become a truism, but is no less true for its repetition: construction is a key engine of the economy. The different segments of the real estate market – housing, office, retail – are developing at different speeds. In all segments there is a risk of supply exceeding demand, resulting in vacant spaces and gradual decay to buildings. In the housing segment, shortage is a perennial problem. How is the Polish law reacting to these phenomena? Is collective investing in rental housing projects possible? Have the country’s policymakers made the connection between empty offices and shopping malls on the one hand and the shortage of flats on the other? Could the rental market be socialised? The present article is the first of a series that will address these questions.
REITs in Poland
The rental housing market in Poland is a highly fragmented one. Just 16% of the rental stock is owned by companies[1]. That may be partly because, unlike many other countries, the Polish legal system does not contain real estate investment trust (REIT)-type entities.
REITs are a convenient, tax-advantaged instrument for investors, both legal persons and individuals, to invest in income-generating real estate, including housing. The first country to introduce REITs was the Netherlands in 1969. Belgium followed, and then France, Great Britain, Germany, Italy and other countries. Investing in specialty REITs focused on rental housing represents an appealing option, not just for institutional investors but also for retail investors, due to an attractive risk profile, with high quality properties and regular lease-based income and dividend payouts.
There is a realisation in Poland of the potential of REITs and the need to introduce REIT-like structures into the country’s legal system. In 2018, during the previous parliamentary term, the government put before the Sejm a draft bill titled the “Act on companies investing in property rental”, which sought to do just that. Apart from the benefits of REITs that we already mentioned, the bill’s explanatory notes argued that the new vehicle would stimulate housing construction in Poland and the development of the country’s equity market. The draft bill went through the committee stage but, for reasons that remain unclear until today, was not passed. Ultimately it was killed by the discontinuity rule, under which unfinished legislative work lapses at the end of a parliamentary term[2]. Nevertheless, it is worthwhile to take a look at key elements of this abortive proposal.
The “Polish REITs” envisaged by the draft bill – formally called “companies investing in property rental” and abbreviated as FINN – were to have the form of publicly traded investment funds investing their assets in property rental. They would have to satisfy relevant legal requirements and obtain an entry into a register maintained by the Financial Supervisory Commission (KNF).
FINNs were defined as joint stock companies with a registered seat and management address in Poland whose core business involves rental of housing properties located on the territory of Poland. The minimum share capital requirement was set at PLN 50m (€10.6m). The share capital was to consist of bearer shares and could not include preference shares.
Potential investors in FINN, both legal entities and individuals, would enjoy tax incentives. First, FINNs would not pay the corporate income tax, so investors would only be taxed once. Furthermore, capital gains from FINN shares would be exempt both from the personal income tax and the corporate income tax.
Finally, it is worth citing the definition of housing property adopted by the draft bill. It stated that housing property is a housing unit, or a building in which at least 70% of the total area is used for housing needs. Student residences and elderly care and nursing homes were also covered by this definition.
As noted, the draft bill never made it past Parliament, however, and it appears unlikely that the idea of FINNs will be resurrected. So there are still no REIT-like structures available under Polish law. Meanwhile, foreign funds have stepped up investments in housing assets in Poland in recent months. (In October Prime Minister Mateusz Morawiecki announced that the government planned regulatory steps to address that, notably by imposing an extra levy on such purchases.)
What about other new legal instruments supporting housing construction?
Other new instruments supporting housing construction
Two recent measures prepared by the government are noteworthy. One of them has already been enacted; the other is in the cabinet committee stage.
Thus, last year the Sejm passed the “Act of 28 May amending the Act on certain forms of support for housing construction and some other acts,” which introduced a new entity called the Social Rental Agency (abbreviated as SAN). The purpose of SAN is to help satisfy housing needs in a local community. It does so by renting housing units or single-family houses from private owners and sub-letting them to households indicated and vetted by the council. SAN’s role is therefore purely intermediary. It also mixes the public and private sectors to a significant extent. The law states that SAN can receive subsidies for its operations; and one of the legal forms that SAN can take is a company in which the local council owns more than 50%. Meanwhile, the government has been working on an amendment to the so-called Emergency housing act[3] aimed at facilitating the conversion of certain non-residential buildings to housing. The legislative proposal, known informally as the Vacant spaces bill, is currently being processed by the cabinet’s legal committee (government schedule item no. UD 401).
We will discuss in more detail what SAN is and how it functions, and what the Vacant spaces bill contains, in subsequent articles of the series.
[1] Cf. a report by REAS Sp. z o.o./Sp. kom Najem mieszkań w Polsce. Właściciele indywidualni. 2017.
[2] For an account of the legislative process, cf. Druk nr 2917 – Sejm Rzeczypospolitej Polskiej.
[3] Act of 5 July 2018 on facilitating the preparation and implementation of housing projects and associated projects.