Wobbly start to the year

The festive mood evaporated quite quickly on the trading floors of the world’s stock markets and the second half of January was marked by the fear of rising inflation and its impact on the economy, namely higher interest rates and a slowdown. The increased prices for goods and services is a global phenomenon, with the only difference around the world being the pace of the rises. However, each stock market has been reacting in the same way. The indices in the US were down, even though the financial reports for Q4 showed that most of the figures (70 pct) were much better than had been expected. This can also be seen in the strong data for US GDP (a rise of almost 7 pct in Q4), which is also driving inflation and interest rate hikes, which the head of the US Federal Reserve is now speaking openly about. There are similar expectations as to what the European Central Bank will do and the National Bank of Poland is already raising rates in response to the double-digit inflation forecasts for 2022 – and this will have a direct impact on the mortgage market. The Polish economy is still running red hot and in the last quarter it grew by around 7 pct with the total growth over 2021 coming in at more than 5.5 pct. Now the time has come to slow down to around 3.5–4 pct, but for constructors and developers, this might at most mean only a slight weakening of the situation on the market.

The rising prices and interest rates could slow down the rate of growth of the construction/fit-out industry this year. According to Statistics Poland, the growth rate for this sector in 2021 came in at 3 pct and there is little chance that the current year, in which the whole economy is expected to slow down, is going to bring any improvement in this respect. One important factor weighing heavily on the forecasts for the condition of the construction industry is the fact that funds from the EU’s National Reconstruction Plan, which had been fuelling the sector over a number of years, have now been blocked. Financing from other EU funds is only going to start flowing in 2023. At the same time, people are beginning to say that a slowdown in the building industry might result in prices becoming more stable (cement, steel, gravel and asphalt) and reduce the pressure of rising wages, which are rising particularly quickly in this sector. Despite these negative factors, construction segments, such as for residential, warehousing and logistics buildings (driven by the still as-yet unmet demand for housing and the rapid growth of e-commerce) should still grow. The future also looks bright for road construction; however, those involved in building rail projects could have problems due to a backlog caused by the slowness of Polish state railway company, which has resulted in the number and value of orders shrinking.

The good times for developers are being reflected in their financial results and dividends, and their continued good fortune has been attracting financial investors to the sector. Develia, a developer whose shares are mainly held by pension funds, has become the object of interest of private equity fund Metric Capital (which also owns the Less Mess brand of storage lockers) – and it has issued a call to buy, offering PLN 3.34 per share (in other words, the price they were required to offer to comply with the regulations on such calls). The offer, however, didn’t meet the approval of Develia’s board, who stated that it “didn’t represent the value of the company” and that the company is likely to do very well this year. Compared to 2021, residential sales are expected to rise by 20 pct and handovers by 30 pct. The company has also announced that it is in talks with funds active on the institutional rental (PRS) market.

In January, investors looked at the development sector in Poland and saw the effects of rapidly rising interest rates on the demand for new mortgages. While the figures say that even up to half of all homes are purchased with cash, the fall in demand for mortgages (similar to what was seen in the spring of 2020 during the total lockdown) is worrying and does not bode well for the sector over the coming months. However, in terms of the total value of mortgage loans issued, the last few years have still managed to outdo the home-buying boom of 2007–2008.

Analysts point out that lower residential sales will not necessarily result in a fall in prices and lower margins for developers, since the loss of those buying on credit does not mean fewer people looking to buy as an investment, nor does it mean less activity from funds involved in institutional rentals. Compared to 2021, the number of homes on the market has fallen by over 20 pct, so a small reduction in demand should not have a major effect on developers’ results over the coming quarters. (Mir)