Pundits predict unsure property market in 2001
A world economic slowdown and a tightening local economy have prompted either pessimistic or moderately optimistic predictions for the development of Poland's real estate market in 2001, according to a survey conducted last month by Lokale Immobilia. Below are the results of the survey.
"Ark" scenario
Krzysztof Rybinski, chief economist at ING Barings in Poland, said a hard landing of the U.S. economy would weaken the dollar and force the federal government to boost interest rates. Such a scenario would result in a slowdown of the world economy and spell trouble for Poland. At the same time, stock exchange analysts continue to lower profit forecasts for IT and Internet companies, which could drag the U.S. Nasdaq index below 2,000 points, said Bank Pekao economist Piotr Wozniak. "This would be a tragedy (because) the whole IT sector in Poland would collapse. Following the New York Stock Exchange, the Warsaw Stock Exchange (WSE) would plunge to record lows." Wozniak added that a worst-case scenario would be for the WIG index to drop to 11,000 points (its lowest level since the 1998 Russia crisis) from last year's high of 21,225.
"In addition, a global recession would reduce demand for Polish exports," Rybinski said. He predicted that the trade deficit would increase to 8% of gross domestic product (GDP) from 7.2% at the end of 2000. "The government will try to keep GDP growth on an upward trend because of parliamentary elections later this year. To do this the government will increase public spending to reach 4.7% GDP growth. In a bad scenario, the economy will not be able to endure both higher spending and a negative trade balance. If that happens Poland will find itself in the throes of a currency crisis by the end of this year," according to Rybinski.
"(A currency crisis) would result in a sharp depreciation of the zloty," he said. In his opinion, the zloty could depreciate by as much as 30%, trading at zl. 7.5 to the dollar. To avoid this situation, the Monetary Policy Council (RPP) would have to increase interest rates sharply, thereby leading to a recession in 2002 and an unemployment rate of 19%.
A financial crisis, recession in Poland and bad overall global sentiment would discourage business investment in emerging markets and would badly hit the property market here. "Falling GDP will prompt many tenants to revise their expansion plans in Poland," said Chris Grzesik, head of office at U.K.-based consulting firm King Sturge.
"If growth is lower than planned, it will be bad," agreed Wojtek Szczerba, an entrepreneur with plans to build a Megaplex retail and cinema project in Katowice.
The office market will be hit first as falling GDP will sharply reduce the demand for office space. "Investors won't be willing to locate in our country," said Jerzy Hendrich, who runs Wroclaw-based property firm Commercial Property Services. "Average rents for office space in Warsaw, already flush with space, would fall by 30% to $18-$20 per square meter. This would mean that developers won't make money anymore."
The surplus of office space will increase next year as Turkish developers who built the Reform Plaza building have gone ahead with plans to build a controversial 50,000 square-meter office project on Aleje Jerozolimskie between Plac Zawiszy and Dworzec Zachodni. "That's too big," said Pierre Couderq, who runs real estate agency Couderq & Partners.
This new supply coupled with continuing problems in leasing the Daewoo Tower space will continue to put downward pressure on rents. While lower rates would benefit tenants in the short term, in the long term "it brings instability," Couderq said. "If the market goes downhill too fast, soon it will go up too fast."
Moreover, this scenario would stop all new office developments in Warsaw. "If (the market) tumbles too quickly everybody will be scared to death and stop building," Couderq said.
"A recession will also damage the warehousing market, especially if construction of the Autostrada Wielkopolska A-2 motorway linking Poznan and Warsaw is delayed further," Hendrich said.
In addition, a recession would reduce Warsaw's investments in infrastructure projects and communication links to the city. "Without infrastructure it will all crash," said Grzegorz Buczek, an architect working for U.S.-developer Tishman Speyer.
Reduced spending on infrastructure would dampen the attractiveness of downtown Warsaw for retail projects. And in a particularly bad scenario, Dutch developer ING Real Estate will hold up plans to build its massive Zlote Tarasy shopping and entertainment center near Warszawa Centralna railway station, Buczek said.
In the residential sector, further increases in interest rates will kill mortgage lending and lead to a drastic reduction in home purchases, said Jerzy Muszynski, head of research at Unikat, a Warsaw-based real estate agency. "I don't really see any source of optimism," he said. "The residential market reflects the economic status of the people."
If sales volumes fall, some developers won't be able to complete their projects. Others, which have finished their projects, will not be able to sell them and banks will take over their properties. "That's simply bankruptcy," Muszynski said.
Rosy scenario:
"Everything stays on the same level," Wozniak said. Economists agree there is no chance that the prosperity that has lasted for several years on global markets especially in the United States will continue. As a result, one can hardly expect a big boom in Poland next year. Rather, maintaining its current level will be good enough. "For Poland there will be no rosy scenario unless (the Russian economy) grows by 10%," said Rybinski of ING Barings.
If the Russian economy grows it could "become a significant destination for Polish exports," he said. This would offset a slowdown in the U.S. economy.
In an optimistic 2001, the Russian and Ukrainian economies will boom, bringing direct benefits to Poland.
In another good scenario the European Union (EU) will unexpectedly announce an early entry date for Poland's membership in the EU. "This would instigate the flow of new investment here," Hendrich said.
He added that construction of the Autostrada Wielkopolska A-2 motorway will spur demand for warehousing space across Poland especially in Poznan, Lodz and Warsaw.
As Russia and Ukraine develop, Poland will become a more attractive hub for multinationals looking to do business in Eastern Europe. More companies will set up regional headquarters here, boosting demand for office space, Couderq said. "I really believe in Russia and Ukraine," he added.
As a result, existing office projects could easily find tenants and additional construction will be needed. "I think Daewoo and Reform will fill up next year," said Grzesik of King Sturge.
In a rosy scenario, Warsaw authorities will increase spending on bus and tram fleets as well as parking lots, Buczek said.
ING Real Estate will begin construction of Zlote Tarasy, which would be a huge vote of confidence for downtown Warsaw, he said.
Another optimistic vision would be for the RPP to reduce interest rates, thereby boosting internal lending and investment. "Currently high rates are holding back investment," Hendrich said.
As a result of lower central bank rates, mortgage loan rates would be reduced to 17%, a level not seen since early 1999, said Muszynski of Unikat. "Now interest rates are 22% it could not be worse."
Lower rates enable customers to borrow more easily and residential developers, which are planning to build 40,000 apartments in the next two years, will find customers for their projects, according to Warsaw-based Reas Konsulting.
