Fundamental to success

The year so far has seen several high-profile debuts of real estate companies on the Warsaw stock exchange, as well as a number of take-overs of developers and construction companies. Then along came the crash on the US sub-primes market. ‘Eurobuild Poland’ asked one of the people close to the centre of all this action to tell us what might happen next: Karol Półtorak, deputy director of UniCredit CA IB Polska

z Nathan North, ‘Eurobuild Poland’: How has the recent crash on the US sub-prime mortgages market impacted on the performance of the shares of the newly-listed real estate companies in Poland?

Karol Półtorak, UniCredit CA IB: Obviously, companies on the stock exchanges have experienced dramatic drops, and real estate companies have been no exception: LC Corp’s shares are currently below their issue price, leading to some unease amongst stock exchange investors. However, LC Corp and other companies have raised capital for further growth and from this angle their share issues should be considered a success.

z So is it the case now that companies are putting off plans to go public, in the hope of a recovery in share prices on the stock markets?

Yes, there has been a noticeable effect. Up to 100 IPOs had been expected to take place this year, but since the crash this has been revised down to 60 or 70. Although stock market indices have managed to partially recover, companies continue to remain more reluctant to go public because – before circumstances intervened – they had been hoping for a higher valuation.

z How optimistic are you of a recovery in share prices, and the real estate investment market in general?

The market will recover, because the future depends on the fundamental conditions – these dictate things in the long term, overriding fluctuations on the US markets. And the fundamentals for Poland are very good. One reason for this is the constant inflow of money into funds – especially pension funds. The inflow to pension funds alone is currently around PLN 1.5 bln per month, and this keeps growing. This will create additional demand for shares – irrespective of any turbulence on the international markets. And because of this demand, a lot of companies are still going public. We are very optimistic about the prospects for the market.

z What trends do you foresee in terms of acquisitions of companies in Polish real estate and construction?

The big construction players may choose to make unusual acquisitions of – for example – raw materials companies, in order to seize control of the sources as prices rise. Some new foreign companies not yet present in Poland may also be entering – there is currently lots of work available for foreign firms on, amongst others, infrastructure projects, providing them with the opportunity to gain a foothold in the country. An obvious example of this is highway construction on the back of Euro 2012.

z And how about smaller or medium-sized construction companies?

In the construction sector there will always be some movements and transactions in the medium-sized segment. The most active of these companies will go to the stock market to gain more strength and to seize an opportunity for growth through acquisitions of smaller companies. At the moment there are relatively few medium-sized companies, compared to the whole market. The big players have to concentrate on bigger projects. This leaves mid-sized projects needing mid-sized companies to carry them out.

z So you are expecting some consolidation to take place?

Yes – and this will be driven by smaller companies listed on the stock market buying similar sized or smaller competitors. For example, PBG has grown five times in the last few years, to a large extent through acquisitions – one of which was their buy-out of Hydrobudowa 9 this year. The recently-listed Pol-Aqua bought Vectra. Erbud – also recently listed – decided to focus on real estate development and so acquired a smaller real estate developer. This demonstrates the propensity of construction companies to buy into this segment whenever the margins there become attractive relative to construction margins. Consequently, we expect some smaller real estate firms are likely to be bought by larger construction firms – buying both projects and know-how together. But this is mainly going to happen in the residential sector, because with in the other segments there are lower margins, as well as higher competencies and risks.

Nathan North