Builders to benefit from construction lull

Growing demand for office space in Warsaw resulting from a lull in construction will help stimulate the recovery of office construction firms by the end of 2002, property analysts said.

Private construction firms have fallen on hard times with the slowdown in the Polish economy leaving order books unfilled and construction stocks plummeting in value.

The Central Statistical Office (GUS) business confidence indicator for the construction industry in November hit its lowest level since records began in 1993 with -19 points, compared to -5 points last year. GUS' research regarding business optimism in the construction industry concludes that the financial condition of builders will worsen in the next three months, prices for construction services will fall and further job cuts are likely.

Moreover, with 29% of construction companies declaring overcapacity, a further decline in order books will lead to falling prices for construction services and profits, according to GUS. Arkadiusz Skowroń, construction analyst at Dom Maklerski WBK, said government cutbacks on expenditures designed to minimize the 2002 budget deficit will reduce the number of public sector construction projects. "The budget problems mean that the construction industry cannot expect large public sector orders next year," Skowroń said.

Industry analysts predict that the supply of new office stock in Warsaw will fall to about 130,000 square meters as developers respond to the high 15% vacancy rate in the city. DTZ predicts this will result in a 0% vacancy rate in the central business district, leading to increased rents by 2003.

"Construction companies will start building offices a year from now in order to deliver in time for 2003," said Jeroen van der Toolen, director of Anglo-Dutch real estate agency DTZ Zadelhoff Tie Leung (DTZ).

Other industry players agree. "Between 40-45% of our business is in office construction," said Wojciech Sośnierz, spokesman for Kielce construction firm PIA Piasecki. "If we see a boom on the office market next year, we could easily divert 80% of our production capacity toward office construction."

A November interest rate cut aimed at stimulating investment, which resulted in a base rate of 11.5%, has been absorbed by falling inflation, which Finance Minister Marek Belka estimates will reach 3.6% by year-end. Skowroń said the real interest rate of 7.9% means that the cost of credit has fallen insufficiently to stimulate investment in construction. "We need further reductions to the costs of financing construction projects," Skowroń said. "This is the only way the business climate can be improved."

Between 1996 and 2000, the supply of modern office space delivered to the Warsaw market has ranged from 280,000 to 350,000 square meters a year.

Greg Goodale