Down with the war – and inflation!

Stock market report
With all the uncertainty generated by the war in Ukraine and fears of further interest rate hikes, the mood of investors has hardly improved over the last month. The construction industry faces its own problems, with rising prices and labour shortages, but nonetheless output is still high. For developers, demand remains an unknown, as prices rise and the economy begins to slow

The situation in the world’s financial markets hasn’t changed much since the end of the first quarter. The war in Ukraine is still casting a shadow on prices and the access to raw materials – including agricultural produce – while rapidly rising prices are encouraging central banks to raise interest rates. Capital is withdrawing from emerging markets, while the coronavirus, although no longer centre stage, is still disrupting supply chains in China. More and more analysts are voicing the opinion that the pandemic, the war and Russia’s isolation are slowing down further globalisation (maybe permanently) and economic blocs are now emerging that are much more weakly linked. Of course, the war is also going to slow down the economy in the traditional sense. According to the IMF, global GDP will rise by 3.6 pct compared to 6.1 pct last year. In January this year, it was predicting growth of 4.4 pct. The same thing can be seen in Poland. In January, the GDP for this year was predicted to rise by 5.1 pct, but this figure has not been revised to just 3.7 pct.

For the moment, however, the data coming in isn’t showing any signs of this slowdown. In March, the first month of the war, the figures for industrial production were surprisingly good (up by 17 pct, even though 12 pct had been projected). Construction output was even better at 28 pct (with the prediction having been 17 pct). The fastest-growing segment was building construction, which was up 44 pct y-o-y. Statistics Poland has also published the latest numbers for home sales. At the end of March, almost 870,000 residential units were under construction, up by 3.6 pct on the previous year. However, the number of construction launches fell by 21.1 pct. Over the entire quarter, developers handed over 4 pct fewer units. According to JLL, sales fell over the first three months of the year by 47 pct y-o-y and by 31 pct on the previous quarter. The feeling is that Q2 could be even worse, because rising interest rates as well as expected regulations to tighten credit controls and rising inflation are likely to put downward pressure on demand. The rise in the prices of materials and labour are prompting developers to consider the idea of index-linking the value of their contracts with individual clients, even though such a move could prove problematic for many reasons, such as when the buyer has to take out a mortgage. These concerns are also impacting the PRS market and rentals of apartments by institutional investors. Residential developers are looking to protect their margins from the rising material and labour costs, but analysts believe that the PRS market could act as a stabilising factor for them in the face of high interest rates and subdued demand from individual buyers.

Despite the sudden jump in interest rates, many developers, such as Echo Investment, have reported higher sales in Q1 than in the final quarter of the previous year. The influx of refugees has resulted in a lack of rental accommodation, making apartments an interesting option for those who still have money and want to invest. Echo’s positive mood also derives from its office space, as there are signs of at least a partial return of workers to the office. Developers in the warehouse business are similarly chipper. According to many companies in the sector (such as Marvipol) demand remains high.

Construction companies, just like developers, are trying to hold on to their margins – especially when it comes to public contracts. Among others, Unibep (which had a PLN 3.6 bln order book at the end of 2021) would like not only its new contracts to be index-linked, but also its old ones too. Constructors are also lobbying for clauses of limitation to be removed. Polimex, too, (with an order book worth PLN 5 bln) can see the potential difficulties with index linking contracts, although its profitability isn’t threatened. This year the group is targeting a PLN 3 bln increase in revenues (PLN 2.3 bln in 2012). Although the company does not wish to talk about its profits, it has no shortage of commissions. In the railway construction sector, in which ZUE is a general contractor, there are contracts worth PLN 11 bln for the taking. Rail operators are also prepared to index link payments with a 10 pct ceiling on the contract value. According to the latest forecasts published by Spectis, the prospects for this industry are not so impressive because, on the one hand, PKP is becoming less active when it comes to signing contracts and announcing tenders, while on the other, the industry is also being impacted by the rising cost of materials. The value of work undertaken for the rail sector has noticeably fallen over the last few years, when you look at the portfolios of such contractors as Torpol, Trakcja and Budimex.

The difficult situation with the economy and in the real estate sector is being mirrored by falls in the market indexes. The broader market has lost more than 10 pct since the beginning of the year, while the sector’s indices have also fallen – although the percentage losses are still in single figures. (Mir)