The Yankee bubble bursts, but only drips on Poland

Managing real estate investments is becoming more expensive as the credit for both construction and home and commercial property purchases starts to dry up. Bankers are staying calm, claiming that the more restrictive loans policy is the effect of rising interest rates and not a spill-over of the US crisis. Really?

In 2001 the US economy suffered a crisis caused by an excessive valuation of the new technologies market – the dot.com crash. After this, Americans began investing in something more tangible – real estate. A powerful factor adding to this was the Fed’s reduction of interest from 6.5 pct in 2001 to 1 pct in 2005. The demand for mortgages rocketed, which led to banks relaxing the conditions for granting loans. The proportion
of so-called risky credits surged. In the peak year of 2005, some experts wryly remarked that the main requirement for a bank loan was if the customer’s pulse was detected. The situation has deteriorated today to one in which an increasing number of Americans cannot cope with their debts – which is why the US administration and banks are drafting a joint credit assistance plan for the group.

Passing the buck

The British are also beginning to have problems in paying mortgage loans. They too are experiencing rising interest rates, with analysts fearing a substantial revaluation of the estimated value of properties, whilst at the same time keeping a close eye on the situation in the US. Should the crisis there continue, the result could be a slow down of the market lasting several years. The Royal Institution of Chartered Surveyors (RICS) estimated a rise between September and November of 8.8 pct in the number of unsold properties on the books of estate agencies to
64.9 pct. Now the fear is that the crisis could also affect Poland.

Moshe Eytam, general manager of the Wilanów One project, believes that: “We live in a global village, which means that everything that happens in the USA is reflected on the European market, if only because banks and financial institutions are often closely connected with those of America. But the US economy is strong and the crisis will soon be pushed to one side.”

Bankers are also telling investors to keep their heads, insisting that the situation in the US is not responsible for difficulties in obtaining loans. Mateusz Szczurek, an ING Bank Śląski senior economist, is convinced that: “The impact of the American crisis on Central and Eastern Europe is not so strong, always assuming it does exist. The problems over there do not exist in this part of the world. Our markets are too young and bank policy is too restrictive. Polish financial institutions are not straitjacketing criteria for granting loans, since the competition between them is intense and interest rates are regularly raised. All of which means that access to mortgages is thus strictly limited.”

Banks running scared

Furthermore, the Finance Supervisory Committee had already ordered banks in July 2006 to put more restrictions on loans taken out in Swiss francs. Further regulations limiting the granting of risky loans are to be expected. Additionally the Fiscal Policy Council raised interest rates several times this year to keep inflation under control, leading to a rise in the basis on which loans are granted, which also leads to reduced demand. Further increases are expected in 2008, but cannot be excluded by the end of this year. The price of credit on the interbank market on which loan costs depend rose in November by 0.4 pct, one of the reasons why the housing market is cooling off, with experts speaking of stability and a general calming down throughout the whole real estate market.

In the opinion of Ryszard Petru, a BPH Bank senior economist: “I see no great influence from the American crisis on financing properties in Poland, or on increased restrictions in granting loans, but the effect instead relates to central bank operations. Problems should also not be expected in the granting of real estate loans in the future.”

But developers do seem afraid of bank lending policy becoming more restrictive, which would limit demand on the one hand and make it more difficult to raise the finance on the other.

In the view of Jacek Bielecki of the Polish Association of Developers: “European banks operating in Poland have lost a lot of money on the American market. The European Central Bank recently gave commercial banks loans of more than EUR 100 bln to prevent them becoming bankrupt. For the first time in many years the amount lent balanced with the number
of deposits in Poland, which could signify that money may have to be raised abroad, but it is impossible to say at what cost and whether it will be at all possible.”

For the moment, no major transformation is visible in investment credit, with loans still available and with policy restrictions affecting less reliable borrowers. True, the waiting time for lending decisions to be made is increasing, with banks taking a closer look at their customers.

Janusz Schmidt, vice president of the Polish Real Estate Federation (PFRN) and member of the Polish Association of Real Estate Consultants (PSDRN), remarks: “Are banks still interested in giving property loans? Of course they are. I would even stress that banks keep offering fresh proposals for investors, with the rising costs of loans eliminating less reliable customers.”

A pause for thought

The prices of some homes have recently been falling in Poland, but the drop has been rather small, especially where apartment prices were grossly overestimated. Robert Chojnacki, the president of the RedNet Property Group, notes that price reductions have been recorded in Kraków, where the price asked for 1 sqm was inflated and where a large number of new housing projects appeared on the market.

He wonders whether the market has regained stability and, if so, for how long: “This all depends on the rate at which salaries increase. If they continue to do so at the present rate, the relation between prices and purchasing potential will improve and further price hikes may be possible only in two years or so.”

But will housing investment still generate profit? It will, but not as impressively as it did at the peak of the boom. Properties are always profitable investments. Homes in new developments are only gradually gaining in price, but this is a process that will continue. The same will be true of other kinds of real estate, which will have to give returns on investments or capital despite the rising costs of land, building materials, labour and credit.

Moshe Eytam, general manager of the Wilanów One project, remarks that: “The stability of housing prices today is only a temporary phenomenon. The statistics make it clear that 1.5 mln homes are still required in Poland. People here are earning more and have greater requirements. The economy keeps growing. Big investors are buying expensive land and must make money from it. There is no other way to achieve this than by steady price increases.”

In line with the principle that properties are a good means of investing capital, investors also have nothing to lose from commercial developments, shopping, warehouses and logistics centres. But the important thing is to give much more thought to investments, since the market has become more demanding and competitive – and also much quieter. The experts are expecting stability without huge, sudden price increases – but also without slumps occurring. A slow-down will occur mainly in the first half of 2008, although the climate for investors continues to be positive. This is mainly due to Poland’s snowballing economy and the excellent macroeconomic situation.

Pierre Couderq, the president of Couderq & Partners, puts it this way: “The base on which the property market stands in Central and Eastern Europe is excellent, with the value of such properties as shopping centres, office buildings and warehouses increasing very substantially during the past two years. Today there is no longer any talk of downturns, but only of the maturing of the market.”    n

Emil Górecki