Harsh winter slows down construction activity in early 2010

 

 

After some slowdown in H1 2009, the construction sector in Poland to some extent recovered in the second half of the year, mostly thanks to some recovery in building construction and advanced realisation of major civil engineering projects. According to preliminary data from the Central Statistical Office (GUS), in 2009 companies with more than nine employees generated an aggregate of nearly PLN 80bn (approx. €18.5bn) in construction and assembly output. As a result, output in the sector increased only by 3.7% y-o-y (compared to growths of 13.2% reported in 2008 and 17% in 2007[1]), with a clear expectation of recovery this year due to a much better situation on the property market.

However, due to very low temperatures and intense snowfalls in Poland in early 2010, the value of construction-assembly output in January noted a significant decline of 15.3% y-o-y. In all likelihood, a further output fall, though less severe, is possible in February. We expect however, that as temperatures rise, construction companies will start to make up for the lost winter time and construction-assembly output will start to rise from March onwards.

 

 

Preliminary estimates of GDP growth for 2009 suggest that the last quarter of the year was slightly worse for the construction industry than the previous one − the gross value added (GVA) generated by the construction sector rose by 3.4% year on year. Despite lower growth, construction was one of the fastest developing sectors of the Polish economy last year. In the analysed period the GVA in construction rose by 4.7%, compared to 2.5% in market services and -1.1% in industry. The construction branch was far less affected by the economic crisis than other sectors since demand for construction services was fuelled by infrastructure investments supported with EU funding and preparations for the European Football Championship in 2012.

 

 

In 2009 the construction sector in Poland maintained growth mostly thanks to an increase in the number of projects in the civil engineering segment, especially in the roads, sports facilities and pipelines subdivisions. Civil engineering noted 27% nominal growth last year, whereas the residential segment fell by 23.2% and non-residential by 12.5%.

We believe that after the very weak beginning of the year, construction and assembly output will accelerate in H2 2010 and 2011, fuelled mainly by civil engineering projects (especially in the road construction sector) and an improvement in building construction, which will cease to be a major drag on the total construction output. In our opinion, given efficient conclusion of tenders and the commencement of key infrastructure projects, the construction industry may again develop at a double-digit rate next year.

 

 

The total supply of warehouse space in Poland shrank in 2009 as a result of investors shelving a number of such undertakings. Last year roughly 850,000 m² of new warehouses appeared on the market, which is down by close to 50% compared with 2008. Towards the end of 2009, only 160,000 m² of fresh warehouse space was under construction, compared with 1 million m² during the corresponding period of the previous year. The freezing of many new projects may mean that by the middle of this year there could be a shortage of attractively located warehouses, and this in turn will also affect rents.

Approximately 280,000 m² of office space was completed in 2009, being mostly a consequence of the increase in investments that was triggered by the surge in demand for offices in 2006-2008. In 2010 roughly 130,000 m² of modern office stock will appear on the market. However, this year should bring an improvement on the office market, as a consequence of the improving economic situation and gradually rising demand for office space. The sector is expected to exhibit more robust signs of recovery in 2011.

In 2009 a total of 26 shopping centres were completed for use in Poland. If expanded centres are included in this total then 720,000 m² of retail space appeared on the market last year. The record number of newly opened shopping centres in 2009 is a consequence of investment decisions made two-three years earlier during the economic boom. Supply will begin to shrink in 2010 and 2011 because investors, observing the current state of the market, are cautious when it comes to new projects and only rarely decide to embark on new projects. A total of 450,000-500,000 m² of commercial space will be completed this year, and only slightly more in 2011.

On the other hand, in the non-residential segment, we expect some acceleration in public building construction. The higher number of construction contracts signed in 2009 will seriously improve growth in this segment, partially making up for the expected declines in the category of commercial buildings.

 

In 2009 nearly 160,080 flats were completed, which translates into a decrease of 3.1% in comparison with the year before. In 2010 an even deeper decrease in the number of homes completed is possible, due to a lower number of construction permits and projects commenced in 2009 − construction permits for 178,800 homes were issued last year, which translates into a decline of 22.3% in comparison with 2008. In 2010 some stabilisation is expected in the number of permits relative to the 2009 level. At the end of last year a total of 670,000 flats were under construction, i.e. 2.5% more than during the same period of 2008.

Although individual investors in the long term will remain the dominant group in the housing market in Poland, in 2009 for the first time they were slightly outpaced by property developers in terms of the number of home completions. However, despite adverse circumstances prevailing in the property market, the situation of the individual construction segment appears to be significantly better compared to housing developers.

At the end of 2009 the housing market started to return to the equilibrium position. In all likelihood, 2010 will be a slightly better year for residential construction compared to 2009, in particular in terms of residential construction starts. As far as market situation is concerned, the worst is over for real property developers. 2010 can mark a positive turnaround from the situation at the end of 2008 and beginning of 2009, driven by lower costs of labour, materials and land, reduced housing supply, housing prices stabilisation and a more customer-focused sales approach.

Despite the major slowdown in the residential construction market, long-term growth prospects for the sector remain positive. It should be noted that the crisis in the Polish housing market proved decisively less severe than commonly expected and, compared with most EU countries, its impact was much less acute. Information published by the major developers in H2 2009 suggests that the supply of developer-built homes will start to be rebuilt already in 2010. Hence, it is unlikely that any major demand surplus or an excessive and recurring hike in housing prices will take place.

 

 

Bartlomiej Sosna

Senior Construction Analyst, PMR Publications