Wishing for some Christmas cheer

Since October 20th, the WIG has been steadily making up for its losses, with just one small dip around November 20th. The change in mood is due to the hope that by Christmas the financial market will have reached a turning point and that the interest rate hikes will come to an end. At least the economy will be able to take a break until the spring of 2023, by when it will become apparent how deep the slowdown – or in some countries, recession – really is. Much will also depend on whether central banks will want to focus their efforts on the fight against soaring inflation or the threat of deep recession. For the stock exchanges around the world, as well as in Poland, there still remain such issues and prospects as a possible de-escalation of the armed conflict in Ukraine, a fall in the price of raw materials (due to the lower demand caused by the slowdown), and whether Poland is ever going to receive EU funds from the National Reconstruction Plan.

The week of October 21st to the 27th turned out to be a very successful one for the WSE, when the WIG rose by 20 pct and the WIG 20 by 25 pct. The construction index also grew significantly, but only in single digits (8 pct), while the WIG Nieruchomości was up by 4 pct. Since the beginning of the year, the growth in the construction index now stands at zero, while the developer’s index has lost 14 pct. The main indices have made up some of their losses since the beginning of 2022, but are still down by around 20 pct. The gains of the sector indices are the only evidence of the improved mood on the market, as in reality the economic data remains bleak and the projections made by firms themselves are at the very least cautious.

In October, work started on 7,100 apartments, almost half as many as were launched a year ago. This represents a fall of 28 pct in comparison to the same month of 2021 and by 4 pct on October 2020, when the market was crippled by the Covid lockdowns. The number of building permits has also dropped, although the number of handovers is higher than a year ago and should satisfy the demand of those with cash, who are now the largest group of homebuyers as they invest in housing as a hedge against inflation.

The weakening residential sales figures could result in developers working closer with PRS funds or even prompt them to set up their own rental operations. This process is likely to be a quick one and could be preceded by a wave of consolidation on the residential market due to its current precarious situation. The growing strength of the PRS market, however, could be curbed by government plans to tax such activities. The poor prospects of residential developers are confirmed in a wide-ranging report published by Erste Bank on the condition of stock exchange listed companies in this sector. The high interest rates and weak consumer confidence (which, according to Statistics Poland, is at its lowest point since records began) mean that we can expect to see greater pressure on margins as well as falling revenues, albeit not on a huge scale. Analysts believe that confidence could rise if the war came to an end or if the mortgage lending rules that came into force in spring 2022 were relaxed, but the Financial Supervision Office in Poland has been signalling that there is no chance of this happening, and so residential developers have been coming to terms with the prospect of their high margins becoming a thing of the past. The Polish Association of Developers (PZFD) has urged the government to recognise that the situation in the new housing sector could lead to the collapse of the construction market and up to 100,000 job losses. Its proposal is for tax breaks or the return of a system similar to the Rodzina na Swoim state loan programme for home-buying families of ten years ago. The government, however, has not shown any signs of even having considered such a move. Analysts, meanwhile, are pointing out that larger companies are in a better position to cope with such slowdowns. Smaller companies, therefore, might be awaiting consolidation and to follow the path taken by Archicom, which was taken over by Echo Investment in 2021. Large players such as Dom Development are indeed looking to the future with some optimism, because it is to such developers that those with money are now turning (these currently make up 75 pct of buyers looking for high-standard apartments). The company expects that it will still be able to achieve a net sales margin of around 30 pct for the final quarter. In the third quarter, its net profit fell by half y-o-y and by 9 pct over 9M 2022.

The construction sector is also going through a crisis of confidence. In Q4, more than half of construction firms have stated that they expect the situation to deteriorate, even though at the end of the summer and beginning of the autumn this figure had not quite reached 40 pct. The sector has been hurt badly by the war in Ukraine through the subsequent depletion of its workforce. According to Statistics Poland, 22.5 pct of construction firms are complaining about this, unlike other sectors of the economy, where the influx of refugees has actually resulted in a greater supply of labour. For 85 pct of constructors, the war has resulted in higher costs and for almost half it has disrupted supply chains. But again, as is the case with some developers, some constructors are rather more sanguine about the worsening conditions than others. One example is Budimex, which has an order portfolio 11 pct lower than at the end of Q3, but which is nonetheless is still valued at an impressive PLN 12.5 bln. The company has recently ventured abroad to win contracts in the Czech Republic and Slovakia. In Q3 it generated a profit from ongoing operations of PLN 359 mln – 19 pct higher than a year earlier. Investors have also been impressed by Polimex’s healthy results. Over the first three quarters it registered a net profit of PLN 119 mln – a 65 pct improvement on the previous year. Revenues have grown by 81 pct and the company has won a number of contracts in the energy sector as well as for building warehouses and roads. Torpol, which specialises in railway construction, was also able to publish some very good results. Its profits for January to September shot up by 194 pct y-o-y, while its gross margin from sales came to around 20 pct. (Mir)