Jan Cienski in Warsaw -

Orco Property Group, a Prague-listed real estate developer, announced this week that it plans to begin building an apartment complex in the western Polish city of Szczecin, one of the country's few urban areas that hasn't yet been gripped by a property boom.

Orco's move into the regions is a sign that the enormous price increases that have taken place in Poland's larger cities following EU entry in 2004 may have cooled, and developers are now looking for high returns in areas that until now were considered marginal.

"We see great potential in this region of Poland and we will look for more investments opportunities here," says Douglas John Noble, director of Orco in Poland.

Property prices are taking a breather after a frenetic 2006, during which the cost for an average apartment rose by 60% in Krakow, Gdansk, Lodz and Wroclaw, and by 49% in Warsaw. In an analysis conducted by the Rzeczpospolita newspaper, a group of real estate analysts predicted that for the next three years price increases in those cities would be closer to 7-10%.

One reason for the slowdown in price growth is that a lot of new buildings are coming onto the market. Developers are continuing to build as fast as possible. In the first four months of this year, more than 30,000 construction permits were issued, a 78% increase over the same period last year.

Another is that prices have shot up so fast that a new apartment is becoming something of a luxury item. The boom was in part fostered by the arrival of more innovative mortgage products that are common in Western Europe and the US, like 100% or even 110% mortgages, much easier credit terms, and ever extending loan repayment times – Poland has even seen the arrival of 45-year mortgages.

But even with wage increases estimated at about 9% for this year, many consumers are simply unable to keep up with price increases. Apartments are now so expensive, that some potential buyers decided to buy building lots on the outskirts of larger cities and build their own houses, which cost about the same as a flat. However, in the last half-year, land prices have leapt and construction costs soared, in part because millions of skilled workers have decamped for Western Europe and the building boom has created a building materials shortage. Lately, Polish companies have resorted to importing bricks from Romania and gravel from Scotland.

With prices high and future growth less exciting, foreign and Polish punters who bought flats as investments are expected to begin cashing out, which will put more product on the market.

The government is also taking steps to make housing more affordable. Although an election promise to build 3m low cost apartments appears to be wildly unrealistic, authorities are now promising to build 2m. They are also taking steps to allow cooperative housing tenants to buy their apartments for a song, many of which will quickly end up on the market.

Finally, the government is beginning to take halting steps to address one of the main reasons that Poland is short of about 1.6m housing units - the lack of land. Until now, it has been very difficult to get permission to turn farm land into building lots, resulting in the paradox that there are potato and cabbage fields within Warsaw's city limits, while developers are screaming for property to develop. The government is promising to make land reclassification inside cities automatic, and to finally move on creating zoning plans for the country's largest cities.

To the borders

With signs of the boom beginning to cool, many developers are following in Orco's footsteps and listing on the stock exchange. Real estate-related stocks have jumped by more than 50% so far this year on the Warsaw Stock Exchange.

With more mature property markets taking a breather and these developers needing to maintain high yields for their new investors, analysts expect cities like Poznan, in central Poland, and Szczecin, hard up against the German border on Poland's Baltic coast, to see price increases similar to those experienced by more developed cities.

Poznan is particularly interesting, because it's one of the host cities of the 2012 European football championships, which should see rapid improvements in infrastructure and which could attract foreign investors who until now have focused on cities like Krakow and Wroclaw.

Even with a slight pause in price increases, no one expects Polish housing prices to start falling. According to analysis conducted by Janusz Jankowiak, chief economist of the Polish Business Roundtable, Poland's ratio of mortgage loans to gross domestic product is still only about 8%, compared with more than 50% in much of Western Europe. Mortgage loans are expected to grow from about PLN80bn (€21bn) this year to more than PLN250bn in 2011.

As analysts point out, Spain, Greece and Ireland enjoyed about a decade of real estate price rises when their economies took off after joining the EU, and there is nothing to suggest that a similar pattern won't be replicated in Poland.

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