Hunting customers in crisis time

Although residential developers are not yet going to the wall in droves in Central and Eastern Europe as in some West European countries, every market in the region is feeling the painful effects of the financial crisis

Zuzanna Wiak

There were not many in late 2007 who openly admitted that the financial crisis would hit the CEE region, and the general consensus in H1 2008 was that the crisis would not really be felt by customers or developers. How wrong they were! The crisis has struck hard in the residential market at both customers, who regret the time when mortgages were being virtually given away, and at developers, who are being forced to freeze their projects. Analysts at Reas and Ober-Haus identify Estonia and Latvia as the states that are suffering the most, where the rate of indebtedness of 40 pct of the GNP is the highest in Central Europe.

The first victims

According to Peter Gage Morris, Ober-Haus’ managing director: “Home prices in Tallinn fell by 22 pct in 2008, and have decreased by 28 pct from their average peak value of EUR 1,614 per sqm when they were highest in April 2007, to a mere EUR 1,158 today.” The most popular homes are flats of about 50 sqm, which means they cost an average of EUR 58,000 today. Prices have fallen below construction costs, leading to the postponement of new projects. More than 3,000 new homes appeared on the market in 2008, but there will be only around 1,000 residences delivered in 2009, with practically no new developments scheduled for completion in 2010. New homes on the outskirts of Tallinn currently cost between EUR 950 and EUR 1,500 per sqm, while flats built in Soviet times command, at the most, EUR 1,000 per sqm on the secondary market – a 30 pct drop compared with what was available a few months earlier. Peter Gage Morris adds in a separate comment that the situation in Latvia is just as bad, with the largest price variation in the whole region occurring in that country: “Prices have tumbled 35 pct in Riga since the banks ceased granting loans with their previous eagerness and the economy started slowing down. The GDP rose 10 pct in 2007, but a fall to 4 pct is currently being forecast.” In 2008, the supply of new homes in Riga exceeded 7,000, but only 70 pct of these could find buyers. In the previous year, 95 pct of the homes on offer were bought. Banks are also encountering difficulties, with around 3,000 outstanding loans on their books.

Vilnius-style luxury becomes less expensive

The Ober-Haus report claims that the average price of a home in the Lithuanian capital dipped by around 15 pct in 2008, with the number of transactions dropping by more than 35 pct. The crisis has affected not only the capital city, but is also being felt in Kaunas, Šiauliai, Panevėžys and Klaipėda. The section of top-shelf properties (commanding around EUR 2,500 per sqm) has suffered the most, as also have the largest size of homes. Prices for top-shelf homes have fallen by 25 to 30 pct. The supply of all new residences on the Vilnius market dropped from 6,300 
in 2007 to 5,600 in 2008. Ober-Haus expects 
that only 3,000 homes will be delivered in 2009, with the resulting shortfall in supply causing 
prices to stop slipping and to eventually rise
again once the market starts to exhibit greater demand. But for the moment prices have been falling 
by 10-25 pct, and those in older buildings 
by 10-20 pct. On the primary market of partly finished homes, prices stand at between EUR 1,700 and EUR 2,900 per sqm. A square metre of a 2-room flat in a new building will cost you between EUR 1,000 and 1,900, while the price will be around EUR 1,250-1,800 in an old building.

Where prices have yet to fall

Poland is one of the countries on the Baltic Sea which have yet to feel the force of the credit crunch. It was still being hoped, in mid-2008, that the turmoil on the financial market would affect Poland only to a minor extent. Peter Gage Morris of Ober-Haus notes that: “Warsaw prices have, indeed, begun to fall. The increases will come to a grinding halt in 2009 due to poorer access to loans, the greater supply of new residences and the economic slowdown.” Data published by the Central Office of Statistics (GUS) reveals that in the first 11 months of 2008 a total of 134,800 homes were delivered for occupancy, which is 15.7 pct more than in the previous year. But not all residences found purchasers. According to Open Finance data, in Warsaw 15,000 new homes are looking for buyers, 4,500 in Kraków and 3,000 in Wrocław. The number of building permits y-o-y also increased by 10 pct in 2008. But analysts expect the number of new homes to fall in 2010. While more than 94 pct of all residences found purchasers in 2006-2007 before construction was completed, that ratio fell to 73 pct in 2008. The demand for new homes in Warsaw has fallen off, resulting in a 15 pct price slump to EUR 2,560 per sqm compared with 2007 (Ober-Haus data). However, the average present sqm price in Warsaw amounts to around EUR 2,300, and between EUR 1,900 and EUR 1,150 in other large Polish cities, such as Kraków, Wrocław, Gdańsk, Poznań and Łódź.

Project refrigeration

A number of developers operating on the Polish market have decided to postpone several pipeline projects due to the fall in demand. One of the first to freeze investments was Grant Development which, admittedly, had decided to finish those which had been started, but has now held back four investments planned for 2009. A company which went a step further, stopping a project where construction has already begun, was LC Corp. The company, which is owned by one of Poland’s richest businessmen, Leszek Czarnecki, was planning to develop the tallest building in Wrocław – the 258 m high Sky Tower.

The number of unsold apartments is also reflected in the financial performance of individual companies. Some have had to retract their predictions for 2008, including one of the largest Polish developers, J.W. Construction, which was still forecasting a profit of PLN 150.6 mln and a revenue of PLN 820 mln in August 2008. These amounts are now clearly way off the mark. Dom Development, too, has revealed that it is reducing its expenditure by PLN 1.5 bln from its original 2008 budget and its initial plans for 2009.

The companies which have opted not to pull out of projects are now making ever more desperate attempts to lure customers with increasingly attractive promotion offers, which are becoming a market norm to an increasing degree.

The lending policies of banks are now stipulating greater collateral and down payments before construction work on any projects can get started – and this has been a major cause of the market slowdown and the fall in demand. This, however, is becoming less severe now as the banks are now beginning to impose less painful criteria for granting mortgages. Since mid-December, GE Money Bank has reduced the required down payment from 35 to 20 pct, and DomBank from 25 to 20 pct. The aversion to