Apocalypse...not yet

Lower residential sales – both quarterly and semi-annual – are being reported by most of the developers in this sector. Until recently, such declines only occurred sporadically, in isolated cases – and there was always some neutral explanation at hand, usually that the sales were all concentrated in another quarter due to the schedule for launching project sales. However, the current drop in sales has been affecting the majority of developers, while their PR departments, which normally spring into action in such situations, are not even trying to explain away the decline as actually some sort of increase, as they often do.

Challenging for both big and small

The ‘big four’ largest players, each of which have sold over 1,000 units in the last six months, have also not been immune to the decline in sales. The one exception has been Murapol, which sold 1,798 apartments in H1 (189 more than a year earlier). However, this developer includes paid reservations to its net sales (development contracts and preliminary sales contracts – and there were 1,422 of these), which makes it rather difficult to compare their results with those of other companies. In quarterly terms, Murapol also reported year-on-year progress – from 795 to 872 apartments in Q2 this year. “Looking to the future, we expect there to be sustainable development in terms of the level of residential production and the volume of apartments available for purchase, which will be secured by the portfolio of projects we have under construction and its systematic but well thought out development,” Nikodem Iskra, the CEO of Murapol, has stated.

“Looking to the future, we expect there to be sustainable development in terms of the level of residential production and the volume of the apartments available to purchase,” says Nikodem Iskra, the CEO of Murapol

The second firm on the list, Dom Development, found buyers for 1,650 units in H1, although it sold 1,845 a year earlier (its quarterly result fell from 850 to 802 apartments). In its announcement, the developer lists the main factors limiting the supply, such as soaring costs and the low availability of land, difficulties in obtaining administrative decisions as well as an increase in costs and the reduced availability of construction services. “Dom Development is in a very healthy position and can take advantage of the opportunities created by the strong demand, which will continue. Having dealt with the challenges connected with the construction process, we expect that the increase in margins will compensate for lower sales volumes,” announced Jarosław Szanajca, the CEO of Dom Development.

Robyg’s sales declined on a similar scale – its H1 2018 figure amounted to 1,516 apartments (1,693 a year earlier) and its Q2 result was 602 units (756 a year earlier). “Market trends suggest that home prices will have grown by the end of the year by up to 15 pct. The residential development sector in Poland still has attractive growth prospects due to the significant need for housing, ensuring there will be continuous absorption, along with the low interest rates, which will probably remain at their current levels until the end of the year,” explained Oscar Kazanelson, the chairman of the board at Robyg.

“On the demand side the situation on the residential market is good. Therefore we are currently working on continuing the expansion of our offer in all the seven cities we operate in,” revealed Zbigniew Juroszek, the CEO of Atal, which also reported worsening sales results in H1 and Q2 of this year. By the end of June the developer had sold 1,296 units (1,364 a year before), while 582 were sold from April to the end of June inclusive (688 units a year earlier).

A much more diverse situation prevails in the second division – that is, for those developers whose sales fluctuate at between 500 and 1,000 apartments. LC Corp, which tops this league, recorded an increase in semi-annual sales (from 952 to 990 apartments y-o-y), as well as a drop in quarterly terms (from 399 to 341 units). The second company on the list, JW Construction, revealed a semi-annual decline (from 850 to 758 apartments), whereas Archicom, in third position, was the only company on the list that could boast growth in both categories: semi-annual, from 601 to 656 units sold, as well as quarterly, from 235 up to 389 units. Those with more than 500 apartments sold in H1 included Echo Investment (557), Lokum Developer (531) and Budimex Nieruchomości (509), while in Q2 the same developers found buyers for (respectively) 210, 227 and 239 apartments, each of them recording y-o-y declines. Polnord, meanwhile, could only approach the level of 500 apartments (selling 497 in H1 2018 compared to 652 a year earlier). Dariusz Krawczyk, the CEO of the company [until August 17th, 2018], was not mincing his words as he explained the reasons for the suspension of certain projects: “Due to the prices for general contracting, which diverge wildly from common sense, we will not be carrying out projects that could generate a negative margin,” he declared. “We will be selling units in those projects we already have general contracting agreements signed for, because with these we are able to estimate the construction costs. We have the comfort of having a large stock of investment land and our own construction company, so we can postpone some projects until next year. We do not intend to build expensively and pass the costs on to our buyers. When reasonable prices return to the contractor market, our products will be more competitive compared to many currently projects, the profitability of which can only be achieved through significant price increases,” Dariusz Krawczyk added.

The end is not nigh...

Falling sales have also been confirmed by the consultancies for this sector. According to Reas, which surveys the six largest residential markets in Poland, developers sold 15,600 new apartments on them in Q2 of 2018 (Reas also includes paid reservations), which was 15.2 pct down on the previous quarter and the first such a clear drop in sales in more than five years. The market last bottomed out in 2013, in the year when one government mortgage-subsidy scheme (‘A Family’s Own Place’) had come to end and the next one had yet to start (‘Apartments for the Young’).

But Q2 2018 was the third consecutive quarter when fewer new apartments came onto the market, as a result of which prices increased significantly. A total of 30,300 new apartments became available for buyers in Warsaw, Wrocław, Kraków, the TriCity, Poznań and Łódź in H1, app. 3,000 fewer than in the same period of 2017. At the same time, 34,100 apartments were sold, also a worse figure y-o-y. On the largest market, Warsaw, sales decreased by 24 pct q-o-q. Reas recorded a similar fall in Wrocław (23.3 pct), while in Kraków and the TriCity the quarterly falls were around 10 pct (9.6 and 11.5 pct respectively). Interestingly, the smallest of the markets surveyed recorded increases – in Poznań, the number of transactions increased by 6.7 pct q-o-q, while Łódź, where sales improved by 16.2 pct, has broken its record for the second quarter in a row.

The experts insist that there is still no crisis or collapse on the horizon, and the decline in sales is the result of a ‘withdrawal of demand’, which is a natural reaction to price increases. The rising prices were the result of long-term inflation in the prices of land and building materials, which are mainly being pushed up by market players wanting to get rich quick on the back of the growing demand or who are being rushed by their stock repayment dates.

“Falling sales do not mean that buyers have suddenly stopped purchasing apartments. The sales pace and the very low percentage of completed unsold apartments confirm that the demand is still outstripping the supply. This was one of the reasons why prices have risen in all cities. Some buyers have not been able to accept these increases. Furthermore, those who were balancing on the verge of credit-worthiness have not been able to rely on any support from governmental subsidies under the ‘Apartments for the Young’ programme for almost two quarters now,” explains Katarzyna Kuniewicz, a partner at Reas who manages the work of its market research and analysis team.

Analysts also point to the decrease in the availability of land and the increase in the price for buying it, along with the rising costs of construction and building material prices (in the latter case, ‘inflated’ by producers sensing the good prospects for the construction sector), as well as problems with the availability of labour – as some of the main reasons for the market slowdown. Increasingly drawn-out administrative procedures are another issue. This is a result of the fact that due to the decrease in the availability of land, ‘difficult’ plots are now often coming onto the market. The legal status of such plots can only be cleared up after a lengthy process. The local elections that are to take place in the autumn are also a factor, as they are effectively discouraging council officials from making administrative decisions that bear even a modicum of legal risk.

“The lengthening of the investment cycle – and, as a result, the longer waiting time for an apartment – has led to part of the demand being transferred from the primary to the secondary market,” argues Katarzyna Kuniewicz. “This also applies, perhaps most of all, to people who buy apartments for investment purposes. Every fourth apartment in Poland, and in some markets even one in three, is being purchased by investors – and they do not want to wait longer for a return on their investment. We also have to bear in mind that today the term ‘secondary market’ does not only apply to old apartment buildings or blocks from the 1980s, but also several-year-old units in modern buildings,” she adds.

The question on everybody’s lips is: “Will prices fall? And if so, when?”. “The theory goes that in a typical market cycle, without the impact of a global crisis, prices should definitely fall when the downturn comes – by about 10–15 pct,” comments Kazimierz Kirejczyk, the CEO and the main expert at Reas. “But this decline should result from a large overhang: a situation in which the number of apartments waiting for buyers is about twice as large as the annual sales. However, this is not the case – the apartments on offer are just over half of the annual sales, and so the scissors of demand and supply are not opening. In fact, the contrary is the case – the supply is falling faster than the demand. Therefore the usual mechanism forcing prices to fall just isn’t there, so it can be assumed that prices will continue to grow until the end of this year and only in 2019 will they start to stabilise,” he believes.

All the market players we spoke to unanimously agree that there is no chance of a repeat of the nightmare scenario of 2008. A decline in sales would only herald a catastrophe if it was being accompanied by an increase in the number of projects coming onto the market and of unsold homes – but these indicators are also falling proportionately. The current demand is therefore not characteristic of a ‘speculative bubble’, and the fact that developers are restricting the supply in anticipation of more favourable conditions could instead be evidence that the Polish residential market has finally reached maturity. ν