• The Office of Competition and Consumer Protection (UOKiK) continues the social campaign "Calculate and don't miscalculate" initiated by its President, Tomasz Chróstny. Today we direct your attention to investments in rental properties.
• Poles perceive real estate investments as completely safe – meanwhile, when it comes to commercial real estate, the risk of loss is actually significant.
•  The real rental yield, after all costs are factored in, may not be very impressive. In addition, in case of market turmoil, a problem might arise with lossless resale of the property.

As part of the ongoing "Calculate and don’t miscalculate" campaign initiated by the President of UOKiK, we draw consumers' attention to investing in various types of products. There is still a significant number of offers on the market for the purchase of the so-called investment properties. They are most often purchased for short-term rentals – they are e.g. units in apartment hotels/condo hotels or dormitories.

– Before investing money, we should read the terms of the offer very carefully and take the risks into account. It may happen that we do not achieve the expected profitability, having to bear additional running costs such as property maintenance. Earning profit depends on many factors, such as occupancy, location and administrative fees. The vast majority of investment properties are new, which means that their long-term profit potential is difficult to estimate at an early stage. For example, it will take from a few months up to even a few years for hotel facilities to start up and only after this period it becomes clear whether their ability to generate income for their owners was accurately forecasted in the offer – says Tomasz Chróstny, the President of UOKiK.

How does commercial real estate investment work?

Investment in such type of venture, in principle, involves the purchase of a unit, e.g. in a hotel or residential building intended entirely for short-term rentals. The owner of the purchased property can use it for a certain period of the year, and in the remaining time the property is rented out. Rental management is usually done by a specialised company (so-called "operator"), with whom the lease agreement is usually concluded for a period of 5 to 15 years, with the possibility of extension. The operator shares rental profit with the property owner by paying, for example, the rate of return specified in the agreement. An honest operator will never be able to guarantee that a facility will be profitable enough to regularly pay out the promised amount of yield. For example, during the lockdown periods of the COVID-19 pandemic, these types of facilities were unable to operate, which resulted in negative profitability i.e. they suffered losses. Because of this, their operators were often unable to deliver on their promises concerning the rates of return. It should be stressed that the property owner may not be able to change the operator or cancel the property management service altogether, which, in practice, means lack of a real impact on the profitability of the investment.

Financing of investments

In the case of facilities that are at the planning or construction stage, it is important how the investment is financed – is it with the developer's own funds, funds from a bank loan or a corporate bond issuance, or perhaps only payments from unit purchasers? Investments financed solely by payments from unit purchasers or through the issuance of bonds are riskier than investments financed by the developer's own funds or a loan. In this case, the purchaser of a unit or the issuer of a bond bears all the risk of the project's failure and - in the event of the developer's bankruptcy - could lose all of the money invested because it was used to finance construction that could not be completed.

Lack of security

The developer act requires that the contract be concluded in the form of a notarial deed, the purchaser's claim be recorded in the property's land and mortgage register, and their payments be kept in escrow accounts. However, this only applies to residential units and single family houses. This is why investments in commercial premises, for which there is no such protection of the purchaser's funds, are particularly risky.

Unreliable profit

Earning profit depends on many different factors (business, market, economic, etc.) that are beyond the control of the property purchaser and can be negatively affected. This is especially true for tourism facilities, which are characterised by economic dependency and seasonality, as well as susceptibility to supply and demand shocks. Moreover, there are fixed costs related to the management and maintenance of the property, possible debt service or taxes, which are usually borne by the owner. All of these factors can significantly reduce the profitability of an investment even if the facility is properly managed.

The purchaser of the property should be aware that the possibility of investment withdrawal (e.g. in the event of an unsatisfactory rate of return) may be limited. Low market liquidity and its susceptibility to external factors mean that, for example, finding a new purchaser can be problematic in the event of a sharp decline in demand. In such a situation, it may happen that the current owner would be forced to sell the property at a reduced price, lower than the price at which it was purchased.

Be especially careful when financing the purchase of an investment property on credit. This type of purchase is particularly risky, because the property purchaser, in addition to the problems described above, is exposed to the risk of an increase in the debt service cost that can be caused by, for example, an increase in loan installment or a decrease in the value of collateral. This can result in a significant decrease in the investment's profitability or even in losses.

Some of the problems listed above became more prominent during the COVID-19 pandemic, when the ability to operate a business and generate profit from rental properties was severely limited. Given the resulting market turmoil, some property operators and other companies obliged to pay an owner the agreed rate of return were forced to renegotiate their contracts, which may have resulted in some payments being delayed or reduced. There have also been cases when the operator simply withdrew from the management of the facility if it turned out to be unprofitable for reasons beyond the operator's control, such as structural defects for which the developer was responsible, or location factors.

It is worth mentioning here that even a facility managed professionally by a hotel brand recognised on the market may, for various reasons, turn out unprofitable for further management to make sense from a purely economic point of view.

- Proper assessment of the profit potential of a property or undertaking often requires expert knowledge of the market sector within which it would operate. A prospective purchaser of such a property should assess at the outset whether their level of knowledge allows them to minimise the risk of making a wrong investment decision that may be counterproductive. Therefore, before making a decision to invest money, the consumer should calmly think it over and analyse it thoroughly. So calculate and don't miscalculate! – says Tomasz Chróstny, the President of UOKiK.

"Calculate and don't miscalculate" – campaign of the President of the Office of Competition and Consumer Protection

As part of the "Calculate and don't miscalculate!" social campaign, UOKIK prepared two 30-second video spots for broadcast on TV and radio. They warn of the real loss of invested funds and point out the inability to repay the loan in the event that interest rates rise. These video spots are available on public television and radio from 6 September. They are broadcast at no cost, pursuant to Art. 31(c) of the Act on Competition and Consumer Protection.

― I encourage media, institutions and NGOs to join our campaign. Any form of support for the campaign will help us reach a wider audience and improve consumer safety," says Tomasz Chróstny, the President of UOKiK.

The "Calculate and don't miscalculate!" campaign video spots and other downloadable content are available on the UOKiK website.

Konsument.edu.pl

You don't have a clue about investing? We encourage people to invest their savings in a wise and prudent manner and to think about these investments in a long-term perspective not only through the "Calculate and don’t miscalculate" campaign. Go to konsument.edu.pl and find out about red flags in investing. Learn about the consequences of reckless online behaviour in a completely safe space.

Consumer assistance:

Telephone: 801 440 220 or 22 290 89 16 – consumer helpline
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Consumer right advisers – in your town or district

Additional information for the media:

UOKiK Press Office
Pl. Powstańców Warszawy 1, 00-950 Warszawa, Poland
Phone +48 695 902 088, +48 22 55 60 246
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