Summertime blues

For many months, those with an eye on the capital markets have been mulling over the question of whether the global economy can cope with the continuing high inflation levels and interest rates as well as the reduced investor appetite that typically comes with them. At the end of the summer, stock buying came to a halt and any remaining optimism evaporated as concerns grew over US central bank policy, since, even though the market had been expecting one more interest rate hike, the Federal Reserve had categorically stated it was going to bring inflation down to its target level. However, by the beginning of October there had been a change in tone from the Fed, which has improved investor sentiment. The Fed is certainly going to leave interest rates where they are for a long time to come, but the fact that it just gave a hint that no more rises were on the cards was enough to push the indices back up. Other important central banks, such as those in the UK and Switzerland, have also been holding back from further interest rate rises, while the central bank for the eurozone is another that has been hinting that interest rate hikes were coming to an end. Financial market analysts believe they will soon embark upon lowering interest rates, the prospect of which has been driving up the stock markets. Inflation is slowing, but at the same time economic activity is slowing. While the International Monetary Fund’s latest forecast for the most likely scenario is for the world economy to have a soft landing without any drama, it nonetheless seems that the period of slow economic growth is set to be drawn out. This year, global GDP should grow by 3 pct, slightly down on the 3.5 pct recorded last year, while in 2024 it is forecast to fall further, to just under 3 pct. This represents much slower growth than the 15-year average up to 2020, which came in at 3.7 pct. Now the IMF sees GDP growth holding at around 3 pct for the next four years. This is all due to the pandemic period and the recession that resulted from it combined with the kind of high inflation unseen in decades. According to the IMF, Poland is going to see only slight GDP growth this year (0.6 pct) and nothing too impressive next year, either – around just over 2 pct. This is still much slower than what was seen in 2022, when the economy grew by 5.3 pct, or in 2021, when it was close to 7 pct. Such poor prospects have also been reconfirmed by rating agencies and Western banks, which have both lowered their forecasts for Polish GDP growth. The Warsaw Stock Exchange has been, for the moment, following the other trading floors around the world (including the October rallies of the New York, Frankfurt and Paris stock exchanges), allowing the main WIG indices to make up for some of their losses. It’s worth mentioning that these indices still have double-digit rates of return when calculated from the beginning of the year.

The WIG-Nieruchomości has also been hit by the correction, even though right now home construction is undergoing a boom and companies in this sector have not been facing any problems in terms of access to finance, nor when it comes to selling shares (Archicom recently raised PLN 220 mln in this manner) or bonds (Marvipol is currently preparing an issue). Given the boom in this sector, there has even been talk of stock exchange listings (for the likes of such developers as Unidevelopment and Murapol). The supply, however, has not been keeping up with the demand, even though analysts have started to worry about how long this situation will last. Home purchases through taking out mortgages have been brought to an abrupt halt due to the high interest rates as well as the anticipation of government support, which heated up the market just as quickly as it subsequently slowed down. And Poland is now bracing itself for an economic slowdown that, luckily, is so far not taking the form of increased unemployment (which is currently at its lowest level ever), but can nevertheless now be seen in reduced consumer spending.

But at the moment, residential developers are enjoying the fruits of the current boom. Dom Development increased its year-on-year sales by 54 pct in the third quarter, while over the last three quarters its figures grew by 29 pct. Atal’s sales have almost doubled. The company saw a Q3 rise of almost 90 pct over the year, but the developer believes that this is not so much because of the state support programme, but is instead due to the consistent improvement in consumer sentiment since the beginning of the year. This mood, as developers have noted, is being disrupted by supply problems, which in their opinion results from the delays in enacting zoning plans and administrative procedures. Home prices are therefore set to rise markedly, but according to Lokum, such increases as there have been over the last few months have not offset the rising prices of construction materials and general contractors. On the other hand, in a study of developers’ margins for the first six months of the year published by ‘Parkiet’, it’s hard to find a single company whose gross profits from sales fell below 30 pct (Lokum itself generated 37 pct). However, it’s important to note that these margins are for projects that were begun in mid-2021 – and that the earnings from this year’s sales will only be revealed in the results covering 2024–2025.

The commercial real estate sector, meanwhile, has seen a reduction in transaction activity. According to data from JLL, over the first six months of the year transaction volumes fell across the entire CEE region. Poland has suffered a fall of 70 pct, while for the Czech Republic it was 37 pct and in Hungary the reduction was 60 pct. According to JLL, this is a consequence of the geopolitical uncertainty and the increased financing costs as interest rates remain high. This has led to international players backing out of the region. Local capital has also been much less active, while on top of that there have been fewer financing opportunities – and in the case of Poland the lack of REIT legislation is being sorely felt. (Mir)