Construction constriction

Last year the courts declared 723 Polish companies bankrupt, according to research by credit service provider Coface Poland. This is more than a 10 pct increase compared to 2010, which, according to analysts, was a period of improvement of payment discipline and finished with a 5 pct decrease in the number of bankruptcies. "The macroeconomic condition of Poland last year was good," says Marcin Siwa, director of the risk assessment department of Coface Poland. "The period finished with a satisfactory growth in GDP and good indexes with regard to retail sales and industrial production. However, it is hard not to notice that the Polish economy is now under some strain. Eurozone problems, the uncertain future, the fluctuation of the złoty's exchange rate, growing inflation, sharp increases in the prices of basic materials and goods (fuel, energy and food) are all combining to undermine the profitability of Polish companies and their payment behaviour in a negative way," explains Marcin Siwa.

Going bust despite no shortage of projects
Construction companies could serve as a perfect example of this trend. Despite the fact that the sector has been receiving a lot in terms of EU subsidies for the many infrastructural projects that have been commissioned, it has been increasingly experiencing serious problems with liquidity. This is reflected in research carried out by Coface Poland. A total of 143 construction companies became insolvent in 2011, and the number has been continuously growing since 2007, when the courts declared 49 companies bankrupt. The scale of the bankruptcies of construction companies may not be as huge as in the period 2002-2005 (431, 361, 226 and 129 bankruptcies respectively), but still the trend is worrying. What is the source of the problem? "Profitability issues with regard to subcontracts and the prolonged execution of projects followed by delayed payments for the completed work translate directly into the liquidity of companies carrying out infrastructure construction," explains Marcin Siwa. "The problems are starting in big companies, but it is the smaller subcontracting companies that are experiencing the biggest difficulties. The withholding of payments by general contractors is sometimes impossible for them to bear. This is why the biggest number of bankruptcies is happening among the smaller entities," adds Marcin Siwa. According to the Coface Poland expert, the stagnation in the residential construction business is contributing to the depressing situation in the industry. Demand is being curtailed by the uncertain economic climate as well as the restricted access to financing, which results from a reduction in lending while the supply remains high. "Developers are facing growing problems with the sale of finished apartments. Prices are slowly dropping. The prospects for this year are not good," emphasises Marcin Siwa.
However, Janusz Zaleski, vice-chairman of the Polish Association of Construction Industry Employers, is somewhat sanguine about the data collated by Coface Poland. "Statistics do not always reflect the truth. I suppose that these bankruptcies affect small companies with fewer than ten employees. The number of orders from the General Directorate of National Roads and Motorways has dropped off a little and there are fewer and fewer so-called ?schetynówki' being built [roads constructed under the National Programme for Local Roads Reconstruction]. Indeed, smaller companies might be throwing in the towel or moving into the black market more often. However, when we take a look at the numbers we can see that infrastructure projects have not dried up at all. There are currently 1,323 km of national roads under construction, including 580 motorways and 743 expressways and ring roads. Faced with such data it is hard to talk about stagnation on the market," emphasises Janusz Zaleski.

Companies must adjust to market requirements
Construction companies have a year full of challenges ahead of them. "It is difficult to predict an improvement in the construction sector. The number and the value of infrastructure projects could be decreasing, the debt level of local government agencies will not allow them to engage in other big projects, Euro 2012 will be over, so the number of growth stimulators will be lower," concludes Marcin Siwa. Janusz Zaleski is slightly more optimistic. "The pace of projects will not decrease considerably until Q3 2012. The General Directorate of National Roads and Motorways itself has PLN 29.3 bln to spend on projects this year. The problem is the fact that there are fewer and fewer tenders being announced. So construction companies will have less work. However, this does not mean that the market will suddenly come to a halt. After all, there will be new sewage treatment plants and incineration plants built. But we should not expect the same number of projects as now. Some smaller companies might not survive. Those that can adjust to market requirements will remain; those that do not function from one day to the next, from one contract to another, but operate long term. Some might join interesting initiatives. I am talking about construction clusters, for instance," believes Janusz Zaleski. Meanwhile Jeremi Mordasewicz of the Polish Confederation of Private Employers Lewiatan is of the view that the Polish government cannot afford to stop infrastructure projects. "This would be suicide. And I expect nobody is thinking about doing this. The civilisation gap between Poland and the Western European countries is getting smaller, but it has not disappeared. That is why I believe that there won't be any shortage of big projects until 2020," says Jeremi Mordasewicz.

Developers with debt
The scale of the bankruptcy problem when it comes to developers is not as big as in the case of construction companies. However, there have been some spectacular collapses. One of the most well-known cases is that of Kraków-based developer Leopard. The company's bankruptcy resulted in the despair of 200 families who had paid for and moved into their apartments. All will have to move out as a consequence. Why? Because the developer had not handed over the notarial deeds that would have separated out the apartments and transferred the ownership to the buyers. When the company got into financial trouble, it applied to a foreign fund for a loan, with the residential block being used as collateral. According to the law the court-appointed administrators in the bankruptcy had to sell the property. The money from the sale was first of all paid to the fund that held the mortgage. Szczecin residents who had bought apartments on ul. Grafitowa in the city from a company called Management also found themselves in a similar situation as the clients of Leopard. However: "I do not remember any bankruptcy of a well-known company recently," claims Jacek Bielecki, director of the Polish Association of Developers, which brings together residential developers. Nevertheless, research is increasingly showing that the condition of Polish development companies might be a cause for concern, and for evidence of this we only need to look at the figures on the National Debt Register. In the last five years the number of indebted developers listed on the register grew by as much as 356 pct from 25 to 114 companies. This is due to a decrease in the demand for apartments and the restriction of investment loans. Companies in the province of Masovia are having the biggest problems with finishing their projects. According to the National Debt Register, as many as 37.7 pct of the debtors come from this province. Lower Silesia comes second with 14.04 pct, followed by Lesser Poland and Greater Poland (8.77 pct each), West Pomerania (7.02 pct) and Pomerania (6.14 pct). The most indebted developer is a company from Łódź, the liabilities of which have already exceeded PLN 1.5 mln. According to the National Debt Register's statistics, developers tend to fail to clear their payments on time with construction companies first (34.5 pct), followed by construction materials sellers (15.6 pct).

Smaller companies, bigger trouble
A report prepared by the D&B Poland information agency in cooperation with CEE Property Group, a research company for the property market, also confirms the weak condition of Polish developers. According to the report, 38 pct of 300 companies operating on the market are in a poor or very poor financial situation. How was this measured? Commercial companies and partnerships were assessed on the basis of their balance sheets and profit and loss reports, using financial data no older than two years. In the case of companies that do not maintain comprehensive bookkeeping, the assessment was based on their revenue, costs and financial results. The main factors considered in this assessment of developers included the financial liquidity index, the level of debt, profitability and the level of overdue payments for contracting parties. "If a developer is judged to be in a poor condition, this means two things in practice," explains Paweł Grząbka, president of the management board of CEE Property Group. "Firstly: long-term or temporary problems with their financial liquidity. Such a situation could also have deeper roots and result from an ill-advised strategy - for example, entering an unfamiliar segment of the market or bad land purchases. In a nutshell, the characteristic signs of over-investing are evident. It is this syndrome that mainly affects small developers lacking substantial funds of their own, with poor securities - such as unattractive plots - and difficulties with raising funds from the market, through bond issues or loans for instance," says Paweł Grząbka. Why are smaller companies more prone to financial difficulties? According to the president of the management board of CEE Property Group, credit-ratings are the key. If a company has a poor rating because it is young and has no history of successful projects, it is hard to find the funding. Client pre-payments themselves are not enough, either to launch a project or to finish one that has already started. Paweł Grząbka goes on to add that there were no spectacular bankruptcies of developers in 2011, as a result of which buyers would have suffered or the money paid by them would have been irrevocably lost. There is a lot of room between being in a poor condition and going bankrupt with all its unpleasant consequences. "There is no avalanche of bankruptcies in sight. They are happening, but the scale is nothing out of the ordinary, just as in any other industry. It is a normal state of affairs - especially when taking into consideration the weaker economic climate," sums up Paweł Grząbka.

No disaster looming
Could there be a serious tumble on the development market in the next few years? "The situation on the property market is a litmus test of the overall economic changes," comments Marzena Rudnicka, the owner of Rudnicka & Consulting. "This year brings us new regulations governing project development and the availability of loans to individual clients. The new development act will enter into force in April. On the other hand, the ?Family's Own Home' programme is still functioning. Some newly-built residential projects are aimed at investors who will lease the purchased apartments to those who decide not buy them for various reasons. So we should not expect a paralysis of the residential market or anticipate spectacular bankruptcies of development companies. Apart from bank finance, a large number of them are using their own funds or securing capital from alternative sources, such as through share issues. This year might be a test especially for the development companies whose project financing structure is mainly based on securing loans from banks." Paweł Grząbka believes, on the other hand, that the situation could only be worsened by a collapse in bank lending due, for example, to problems in their parent-companies in Western Europe. "Last year the number of permits issued for new projects was higher in each consecutive quarter. As a result, the conclusion could be drawn that developers are optimistic and have enough work for the next 20 months. Of course, this would be making a generalisation about the condition of the sector. However, the strongest developers in the big cities should at least not be in any danger for the next two years. Besides, their relatively uncomplaining acceptance of a fairly strict development act also suggests that they are feeling strong," he adds.

One crisis does not lead to another
The experts agree. The financial problems experienced by construction companies and developers are not as worrying as those of ten years ago. Why? "The structure of project financing is different," believes Paweł Grząbka. "Companies use credit lines, bonds, private loans and their clients' money. There are more pieces to this puzzle. If one of them is lost, it does not endanger the existence of the whole pyramid. The previous crisis thinned out those companies which perhaps had entered the market accidentally," he adds. Jeremi Mordasewicz is of a similar opinion. "The recession at that time was short-lived but very severe. It was exacerbated by a high unemployment rate and the restructuring of the economy. At this point we can say this much about the development sector: companies must adjust their prices and adapt to the financial capabilities of their clients. This will simply make property purchasing prices more realistic," predicts the representative of the Polish Confederation of Private Employers Lewiatan. In conclusion, the crisis is not as deep as the statistical data might suggest. Large and reputable construction companies and developers are still doing quite well. There is nothing to suggest that this will change in the next few years. Unless the Polish economy collapses completely. Thankfully, so far this is still something of a science-fiction scenario.