Are analysts worth their salt?

Although the market first showed signs of a slowdown two years ago, few analysts predicted the problems 
that the residential market is now facing. Can any of the market reports be trusted? Developers say: 
read them, but act with due caution

Emil Górecki

The prices of homes will grow by two thirds on average in the next three years, wrote ‘Rzeczpospolita’ in May 2007, citing experts who, unfortunately, were not named. In December of the same year, ‘Gazeta Wyborcza’ quoted experts of the Polish Federation of Real Estate making the claim that a downturn in the residential market in 2008 was highly unlikely because the economy was growing and unemployment was going down, while wages were rising. In April 2008, Paweł Majtkowski of Expander confidently expressed the following opinion in the daily newspaper ‘Puls Biznesu’: “I would not expect the prices of homes to drop any time soon. On the contrary, they could still grow in the next two or three years.” This view was shared by Jacek Bielecki of the Polish Association of Developers: “If developers lowered the prices of homes, their projects would become unprofitable.” Now, however, it is clear to see that they have lowered their margins and the prices of their homes – and without going bankrupt.

Reports are not fortune telling

Residential real estate analysts in Poland usually work in small teams of a few people. In addition, the turnover of personnel is quite rapid, so the majority of are only able to observe the market for a short period of time, on and off, so to speak. The residential market in Poland does not have a very long history. However, the preparation of a long-term prognosis starts with as precise a mapping of the past behaviour of the market and its environment as possible. “Apart from our market research programme, which currently includes over 80 pct of development projects, we are also collating data on changes in the factors which have had an influence on the market so far, such as economic growth, demographic changes, people’s earnings, the accessibility of mortgages, the job market, social trends, and so on. Then we try to think what form they will take in the future. The problem consists in the fact that while preparing forecasts for the behaviour of the residential market environment, we have to rely on the research of other institutions. The accuracy of our forecasts depends to a large extent on the accuracy of their data,” claims Kazimierz Kirejczyk, the president of REAS, a consulting company that employs about 20 consultants dealing only with the residential market.

No changes in methodology

Clearly it is not possible to forecast all the factors. The best and the latest example is, according to Mr Kirejczyk, the unexpected behaviour of the banking system, which has led to the current crisis. That aside, the length of a cycle on the residential market, which amounts to app. 7 or 8 years, i.e. as long as the completion period for two average projects, is recognized as the standard yardstick. Incorrect forecasts with regard to local factors are quite common because they are much more difficult to identify, but they still contribute to the development of the residential market to quite a large extent. However, this does not mean that the methodology should be changed. “Currently, the big challenge is to predict the most probable scenario for the economic situation next year. The forecasts of the most important public institutions, such as the Polish National Bank, the International Monetary Fund and the European Commission, are quite optimistic; however, the growing budget deficit may inhibit the growth in salaries, and as a consequence, suppress demand, including the demand for apartments,” Kazimierz Kirejczyk explains.

Ober Haus has also decided not to change its methods of gauging the state of the residential market. “When assessing the value, we only take into account the hard, confirmed data, and do not estimate the future value (...) we only indicate the trend. I would like to repeat one more time, we avoid any kind of future prediction,” emphasizes the regional managing director of the agency, Peter Gage Morris.

The shape of things to come

He goes on to add that: “Of course, we research the market and announce the results of our research, but this is only information about its current state. We do not say to developers, ‘build now, because you will make twice as much in two years’ time.’ We talk about the prices now and in the past, we show what sort of demand and for what sort of apartments there is, and which locations are popular at the moment.” Mr Gage Morris thinks that developers and some Polish residential market analysts did not see the signs of the slump because the problem came from the outside and was caused by factors which were not supposed to have any influence in Poland.

Thus the effects of the credit crunch came as a complete surprise, and for market analysts as much as for everyone else. “We expected a clear economic downturn, but the depth of the crisis globally was surprising for us. On the other hand, I think that our forecasts for 2009, prepared at the end of 2008, turned out to be correct. We are indeed experiencing a recession, but the primary real estate market is enduring it in a slightly better way than might have been expected a year ago,” claims Kazimierz Kirejczyk. This soft landing is to a large extent a result of the quick reactions of developers: first of all their flexibility with regard to prices and reining in the supply, even to the extent of withdrawing from certain projects. The market gave developers the first signals of a slowdown in the middle of 2007, when the sales speed dropped. “Many of them understood the signals then, although some of were quite convinced that our warnings were somewhat exaggerated,” asserts Kazimierz Kirejczyk.

The last few months have also been surprising for Peter Gage Morris. “Fortunately for Poland it was a nice surprise. Compared to some neighbouring countries, such as the Baltic states, the prices of apartments have not substantially fallen over here. There is still demand for them and there will probably continue to be, regardless of the weak condition of the European economy. Besides, the expectations of mass bankruptcies for developers have not materialized so far,” he explains.

Some slip-ups are unavoidable

However, there were in fact more surprises in store. Because contrary to what they may claim, the agents did estimate certain values and trends for the current year which have not come to pass. In December last year, you could find some good news in a report by Ober Haus. As it later turned out, the news was premature. “Last week (…) mBank, DomBank and GE Money Bank decided to lower their requirements. It will now be easier to get good credit ratings in their branches. (…) Unfortunately some banks have withdrawn their offers of foreign currency mortgages, but the offer on the bank market is relatively broad, which gives grounds for optimism, and there are observable trends towards the easing up of the recent restrictions,” “We wrote that? Well, you can’t forecast everything correctly,” responded Mr Gage Morris.

The most accurate prediction by REAS for the period up to 2010 was made in 2003. It was relatively pessimistic compared to other economic forecasts, predicting that demand would peak in 2007, followed by a serious drop and finally hitting the bottom in 2009. However, later forecasts became more optimistic. Kazimierz Kirejczyk says that the forecast from 2003 was based on a correct fundamental assumption with regard to the way the market functions i.e. its cyclical nature. “In the years that followed, we gradually softened the depth of the economic downturn forecast for the years 2008-2009, because the leading economic institutions started to encourage the notion that we had a prolonged economic cycle and forecast only a very gentle downturn in growth. It was hard for us to forecast a deep recession at the beginning of 2007, against the expectations of the government, the National Polish Bank, the World Bank and many other highly influential financial institutions,” admits Kazimierz Kirejczyk.

The social responsibility of analysts is a topic that is rarely brought up. Mr Kirejczyk agrees that this is an important issue, especially in Poland, where alternative methods of meeting residential needs, other than via the market itself, are scarce. “This is why formulating catastrophic visions should be well thought through and supported with very strong data, especially in hard times when faith in the market can be very fragile. Apart from more or less measurable factors, demand is also influenced by the moods of potential buyers, both the euphoric and the pessimistic ones,” says Kazimierz Kirejczyk.

With a certain measure of caution

“Developers closely scrutinize all the different kinds of residential market research done by analysts. This provides clues for them, and often very important ones, to help them make investment decisions. However, market reports should not be treated as gospel truth. They are of course worth reading. But after such reading, I try to find out more about the methodology used by the researcher and make my own conclusions based on that. Anyway, I do not approach expert reports uncritically,” asserts Jarosław Szanajca, president of the management board at Dom Development.

Home buyers are in a worse position when it comes to analyzing market reports. “When deciding whether to buy a home, they also take into account information in the press, because they do not have in-depth knowledge about it. This is why they have to rely on the media. But there are two different kinds of expert commentating on the state of the market: those who are worth trusting and those who do not have a full understanding of the realities of the Polish residential market,” adds Mr Szanajca.

Check for yourself

“For me reports are a general indicator of the trends, and not an infallible interpretation of the market. This is why I always check them against my own knowledge and everything I find out from other market players. It sometimes happens that I can’t find any confirmation of the data from the analysis, which does not necessarily mean that it is incorrect. You have take into account the methodology of the research,” explains Alicja Kościesza, sales and marketing director of Orco Property Group, which, as well as its flagship project 
Złota 44 in Warsaw, has in its portfolio a number of residential projects under construction.

However, despite its caution, Orco also got carried away by the optimistic forecasts for the market. Was this also the case with the Daniel Libeskind-designed luxury tower project, Złota 44? Alicja Kościesza, however, makes the point that the experts gave wrong assessments of the project at a very early stage in its preparation. “They did not believe that luxury apartments in a tall building located in the very city centre could sell in Poland. It turned out, however, that the demand for them is quite high,” she claims.

Douglas J. Noble, the director of Orco Property Group in Poland, in an interview for ‘Rzeczpospolita’ in March 2008, said: “Recently, some buyers (…) have been counting on the fact that prices will fall. In my opinion this will not happen, there might only be a small correction in individual cases – a maximum of 5 pct this year. In the next seven to ten years (...) there should be balanced but steady growth.” Will this really be the case? We shall have to wait and see. At the moment it is clear that prices have not managed to stay at the same level as at the beginning of the year. ν

Peter Gage Morris

regional managing director, Ober-Haus

Buy, if you like it

Looking at the next five years, prices will continue to grow because of high demand, increasing income and the continuing development of cities. Not as fast as before of course, but in a more balanced way. A 6-year economic cycle is still evident, even in the case of the worst crisis. So according to this theory, if the growth in home prices started to slow down in 2007, the next peak will occur around 2012 or 2013. The market will probably start to warm up at the end of 2010. I should not say this though, because we refrain from making forecasts about the future [he laughs]. My only advice is: if you find an apartment or a house that you like and that suits all your needs, simply buy it. 
If prices fall by a further 5 pct, in a long run they will grow anyway. What is the point of buying an apartment 5 pct cheaper if it is not pleasant to live in?

Kazimierz Kirejczyk

president of REAS

Very cool in 2010

The total number of homes being finished is falling, so the number of completed residential units in 2009 will most probably be similar to the previous year, i.e. app. 160,000-170,000. This is a good result for Poland, but it is mainly due to the investment boom in 2007. Even if this is slightly better than last year, the result for 2010 will be characterized by the reversal of this tendency. The statistics show that there has been a reduction in the number of new residential project launches. 
In the development sector, the data confirms a steep slowdown in the scale of activities: 45.1 pct fewer projects were started in the first nine months of the year compared to the corresponding period in 2008. There has been a slight improvement since the first half of the year, but still the depth of the slump is substantial. Moreover, you have to take into consideration that in many cases the construction work started has in reality been either of a smaller scale, e.g. the construction of only one of many buildings has been launched, or of an exclusively formal character – only the symbolic first hole has been dug.