To what extent will you be building your own developments, as opposed to doing deal with developers who have their own projects?
We want to grow the residential for rent portfolio AFI Home quite significantly for the foreseeable future. And the way to do that is to use both methods. So, we’re using our own development capacity while trying to expedite the development phase through funding structures with third-party developers. We’re doing this both in Poland and in the Czech Republic.
Do you have a preference?
If we just take the last two transactions that we did here in Prague, altogether we bought about 800 apartments in two projects:500 of them in the V Korytech project in Prague 10 – Strašnice will be developed directly by us, while 300 in the Nová Elektra project in Prague 9 – Hloubětín will be developed by a third-party developer. We have a great development team in-house and need to ensure that they will have work to do. Apart from that, we signed in October a Memorandum of Cooperation with Finep for a further cca 1,700 apartments in five different locations in Prague.
How does your focus on BTR resi change the criteria of the plots you’re interested in, whether it’s size, or local amenities?
From our point of view, in order to be able to provide the proper services and on-site management for separate locations, we need projects with at least 150 to 200 units. If we’re talking about a city center location, I don’t have any problem with even smaller projects, because the amenities around them should already be well-developed. AFI Home Trebesin is a relatively small project by itself, with just 61 apartments. But this is the last phase of our big Tulipa Trebesin project, which already has all the needed amenities around.
Here in Kolbenova, it’s a relatively new location, a new destination. We’ve already developed 640 apartments over two phases of AFI Home Kolbenova. But we’re also offering a wider range of services and amenities, such as the co-working that we just opened a month ago. A canteen, café, supermarket and laundry services are in place and there will be more to come.
There’s been a lot more talk about BTR than action. Why is it so tricky?
First of all, it’s a financing issue. Compared to residential for sale where you get your return relatively quickly, in resi-for-rent, the development yield is very, very slim. And the needed equity is high with a longer return profile, not many developers have the ability to afford it.
Not all developers see it that way.
I’m not sure if there are many developers that are in a position to finance the acquisition, the development, and that can accept such a relatively small development margin. The equity requirements and financing restrictions are the main barriers preventing more developers from getting into the sector. Especially compared to the temptation of making a nice profit on a standard sales project, where you make a nice return on your investment in a relatively short time, and you can continue on to the next one.
Do you think conditions on the market are bending in your favor?
I think we’re already seeing it. Developers are facing greater difficulties selling their product. Before it was very easy: You got the permit, started the pre-sale campaign and you could sell 30 or 40%. You could be eligible for financing even before you started construction. And financing was relatively cheap back then. Today, financing is more expensive, and it’s more difficult to achieve the pre-sale ratio banks require. Many developers are under pressure, especially those who used loans to buy their land. They invested in the design, in the permitting, and they’re ready to build. But they’re struggling with pre-sales. This is where we believe that we can come into the picture.
If there aren’t more deals between BTR investors and resi developers happening, is it because there’s essentially enough supply for existing demand? Is the market in balance?
I think that if we could find more supply, I would go for two, three times more than what we are currently building.
Really?
Absolutely. Assuming obviously that the numbers work. Finding the right product today where the numbers work is the main challenge. Demand is not the issue. It’s there. We have opened the second phase of AFI Home Kolbenova in March this year and it’s 327 units are to date more than 80% leased. I don’t see any problem with the demand if you offer people a proper product, with a proper rent and additional services.
Traditionally AFI Europe developed a good deal of office space. But I don’t see you or many other developers building new stock. Why not?
It’s very simple: the numbers don’t work. Development yields went down significantly- construction costs rose, and land prices increased while rents are quite stable. We have more land here in AFI City within this project. But even if we had a building permit, and a 100% pre-lease from day one, it still wouldn’t make sense to build. The development yield would be below value, so it really doesn’t make any sense. That’s pretty much what the financing costs are today. A lot still has to happen. Equilibrium will have to be restored. Rents will have to rise. Managers want their people and teams back in the office, not just here but everywhere. Demand is stable. People are coming back to the offices and the supply is very limited. Eventually, this will translate into pressure on rents. That’s what will bring back developer interest in the sector.
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