Going down fast

Stock market report
After the slight whiff of optimism at the start of the summer, the beginning of the third quarter was a time of stock exchange sell-offs – both in developed and emerging markets. Against this background, the construction and development markets have fared a little better, even though investors with money in them are gazing directly into the spectre of a serious slowdown

The main WIG index in Warsaw slid to below 50,000 points, even though around the same time last year it stood at around 75,000. Since the beginning of 2022, the discount on this index has risen to over 30 pct, while for the WIG 20 it has been closer to 40 pct. As usual, the Polish stock exchange has performed weaker than those in the rest of the region, although the size and liquidity of each particular market has to be borne in mind. The belief stemming from the short-term but rather insubstantial rise in interest rates soon evaporated across the world as the money invested in shares started disappearing. In the face of high inflation, the US Fed sent out a clear signal that it would not delay raising interest rates, which helped to strengthen the dollar, pushing it up to more than PLN 5. Added to all this are the problems in Europe with fossil fuels and the slowdown in China, as well as the looming danger of an escalation of the war in Ukraine. The Polish economy is slowing down, but there’s no immediate prospect of it shrinking. The latest International Monetary Fund forecast is for GDP growth in Poland next year of a mere 0.5 pct – a marked difference from the 4 pct growth this year. Interest rate hikes in Poland have been put hold for the time being, but inflation has now almost reached 20 pct and this is certain to prompt further rises in the cost of money.

Meanwhile, the demand for apartments bought with ever-more expensive loans has been slowing – in August, the number of mortgage approvals was down by 71 pct y-o-y and by 12 pct in comparison to July. This is the lowest level since records began. On top of that, the demand for credit has also fallen to its lowest ever level – and this is certainly not the end of the bad news for the credit market (the value of loans taken out in July slumped by 60 pct y-o-y). Even though interest rates remain for the moment unchanged, the uncertainty over the strength of the economy has also been adding to the price of loans. Unemployment, another key indicator of consumer demand, has also joined the lowest level ever club.

The upwards pressure on interest rates and the uncertainty over the future of the economy has meant not only lower demand for developers but also increased financing costs. Over the last few years, developers have been enthusiastically issuing corporate bonds with interest based on market rates. So, when the maturation date of a particular series of bonds comes up, a developer’s liquidity becomes crucially important. However, construction and energy costs continue to rise. Residential developers, such as Lokum, are now looking more kindly at the rental market and not necessarily with the help of PRS funds because, as the company explains, with such a model it’s not so easy to index-link development costs in contracts. However, in the first half of the year, Lokum suffered a sales drop of over 50 pct and expects similar figures for the entire year. The decline in Atal’s first half year result has been somewhat less dramatic (35 pct) and it wants to use the period of weakened demand to take small steps, looking after the supply side using its own financial resources due to the high costs of financing, instead of resorting to any new debt. Develia has also lowered its targets for 2022 by around 30 pct, having originally predicted sales of 1,600–1,800 apartments. When it comes to financing, the company intends to court individual investors with its bonds and to raise PLN 150 mln through another issue. Echo Investment is also aiming to raise money in a similar manner, having already sold bonds to individual investors on several occasions. It is also determined to maintain its high profitability in the face of the reduced number of apartments it sells (down by 40 pct in H1), while building up its PRS platform, which is to be enlarged by 10,000 rental apartments. Developers across the board have been reporting falling margins, with gross margins rarely coming to more than 30 pct. According to analysts, the weakening economy and rising costs (and particularly for energy) will bring margins down to around 20 pct.

State owned PHN was able to boast relatively better first half results due to being involved in three segments – office space leasing, development and construction services. Even though its results for each of these were weaker y-o-y, its operating profit rose due to improved real estate valuations. For Cavatina, valuations had a negative effect on its figures, and despite the rise in rental income and higher gross profits from sales, the developer saw its net profit fall. However, at the same time the company enjoyed an increase in the commercialisation of its office space (with almost 170,000 sqm under construction).

Finally, it’s worth mentioning another departure from the Warsaw trading floor. Interferia decided to cease trading its stock after 16 years, when it succumbed in the spring to a call on its shares by Polski Holding Hotelowy. Meanwhile, Trakcja’s shares also became subject to a call by Agencja Rozwoju Przemysłu and PKP PLK. The latter of these companies already has a stake of over 70 pct in Trakcja but insists that it does not intend to delist the company from the stock exchange.