Troubling times

Stock market report
The Warsaw Stock Exchange has been performing poorly recently in comparison to other trading floors across Europe, even though the economy has been surprisingly resilient and the expected slowdown shouldn’t be so severe. Inflation is undercutting construction firms’ profitability, but developers still seem to be in a happy place

The mood on the world’s stock markets has been glum, to say the least. Indices are falling and have lost ground since the beginning of the year. The S&P 500 in the US has lost almost 20 pct since January 1st, while the Dow Jones industrial index has lost 14 pct. The Nasdaq technology index has fared even worse, falling 27 pct since January. Investors fear a recession and also high inflation, which will force the central bank to act and tighten the money supply. China’s stock exchanges have suffered double-digit falls as its economy reels from the imposition of further coronavirus lockdowns. The mood in Europe is only a little better. It seems that the gloomy forecasts of a deep recession induced by Europe’s attempts to free itself of its dependence on Russian gas (which as well as rising prices could also mean limited supply and reduced economic activity) is not actually the main worry at the moment – at least not until the autumn. The European Commission has published further forecasts that take into account two nightmare scenarios (that it terms ‘drastic’) that could arise if gas prices suddenly rose or supply problems occurred. But even according to the standard scenario, the forecast for April is for GDP to have fallen by 1.3 pct compared to February. Polish GDP should also have risen considerably slower – instead of the initial forecast of 5.5 pct we should expect around 3.7 pct. The slowdown will be significant but, due to the high speed the economy has been running at, when the brakes go on the effects on the job market and on consumer spending might not be so noticeable. Poland is one of the countries whose economies have returned to growth the quickest. The first quarter was a period of continuous growth in exports and consumer spending. The situation looks similar across the region, where the economies of Hungary, Romania (where a construction boom is underway) and Slovakia have all been having a better time of it than was expected.

The current double-digit inflation is an even more serious challenge and, according to most economists, it’s going to remain high for many quarters to come. Further hikes in interest rates (which are at their highest since 2008) are being weakened by fiscal policy – the anti-inflation shield and further social benefits could even accelerate consumption and encourage companies to raise their prices even further. The return of inflation after 20 years has been disconcerting and makes forecasting difficult, thus discouraging investment. The regular interest rates hikes have been reducing the demand for loans, but Polish people still have too much of an appetite for borrowing. In March they applied for loans worth a combined PLN 20 bln. This large demand is clearly related to the financial supervisory authority recommendations introduced in April governing the conditions for granting loans and assessing creditworthiness. Home sales in 2022 are set to be lower as a result, but prices could remain high due to costs and availability.

Stock exchange-listed companies have just published their results. Atal’s sales were down by over 20 pct. It also expects to sell 3,500 apartments at the most over the year (4,200 in 2021). The company claims that the trend for buying apartments as an investment is continuing to grow, especially in a climate of high inflation and high rental demand, which is also being driven up in this sector by Ukrainian refugees settling down permanently in Poland.

Analysts believe that the surging growth in the institutional rental market (PRS funds) will provide some succour to residential developers. Although home purchases in bulk have lower margins, they should help to maintain high sales levels. Recently, the LifeSpot platform was launched by Murapol’s Ares fund, joining others such as Resi4Rent and Fundusz Mieszkań na Wynajem.

Despite the worsening circumstances due to the war and inflation, some developers are still making hay from the end of the pandemic. One such company is GTC, which recorded a PLN 195 mln profit for 2001 compared to net losses of PLN 329 mln in 2020. Its return to health is also confirmed by its Q1 figures. According to the company, the turnover in its shopping centres is comparable to the pre-pandemic period, even though footfall is still considerably down. When it comes to office real estate, developers are currently preparing projects with a total area of 200,000 sqm.

For construction firms the challenge is to maintain the profitability of contracts signed during the previous quarter. Rising costs are forcing them to renegotiate their contracts with clients and look for new work. Constructors such as Erbud admitted this was the case when it published its figures for the first quarter. Erbud has recently added to its activities projects to build military facilities and supplying modules for wooden houses to Germany, while it will also be taking advantage of the revival of the wind farm market once zoning restrictions for building them are lifted. Budimex also spoke of a ‘difficult quarter’ in its results announcement. Despite improved revenues (up by over 20 pct), its profitability fell to 3.6 pct – down on 5 pct a year earlier. (Mir)