2013: A living space oddity

What are housing developers most afraid of? Their main fear is that the price war will only get more aggressive - and their anxiety is intensifying. This will in turn put pressure on them to reduce their margins, lowering the profitability of their projects. The end of government support for the sector in the form of the ?Family's Own Home' programme, followed by the announcement of a new scheme for refunding mortgages, might result in buyers putting off apartment purchases for at least a few months. Some of the unsold finished apartments will have to be sold without any profit. Is it possible to look on the bright side in such a situation? It turns out that it is indeed! We will outline a few scenarios which, if they materialise, will allow residential developers to survive the grim times ahead for them.

Have we hit bottom?
Firstly, a few observations, numbers and a touch of doom and gloom. The price war is a fact. The intense competition on the market can make buyers feel spoilt, as can be seen from the latest developers' ads attempting to seduce them not only with price reductions but also with additional bonuses. Qualia Development is starting from PLN 5,900 per sqm in Miasteczko Wilanów, and offers two parking spaces free of charge on top. Dom Development has broken the magic limit of PLN 5,000 per sqm in Warsaw to offer apartments in the Białołęka district for PLN 4,900. Victoria Dom is attempting to induce sales with a discount of PLN 50,000 for turnkey finished houses in Wawer district, while APM Development is advertising "mega-discounts". Ronson is introducing its own programme of mortgage refunds called ?Everyone's Own Home' and promises to pay back PLN 2,200 per month to buyers of two-room apartments. Similar slogans can be seen in most ads - promotions, rebates, offers to negotiate prices, free of charge garages and finishes. The current situation is ideal for customers - they can choose from finished apartments and those under construction at prices that are attractive. Unfortunately, the banks are not so optimistic about potential borrowers and are still unwilling to grant loans. So this creates a vicious circle - homes are cheap, but most people cannot afford their own apartment anyway. And here comes the question which has been recurring for the last few months - have the prices reached rock bottom? Or will homes get even cheaper? The Ober-Haus real estate agency has been looking at the prices since 2004. The index prepared by the company starts from January 2004, when the average price per sqm in Warsaw amounted to PLN 4,150. Even from the perspective of today this is still a very attractive rate. The peak of the prices was reached in the middle of 2007 - in August the average rate per sqm in the capital city was as much as PLN 9,200. From that time prices have been steadily falling. According to Ober-Haus, the average rate in October amounted to just over PLN 8,000 per sqm. REAS' Q3 figures for the average price in Warsaw (for apartments from developers that are currently on offer) show that it now slightly exceeds PLN 7,600. Meanwhile, the latest report from the National Bank of Poland states that the transaction prices of apartments on the primary market in Warsaw has dropped to just under PLN 7,000 (Q2 data). Of course, average prices are only one kind of indicator. But they are showing a clear trend: homes are cheaper and will get cheaper, at least over the next few months.

Black scenarios
According to some developers and market analysts the price war is already resulting in a lowering of standards. "Just by looking at a few projects developed in a number of stages, we can see that the standard of the first stages is usually much higher than that of later ones," notes Andrzej Gutowski, the sales and marketing director of Ronson Development. Łukasz Madej, the president of the management board of consulting firm ProDevelopment, agrees. "Developers' margins have been decreasing. Everything points to the fact that they will become lower and lower. At the moment an increasing number of companies' present margins are lower than 18 pct and are even in single-digit figures in the case of some projects. The decreasing margins will lead to a situation where some smaller players will suspend their operations. To put it bluntly, when the prices of apartments drop below PLN 5,000 per sqm, negligent building starts," says Łukasz Madej, pointing out that some developers are already saving money on construction. "For example they are not plastering bathrooms and leaving conveniences uninstalled. If possible they forego the construction of underground car parks. In short - the standard of new apartments is now drastically lower. This may not be the case on the biggest markets, but it is an increasingly common phenomenon in medium-sized towns," believes Łukasz Madej.

An end of reductions?
However, let's consider the more optimistic scenarios - market downturns cannot of course be ignored, but some of the experts we spoke to are trying not to heed the doomsayers. In their opinion there is a chance for developers to extricate themselves from this difficult situation. A few factors support this idea. Firstly - not everybody thinks that prices will only continue to decrease, or at least not in the long run. "We are following what people are saying about price reductions but staying calm. You need to remember one basic rule: the residential market is cyclical in its nature. The number apartments on offer is growing while the demand and the economy are weakening, the natural consequence of which is a decrease in prices. However, the most important question players on the residential market should ask themselves is this: at which point of the cycle is the residential market in Poland currently at?" comments Katarzyna Kuniewicz, the head of market research and analysis at REAS. And the answer? "I am sure that a significant part of the decline phase is behind us. The time for new market growth is approaching rapidly. Unfortunately, it is the external economic conditions that determine how fast we are going to experience this growth. Developers have to face a very difficult year, despite the fact that a lot of them have done their homework and have done much to prepare themselves. There are a lot of good projects on the market and buyers have a great choice, both with regard to the price and the project quality. Despite that, the prices of apartments continues to fall," explains Katarzyna Kuniewicz.

On the other hand, National Bank of Poland specialists point out that developers are still not very flexible in terms of their pricing policies. According to this view, the reductions in the last few months were not so significant. An analysis by Ober Haus seems to confirm this opinion. According to the data of the agency, prices in Warsaw decreased by 2.7 pct over the last 12 months, in Kraków by 3.9 pct, and in Poznań and Gdańsk by 4.8 pct. The biggest reduction was recorded in Łódź, where it reached 7.2 pct. Such numbers might not be so impressive, so it is worth taking a look at how average prices have changed since their peak in August 2007. It turns out that you will pay 12.7 pct less on average in Warsaw and 17.4 pct less in Kraków. Meanwhile the situation in Gdańsk, Poznań and Łódź is dramatic (of course, from the sellers' perspective). Here the reductions reached 25.4 pct, 27.4 pct and 34.7 pct respectively. However, you need to remember that luxury projects were launched on these markets at some point and their prices had a considerable impact on the average values. It is worth taking a look at the supply and demand. In the last few months the number of apartments built by developers has been on the slide. But this does not mean that there is any shortage of them. On the contrary, according to REAS' data, in 2012 more than 36,000 apartments were introduced for sale in the first three quarters on the six biggest markets in Poland, i.e. Warsaw, Kraków, Wrocław, TriCity, Poznań and Łódź. The large supply was generated by developers pre-empting the so-called ?development act'. Developers are offering a total of app. 55,700 apartments, of which 12,700 are finished residential units. In Warsaw alone there are over 4,700 of these. And there will be even more because developers will finish their latest projects before the end of the year. However, it turns out that sales levels are not so bad. Around 29,600 apartments have been sold in the last few quarters - only 1 pct fewer than in the same period last year.

The family is not yet lost
The governmental ?Family's Own Home' programme comes to a close at the end of the year. Another programme is planned, but will probably come into force only at the end of 2013. According to market observers, some clients might put their home buying decisions on hold until the new programme is launched. And that means trouble for developers. But does it really? "Of course, I agree that there will be a certain gap in the demand if the new programme only comes into force at the end of next year. However, I would not overestimate the importance of ?Family's Own Home'. The programme helped to sell app. 10-15 pct of the apartments on offer. So after its expiry the situation on the market should not get drastically worse," believes Zbigniew Wojciech Okoński, the president of the management board of Robyg. Besides, he reveals that everything is not yet lost. Zbigniew Wojciech Okoński is also the president of the Polish Association of Developers, which is lobbying for the extension of the ?Family's Own Home' scheme for apartments from developers. "We are hoping to have a meeting with a representative of the Ministry of Transport, Construction and Maritime Economy before the end of the year. We have some strong arguments. The extension of the programme is supported by economic calculations. We have calculated that the proceeds from VAT are higher than the amount of the aid granted to clients for the repayment of the interest. This concerns, in a real sense, the first two years of the programme's implementation. And this is something that simply cannot be ignored," insists Zbigniew Wojciech Okoński.

Funds to come to the rescue?
It is also worth considering what will happen to the people who postpone their purchases of homes next year. "After all, the demand will not disappear forever. At some point it will return to the market in a cumulative way. But is this the only hope for developers? They are much more hopeful about the return of investment funds. If they decide to do some shopping it will be in 2013. It will not be the worst time in terms of the number of apartments sold. Such funds expect a return on the invested capital within a minimum of five years. Since a bounce is expected to happen in Poland in the next two or three years, bundled apartment purchases in 2013 might turn out to be a good investment," suggests Katarzyna Kuniewicz. Is such a scenario possible? "It might come to such a situation," says Zbigniew Wojciech Okoński, but he emphasises at the same time that we should be cautious here. "In 2008 we talked to a few funds from Arab countries and the negotiations did not conclude with any concrete results. Funds of this type expect really great premiums. And I am not convinced that developers will opt for such solutions," he says.

Cautious optimism
Despite the negative signals, developers are still cautiously optimistic. "Margins will finally stabilise once the development act starts functioning in full, which will clean the market of some of the more random players. I epect that some small companies might have problems with access to financing. In effect, the market will normalise because the demand and the supply will be balanced," predicts Andrzej Gutowski. Zbigniew Wojciech Okoński speaks in a similar vein. "I am a cautious optimist. I do not expect a wave of bankrupt developers. I think we can expect smaller companies to gradually close down. Most of the danger should be neutralised by reducing the supply," says the head of Robyg and the Polish Association of Developers.

"And as for the future? This will involve looking for increasingly inexpensive solutions in the construction industry in order to be able to offer cheaper and cheaper apartments while maintaining reasonable margins. Perhaps a move towards constructing buildings from pre-cast concrete elements could be some kind of solution," suggests Łukasz Madej, half jokingly. So it would seem that the future will be a very interesting one and 2013 might completely change the balance of power on the market - the apparent over-supply could be negated by extending the ?Family's Own Home' scheme, and there could be less competition.