We can invest in properties directly as well as indirectly. Direct investment is related to obtaining rights for benefiting from the property and as a rule requires investing capital. These benefits could be among else: rent, tenancy and also selling with a profit.  In the recent years new instruments appeared on the Polish market that allow investors to approach the property market without the necessity of engaging large capital: stocks and sector investment funds related to the market we are interested in.

One of the sector indices (this index displays the companies results from a specific sector of the economy) on the Warsaw Stock Exchange is the WIG Construction. It consists of approximately 20 companies that deal with the construction business (one of the companies is in the WIG 20 index – GTC). Additionally there are other companies connected with the construction market that are apart from the sector index (e. g. PBG, Polimex Mostostal, Żurawie EFH, etc.).  Investing on the stock market yet requires extensive knowledge, time commitment and several years of experience that often are bought with high financial loses.

He alternatives for people who wish to become involved with the market without the necessity to constantly control their investment poftolio are the sector investment funds. They currently exist on the Polish market for several years. Most of them operate as closed funds, which mean that we cannot joint them though buying their shares at any time we want. Investment certificates are available during subscription periods. The fund has a set in advanced time period, at end of which the amount is paid out depending on the current certificate value (formally it is a buy out of the fund certificated from their owners).¹ Currently there are 5 closed property funds operating on the Warsaw Stock Exchange (two Arka funds, two BPH and one Skarbiec TFI). Three of them are currently reporting significant loses considering their starting date; the remaining two began their activity later so they present themselves much better at the moment.²

The market offers relatively many open-end property funds from renowned foreign companies (Fortis, Franklin Templeten, Robeco, Schroder Investment Management, Worldwide Investors Portfolio). The Polish open-end property fund is the relatively young, ING Central Eastern European Construction and Property Plus Funds (it began its operation on December 12th 2006, in May 2008 it change its name). It would be a mistake to assume that investing in funds that have in their names worlds associated with security such as: real estate, property, construction, etc. is void of large risk.

The devil is in the details. This is a quote from the information prospectus from the previously mentioned ING fund: the fund fulfils the investment goal through investing up to 100% of the sub-fund assets in stock, principally in companies that: provide construction services, produce construction material, invest in or manage real estate, listed on the Warsaw Stock Exchange and regulated markets in Central Europe.³

At the same time the funds management informs the potential investor about the necessity to accept the high risk associated with investing in stock. 
Despite the relation with the property market the brought up fund qualifies to the group of investment funds with the highest risk degree. If we have chosen this fund in return we receive professional management of our capital by a licensed investment advisor.

Risk is an inseparable part of investing. It specifies the danger of unfulfilling an assumed scenario. Acting bi-directionally it represents the deviating profits or loses from the estimations. There is no ideal form of investing.

We always have to choose between: the safe investment, but with much lower potential profit and the more risky investment, that can bring high profits. An example would be the choice between stock and bonds.⁴ The alternation of the stock price levels is definitely bigger and more rapid than the bond prices quotations.⁵ Also the recommended investment horizon is much longer in case of stock comparing to bonds (the minimal investment period should amount to 5-8 year and 2-3 years accordingly). Stocks are considered to be the most risky investment form on the capital market. To illustrate the differences between investing in real estate and investing in the capital market we can use the example of buying a residential property and renting it. At the end of 2009 the average price for one square meter of residential property in Warsaw was equal to 7804 zloty. At the same time average rent per square meter was equal to 47.5 zloty.⁶ 
After application of the data and making necessary adjustments (it is wrong to assume an uninterrupted rent for 12 months, income from rent should be deducted by expenditures and taxes) the net profitability from renting amounts to the level o 5%. In comparison a 10 year bonds with a buy back period currently exceeding 5 years (so their maturity date is at least in the year 2015) show an average net profitability at a level of 4.84%.⁷ Thus rental is more profitable than investing in bonds (although the difference is very low and raises the question about validity of such a real estate venture).⁸ The situation of higher profitability of the real estate business than the bond investment is typically natural and desirable. A long-term reverse situation would be unhealthy, where the profitability of any alternative means of investing would be lower than the profitability of bonds or any other securities with the highest security levels, guaranteed by the State Treasury. It is no different in investing in properties, which caries many types of risk resulting from unforeseen factors (unpaid rent, unreliable contractors, general economic situation, current trends, etc.).

In the case of purchasing bonds with the intent to exercise its coupons (so not to sell the bonds before their maturity) the risk is only associated with the instability of the country that released the debt securities (I’m skipping inflation which can simply consume all of your profits). The state guarantees, that the debt it has incurred from us, will be repaid to us in a specific time and with a specific rate. 

In the Polish legislation in the Council of Ministers Ordinance from September 21, 2004 in Real Estate Appraisal and Valuation Survey (Dz.U. 2004 No. 207 pos. 2109) it is said directly about profitability in the property investment. During property appraisal that will reflect the market value, when having no market data the appraiser can count the discount rate (rate of return from invested capital considering risk in property investment) and indirectly the capitalization rate based on profitability of safe, long-term deposits in the capital market with consideration to the risk rate while degree while investing in properties similar to the valuated property. The formula looks as follows:

where,

- real interest rate (bond profitability adjusted with the inflation rate),
 

- sector risk in investing in property on a given market,


- risk in investing in a particular property.

The message of the legal registration is unequivocal - investing in real estate cannot be safer than investing in bonds. Despite is disadvantages (the occurring on the market fluctuations in the bond profitability especially in the strategic moments in trend changes in the economic cycle are not ideally correlated with changes in the property values) the sense of the Ordinance’ record well reflectes the market’s behavior.

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¹  Until a fund closes its operations, its certificates can be sold on the Warsaw Stock Exchange. Considering their very low liquidity, the sale
and purchase on the secondary market can take much time.

²  Arka, BPH Skarbiec – accordingly -29%, -36% and -45% (as of January 25th 2010, return rate for 36 months). Annual return rate of the other BPH fund is equal to 21%, Arka -11% (as of January 25th 2010). Comparing the quotations for the funds’ NAVs there is a large variance between them. The market prices are with significant (around 30%) discount in comparison to the net asset value. The situation is diametrically different than it was before the crisis, where the fund charts reached up to a 60% bonus over net asset value. Data from an Open Finance report.

³  ING Parasol FIO, Information prospect, Warsaw October 19th 2009.

⁴  Of course this is a large simplification. A good advisor does not put such a choice before investors. A investment portfolio in created with appropriate share of securities with lower and higher investment risk.

⁵  Bonds are listed on the Warsaw Stock Exchange. Recently the platform Catalyst began working in order to support the secondary bond market.

⁶ Data comes from an Open Finance report, January 13,  2009.

⁷  Data as of January 11, 2010.

⁸ Trade reports clearly show that residential properties for rent as a rule have the lowest levels of profitability.