In terms of residential, you’ve generally gone after mid-market projects. With Metropolis, you didn’t even plan to develop the project yourself. Now you’re finishing a luxury project in a prime location. How did that happen?
Development is not our core business. We invest in development purely with the Mint owners’ money. When we find a piece of land that we really like, the most important aspect is location. In the case of Bratislava, when we bought the land five years ago it still wasn’t a luxury location yet, though the first wave of office buildings being built there were top-notch. But because the residential market was maturing very quickly, the positioning of the location changed, therefore the sort of product that could be built on it had to change. Today in the downtown you have a unique opportunity within central Europe because you have a brownfield connected to the old town and to the river. They’re creating an entirely new urbanism, with very nice cycle lanes, a new shopping center and offices.
You also have to watch the macro trends. It’s clear that the US and Europe have decided to go for ESG to create sustainable economies. At the same time, Czechs and Slovaks are becoming wealthier at a faster pace. Real estate developers have to mirror such economic and demographic trends. We gave the architect two aims: to make it an iconic project, since there’s now a collection of international architects; and we wanted the project to be an integral part of the downtown panorama. Metropolis obtained the highest energy performance certificate, A0, as a testimony to our commitment to ESG. But we also wanted a very effective project with very efficient apartments.
The result is that, for example we have the best in heating and cooling, from the ceiling. We’ve used a classic ceiling solution from the German company Wolf. It allows you to capture 94% of all dust and allergens, so that you have completely clean air. You can operate the system with an app on your phone that also controls the blinds. There’s no other project like it in Bratislava. In fact, you have very few projects with such a design and as ambitious in the world.
The decision to develop it yourself didn’t happen until Covid. Did the pandemic force you to re-evaluate your options?
We keep reevaluating what we do, how we do it and looking at what the opportunities are. Because in the last 5 years, the world has been changing extremely quickly and dynamically. In the case of developments, it’s purely our own equity. We’re not even leveraged. We could have waited a couple of years for the situation to improve and then sell the project. But as you say, we were reevaluating the market, and we saw people sitting at home, getting a lot of money, fantasizing about where they’d like to live. More generally, there’s a structural shortage of apartments both in Bratislava and in Prague where we have an increasingly wealthy population. So, it wasn’t such a huge risk.
After you bought the land, the location changed and improved. That led you to go up-market, but things keep moving quickly. Can you build flexibility into the project so that it continues to adapt as you build?
Part of the work of developers is understanding what will happen in the next 5 – 10 years in the cities and locations where you are. You have to know how people are living. To us, it was clear that this location will eventually become very attractive. The first phases of some of the resi projects there sold quickly for a very low price before 2020. In 2021, when we increased the sales price a lot, other projects in the location started to raise their own prices to meet ours. There’s obvious demand from part of the population. You have a lot of successful business entrepreneurs who have a lot of money and they want to have the best life. And part of that is buying the best potential apartments, especially if it has the best technologies. People travel and they see what others have in NYC and Dubai. When they come home, they think “why shouldn’t I have the best comforts where I live?”
Obviously, we weren’t as aggressive with our prices initially, allowing the first customers to buy at a good price. But we increased it 13 times, meaning the average sale price went from €5,000 to €7,000 per sqm (without VAT) and we started sales with the less attractive units. They have the same standards, but the views aren’t as good.
Are you surprised by the price you’ve ended up with?
We didn’t expect the price to increase to such an extent. For the last year we’ve only had cash buyers because mortgage buyers are deterred by the interest rate hike. It’s still unclear if those buyers will come back next year. Personally, I don’t expect major changes. I still expect most of them to be cash buyers.
We might not sell all of the apartments six months after completion, but we don’t have a strict time schedule to fulfill. The reality is that today, the market doesn’t make sense. The people with money are afraid to buy apartments now and are waiting for prices to collapse. Yet we’ve already gone back a year and a half with apartment prices.
What do you mean, ‘the market doesn’t make sense’?
The reality is that the best time to buy an apartment is when interest rates are high. Because prices have gone back to levels from 18 months ago. Even if you take a mortgage, you might pay higher rates at first, but within three to four years, the rates will come down again. That means you’ll be able to regear your mortgage at a price that’s six years old. It’s always a matter of confidence in yourself and how you make your calculations. When you’re a developer you tend to have a higher ability to manage stress and process it. To analyze it and understand what makes sense and what doesn’t.
If the mortgage market came back, would prices rise back again quickly?
We’re not in a market where there’s no demand. You have delayed demand because people are afraid to buy apartments that are on the market right now. But they’re just delaying their purchase for a time when they feel more comfortable. The problem is that when that happens, you’ll have a disbalance between offer and demand for those apartments. That will definitely happen. It’s not about developers being afraid to build. You simply can’t start a new project when there’s a low level of presales, especially not right after building costs have gone through the roof. Without presales, you don’t get financing. So, it’s clear what will happen in a few years: You’ll get the delayed demand plus current demand for a product that will be scarce. This always happens after big cycles.