The return of inflation

Stock market report
As October turned into November, the construction and real estate sub-markets on the WSE were falling like autumn leaves. The main indexes also slipped back, but not to the same extent. This is, unfortunately, the mark of an emerging market that has much fewer stable indexes than those in developed countries

While it may now be the case that the coronavirus, which has broken through the protection afforded by the vaccine programme, hasn’t resulted in further lockdowns, the disruption to supply chains continues. Production has been down China, leaving the rest of the world desperately waiting for it to regain full steam. Transportation is still restricted and prices are rising, thus feeding inflation. And all of these negative factors are having on impact on the economy. Higher inflation could mean tighter monetary measures, in the form of interest rate hikes and higher costs for servicing debt. The US economy is no longer booming, but consumer spending proved to be higher than expected in the third quarter. The labour market also appears to be in better shape than it has since the start of the pandemic. Across Europe, the post-pandemic recovery slowed, but consumer spending has nevertheless remained resilient. The figures are worse for production – there are shortages of components (mainly silicon chips for producing vehicles and other machines) and also of labour. Limited supply combined with high demand means higher prices – and all of this has been exacerbated by the high cost of transporting energy in the form of coal and gas. The big question economists are asking themselves is whether inflation is going to last just a few quarters or a few years. The answer to this is going to determine the policies of central banks as well as the cost of capital and the behaviour of the stock markets. Interest rates in Poland have also started rising in response to the highest inflation levels of the last ten years. (I’ll talk more about this later when discussing the situation faced by developers.) The end of October marks the start of the season for publishing Q3 results, such as Mostostal Zabrze’s preliminary figures. The group maintained a record order book worth PLN 1 bln in June and the total value of its orders was also twice as high as at the end of Q3 2020. Its revenues for the first three quarters of 2021 came in at almost PLN 570 mln (compared to PLN 429 mln a year earlier) while profits of PLN 12.2 mln were generated (in comparison to PLN 7.3 mln). For Erbud and its subsidiary Onde, which is one of the new stars of the Warsaw bourse, the third-quarter results – despite revenues and profits showing year-on-year growth – were a reason to undersell both companies and, as a result, the share price of Onde fell to a level 20 pct lower than its original IPO in June. Analysts are worried about impact of Onde’s rising costs and, despite the rude health of its owner, the weakness of the subsidiary affected the share price of the mother company. But this isn’t the only construction group faring poorly. Budimex published a record-high order book (PLN 14 bln) and some very good Q3 results but has also seen its share price fall over the last few weeks

In the residential development sector, there are signs that the red-hot market is finally slowing down. These include Statistics Poland’s figures for the number of new residential project launches – down by 10 pct month-on-month in September. It’s also clear that the activity in large cities is falling off much faster than in smaller towns, where the number of project launches was actually higher year-on-year. This situation results from a shortage of land in cities, where the authorities are more bureaucratic and so the issuing of permits takes longer. According to the analysts, this trend has been evident for quite a few months, but it’s worth pointing out that the statistics also cover projects under construction – the developers on the stock market have been reporting Q3 sales that are 25 pct higher y-o-y and as much as 43 pct higher for the first nine months of this year. The rising price of materials is, however, set to cut into their margins, as it is driven up by some of the other previously mentioned rising costs, such as the increases in the price of energy and fuel. Up until now, developers have been passing these rising costs on to their customers, but now home buyers will also have to contend with the increased cost of mortgages. Poland’s base interest rate has now moved up to 1.25 pct and this latest hike has resulted in average monthly mortgage payments shooting up by PLN 220–230 a month. The pressure on margins is, though, a story for the future, because many developers have reported gross margins on sales of around about 30 pct for Q3, while some – such as Lokum – even reported figures closer to 40 pct.

A lot has also been happening for warehouse developers. MLP Group has grown hungry for more financing and hopes to raise EUR 100 mln through a new bond issue – EUR 40 mln more than it originally planned. The company has been buying up land in Germany and is now aiming to enter the Benelux region to take advantage of the current favourable circumstances and (in particular) the apparent unstoppable growth of e-commerce. Following the debut of office developer Cavatina in July, the time has now come for Murapol to issue shares. Its majority shareholder, US investment fund Ares, aims to sell a stake of around 35 pct, but will remain a strategic investor in the company. Murapol is currently concentrating mainly on the PRS market and has signed a contract with its owner to build 10,000 apartments. The developer’s public offer is designed to be attractive to potential investors due to its wide range of businesses in both large cities and smaller towns and also because of its abilities as a general contractor, but the most attractive lure might turn out to be its promise to pay fat dividends of up to 75 pct of the company’s profits. Away from the stock exchange, the market is also preparing for the sale of developer Robyg, which is 100 pct owned by investment bank Goldman Sachs. The company was originally purchased for PLN 1.2 bln and is now valued at around PLN 3 bln, but, as business journal ‘Puls Biznesu’ reports, there’s still no lack of potential buyers. (Mir)