A case of the global hiccups?

But it’s not only the state of the economy and the continuing impact of the pandemic that have dampened the investor sentiment over the last few weeks. In September, the global markets were hit by reports that Chinese residential developer Evergrande is having problems meeting its current financial obligations – mainly the interest on the debt it owes, which in total comes to around USD 305 bln. As a result, what had been quite a bright start to September ended with declines on the stock exchanges in Europe and America. The difficulties faced by China’s largest developer threaten the country’s entire economy as well as the those throughout Asia, which in turn would have a knock-on effect globally. But just for a brief moment, even Evergrande’s woes were eclipsed by unexpected decisions taken by the US Federal Reserve. As it turned out, interest rates were not increased (even though inflation in the US has hit 5 pct), but it was revealed that quantitative easing – or the monetary policy of buying up government bonds – would be curtailed. In effect, this increases the quantity of money on the market, which encourages investment in shares. Inflation and, in particular, the price of raw materials, and thus has become a real barrier to global economic recovery after the long lockdowns. In Poland, inflation is approaching 6 pct, while interest rates have gone up slightly (and unexpectedly), however, for the moment there’s no sign of the economy slowing down. Despite all the turmoil in September, the Polish stock exchange indices are still rising (apart from the WIG-BUD), while the rates of return since the beginning of the year remain impressive (the WIG is up by 30 pct and the WIG-20 by 23 pct) – and even the sub-indexes for different segments are doing well (construction went up by 17 pct and real estate rose by 33 pct).

These fears for the future have not left the investors’ recent darlings unscathed, either. Renewable energy company Onde (part of the Erbud group), after its highly successful IPO when it raised PLN 200 mln, has quickly fallen from favour with its trading price having now dipped below its original offer price. Another debutant, commercial developer Cavatina, which specialises in building and leasing office space, had a rather lack-lustre debut in which it raised a disappointing PLN 187 mln, only half of what it was hoping for, but was then able to publish excellent results for the first half of the year revealing that it had enjoyed a six-fold increase in profits. The company hasn’t wasted this opportunity and is now raising financing on the market by selling bonds to help it develop more than ten projects. Altogether, Cavatina is aiming to invest almost PLN 2 bln in these projects. Another WSE-listed commercial developer, PA Nova, is planning to make changes to its portfolio and to use the funds from selling off properties to invest in retail parks and DIY stores. This strategy is intended to capitalise on the expected investor demand from funds looking to invest in relatively small retail parks. Echo investment has also revealed that it has been seeing higher demand among investors and at the same time more activity from tenants, although you have to bear in mind that the company’s business structure has changed somewhat since it took over residential developer Archicom.

Turning to the residential market, the recent surge in home prices has yet to perturb developers. According to a report by Polish business journal ‘Parkiet’, the average gross margin on sales was higher in H1 2021 than during 2020 at the height of the pandemic, reaching almost 26 pct – and for some developers it was even higher, closer to 40 pct. The rising costs of materials and labour are unlikely to have wiped out these profits, since the land for such projects was purchased relatively cheaply a few years ago. Moreover, analysts believe that despite the current level of inflation and the recent interest rate hikes, prices are set to continue to rise due to the rapid growth of the PRS segment in Poland and also – perhaps surprisingly – because the lack of available land is set to limit the supply of new housing. (It should be added that this analysis is based on projects that had already started.)

Such expectations are reflected in the sales figures of the residential developers that have already been able to publish their third quarter results. Robyg broke its quarterly record for the number of sales contracts signed, but is a long way from meeting its target of selling 4,000 homes in 2021. At the same time, the developer intends to spend up to PLN 900 mln just on the purchase of land. Murapol, which is majority owned by the Ares fund, also published strong quarterly results. Over the summer the company submitted its prospectus to the Polish Financial Supervision Authority and is waiting for the green light to debut on the stock exchange. Atal was also able to boast some very impressive results, with sales up by 50 pct y-o-y.

For Dom Development it was a somewhat weaker third quarter. Its sales fell by several percent on both the previous year and quarter. The company has provided a partial explanation for this by saying that the banks have been slow to grant mortgages (in June a record PLN 8.2 bln in loans was granted and for the fifth month in a row lending was above the PLN 7.5 bln mark). A lot also depends on what is currently available to buy and this is being affected by delays in administrative approvals for construction permits and even by developers deliberately reducing their sales in response to rising costs. (Mir)