Strong economic growth has driven Poland's real estate market to spectacular annual gains of as much as 30 per cent in the past few years. Analysts expect the market to recover and offer good investment opportunities despite recent reversals. The Polish economy has been transformed since the fall of the Berlin Wall and, in recent years, has experienced strong growth, becoming one of the most successful of the former communist countries of Eastern Europe. Gross domestic product growth in recent years has been strong at about 6 per cent a year and, although still high, unemployment has fallen significantly and real earnings have grown rapidly. According to Warsaw property investment consultant REAS, strong demand for residential property has been driven by economic growth and demographics as young people born during a surge in the birth rate in the 1970s and 1980s now seek their own homes. This is especially true in the capital, which has been the focus of economic growth, with unemployment rates at about 2 per cent last year, much lower than the national average, despite the city attracting many newcomers from other parts of Poland. Michael Clay, senior partner of real estate investment company Davidoff Kleeberg & Maresch, which is active in Warsaw, said that growth in the residential sector had benefited greatly from Poland joining the European Union in 2004, which had helped stimulate domestic demand for housing and the entry of foreign investors. As a result, the residential market in Warsaw in recent years has been highly dynamic, especially in the boom years from 2005 to 2007. Much of the city was destroyed in the second world war and it suffered decades of neglect under communism. There has been a considerable amount of construction since and more traditional areas also survive. Key locations for investors are generally in the centre of Warsaw, including the downtown Srodmiescie district which is the main business area, and neighbouring quarters such as Mokotow. It is these central areas that have attracted foreign investors because they have a concentration of high-end properties. But strong demand for housing has meant that development has spread across the whole city including the suburbs, where prices are generally significantly lower. Most new developments in Warsaw are apartments, but there are many older houses and apartments that have undergone renovation, and which find favour with some investors. In the third quarter of last year, the average price for new apartments in Warsaw was 8,900 zloty (HK$21,800) per square metre. Prices in the upmarket areas can reach 13,000 to 15,000 zloty per square metre. Asking prices for new apartments in Warsaw began to decline in the third quarter of last year, according to REAS figures. However, while listed prices of new developments have only declined slightly, in reality developers are offering discounts and promotions such as free parking spaces or interior finishing. According to Magdalena Wit, a consultant with real estate consultancy redNet Investment, these discounts amount to about 5 per cent to 8 per cent off listed prices. However, REAS predicts that this year there will be steeper falls of 10 per cent to 15 per cent in Warsaw residential prices. Warsaw property experts say that this will create opportunities. Mr Clay said, 'Prices which went through the roof over the past three years have taken a real fall and there are some investors who, because of the speculative nature of their purchase, have had to sell or will need to sell at a significantly lower price than they had intended.' Ms Wit said, 'Oversupply in the market provides a great investment opportunity as there is the possibility to negotiate lower prices.' However, the opportunities for short-term gain may be limited. REAS consultant Maximilian Mendel said, 'During the boom period of 2005 to mid-2007 the key strategy of investors was to buy apartments to resell them.' This strategy has now shifted because speculative short-term investment has been replaced by long-term investments in buy-to-let property. Renting has not been the preferred housing option for Poles, but the increasing difficulty in obtaining mortgages is forcing many young potential buyers to rent. This is pushing up demand for rental properties. Mr Mendel said that most Polish buyers still had relatively modest financial means so they tended to go for lower- to middle-market properties. He said that investments aimed at this segment would benefit once the market recovered. Many local buyers are focused on smaller one-bedroom and two-bedroom units, which are from 40 square metres to 80 square metres and they cost from 325,000 zloty to 650,000 zloty. But, as households develop, demand for larger units is expected to grow in the longer term. The Warsaw market is in the doldrums but most experts believe it will begin to recover next year on the basis of strong fundamentals in Poland. The market will also benefit from the Euro 2012 soccer competition which will be jointly hosted by Poland and the Ukraine. Infrastructure in Warsaw will receive a strong boost, including a new metro line, roads and railways, which should help push up property values.