How to buy holiday apartments
Over 12,000 upscale housing units are scheduled to be completed on the Polish coast and in mountain resorts through late 2020. Such properties are enjoying strong investor demand, although the risk of a market glut – with insufficient tourist demand – is increasing.
The summer of 2019 has not been a very good one along the Baltic coast. Unstable weather, noxious organisms in the seawater, and stiff price competition on the part of foreign locations combined to cause a state of affair where, halfway through the vacation season, reservations were down 20-25% compared to the previous year. Yet interest in holiday home investments continues unabated.
PROBLEM BEGIN TO ARISE IN THAT, ALL TOO OFTEN, INVESTORS do not have a good understanding of the risks entailed in such investments. On the face of it, purchasing a vacation apartment is a very attractive proposition, with many sold by developers with a guaranteed rate of return at 6-8%. The seller promises to take matters off our hands and to handle the rentals on his own, allowing us to sit back easy and enjoy yearly payments.
“But many people do not delve into the details of what, exactly this guarantee is about. In fact, it is usually an obligation of a special purpose vehicle incorporated to manage the given property which, oftentimes, does not have much in the way of assets. Any problems with rental may push this entity into bankruptcy, leaving its customers with little from which they might enforce their claims”, notes Maciej Boryczko, attorney at GESSEL.
Possible reasons for which the operator may find it impossible to rent out vacation properties at the hoped-for price levels are myriad, including bad design, strong competition, changing travel patterns, general economic malaise and internal problems of the operator himself. And the greater the promised rate of return, the greater the risk for investors, in that these returns become more difficult to generate. At the end of the day, most of the risk that a market surfeit of vacation properties will cause a drop in prices falls with the customer, who is often oblivious of this fact.
“For these reasons, it is important to establish security for payment of the rent, so as to facilitate enforcement of any claims. The best option lies with security in res established on other assets of the operator”, Maciej Boryczko explains (...)
The full text of this article (in Polish) was published in the October edition of FORBES (p. 196).