Not a bad ending to a poor year

The global inflation combined with the effects of the war in Ukraine were the reasons behind the significantly worse state of the world’s stock exchanges over 2022 than had been forecast by analysts at the beginning of the year. Higher interest rates discourage investors from investing in stocks, and the uncertain geo-political situation only compounded this. The end of 2022 gave us just a ray of hope, because inflation across the world seems to have been tamed and the slowdown, although unavoidable, might not be as deep and long as economists have been predicting. Nonetheless, the global situation (and in particular the war) is still generating a lot of uncertainty. For the moment, however, the forecasts are optimistic. According to surveys aggregated by the Polish business journal ‘Parkiet’, the WIG is set to grow this year by 9 pct up to around 62,300 points and – according to the most optimistic predictions – could even reach 70,000 by the end of this year. But before everything can come good, there will be a weak period, and the first half of the year is more likely to end up in the red. An important factor will be the situation in Ukraine, where a de-escalation of the conflict would be particularly beneficial for the WSE, while Poland’s parliamentary elections in the autumn should also play a significant role. The economy is set to either grow by around 1 pct or stagnate, but this will do little to change the unemployment rate. Investment could grind to a halt, although a resolution to the conflict with the EU over the National Reconstruction Plan could have a positive impact, as could the spending on energy transformation (which should also improve the order portfolios of some construction companies). But before 2023 gets properly underway, we should take a look back at the end of 2022. The indexes were rising, but you can’t really say that Santa has been particularly generous. Inflation, interest rates and the geopolitical situation have continued to take their toll on the mood of investors.

When it comes to the residential development sector, the situation on the mortgage market has still been centre stage. The number of mortgages granted in Q3 fell by 69 pct and sales went down by 34 pct, even though the supply of new homes has been at its highest in some cities for the last seven years. At the same time, the price gap between newly-built and resold apartments has been growing, which experts say could increase the price pressure on developers for new homes. At the moment, only around 20 pct of apartments are being purchased with loans, while the average value of such credit is lower than a year ago.

Not everyone, however, is content to wait out the fall in supply due to the high price of loans and the economic slowdown. One notable idea (which didn’t, however, come from a WSE-listed company, but from J.W. Construction) is to offer credit to potential home buyers. The government has also announced a support programme involving low interest loans, which could temporarily weaken the demand, because many buyers will wait for further details and the launch of the scheme. WSE-listed resi-developers have been targeting the more exclusive segments of the market, focusing on quality and location. In 2023, such a policy was announced by Echo Investment, which is looking to take advantage of the change in land prices and the reduced construction costs, as it seeks out buyers with cash. Its target is to maintain margins of over 30 pct. When it comes to the office market, the company has stated that it is seeing high demand in large cities and office building sales in cash.

Many analysts are predicting that the slowdown, caused by a lack of mortgages and a weakening economy, will be a time of rapid development for institutional rentals (PRS). More players are gradually warming to the idea of working with specialist funds – and these players include some of the biggest around. Dom Development, for example, has signed a contract to build four blocks in Warsaw. Such partnerships can differ in how they payments are settled. These could be on a running basis, as in the case of Dom Development, or only once the completed apartments have been handed over. There are also those who are trying their hand at building their own PRS platforms. Ronson is one example and is already building rental apartments in a number of Warsaw districts. It is now looking at Poznań and Wrocław as well as for investors to increase the scale of its activities.

Construction companies are also counting the benefits of the slowdown (such as the fall in price of construction work and building materials). Mirbud, when it announced its third quarter results (revenues up by 48 pct and gross profit by 16 pct), has announced that it will be looking for more contracts outside of road-building, which accounts for 75 pct of its portfolio, to maintain an order book worth around PLN 5 bln. Its current orders should ensure that the group will be able to operate in comfort until 2025. Onde, the sustainability specialised subsidiary of Erbud, meanwhile, is to open a wooden house production plant that will comply with the EU Fit For 55 programme and requirements for reduced construction emissions. Since producing wooden home generates less C02 by several percentage points compared to traditional construction methods, the demand for these homes has already outpaced the new plant’s production.

Over the year, shares in another constructor, Herkules have performed particularly poorly. The company is still suffering from the terms of a contract signed with PKP PLK four years ago, Over the course of its work, its provisions had to be increased to compensate for an underestimation of the costs for building a GSM-R communication system, This has completely eaten up the company’s profits over the last three quarters. The PLN 280 mln contract was the reason for the attempted sale of the subsidiary working on the project, and was also why it filed for bankruptcy.

Despite the poor performance of the WSE, construction companies are still seeking out development capital – not only through bond issues, but also share issues. One such example is MLP Group, which has recently raised almost PLN 200 mln in this manner. (Mir)