33 (128) 2018
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Real Estate & Construction

The Wave

by Christopher Siemieński, head of development and marketing at CFE Polska and board member of the Belgian Business Chamber
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Imagine the economy as a wave. For the sake of grounding this in context, let’s say the wave is the Polish economy.

It starts out small, way out in the middle of the sea: the lowest growth Poland has seen was 10 years ago with a 1.3% GDP growth rate. As this small wave is pushed by the wind, it moves towards the shore and through momentum increases in size. In other words, the economy grows. In 2017, the Polish 'wave' had even grown to 4.6%, almost double in size compared to the average European wave.

Out at sea, a wave is met with very little resistance, but as it gets closer to the shore, it begins to encounter resistance from the sea bed, in other words, the market. The sea bed consists of sand, algae, shell, rocks, coral and the like. These resistors represent the various limited resources, such as employees, financial liquidity, various companies of various shapes and sizes and so on, that make up the market. The more an economy grows and moves forward, the more these limited resources are involved in it. Because the real-estate and construction markets tend to be at the forefront of economic slow-downs, in the current boom in Poland, resistance in the construction market is now starting to be felt.

Briefly, costs of construction are increasing at a rapid rate. Roughly, the cost of steel HEB 200 profiles has increased around 17%, on average, in the past 6 months. Rebar prices have increased around 20% in that same period. The price hike for Steel St3S sheets is not as impressive, only 5% in six months, but it is an increase nevertheless. Concrete prices have gone up roughly 7-9% in the past eight months, while  mineral wool has increased by 38% in the past 12 months.

Poland is also facing an employment conundrum. Even though Poland has an unemployment rate of 6.6%, which is sometimes even more than double compared to Western countries such as the US, Canada, the UK and the Netherlands, it is still experiencing a skilled labour force shortage. Even the influx of Ukrainians isn’t able to solve the current problem. Consequently the price of labour in Poland is skyrocketing and the price gap for labour between Western Europe and Poland is shrinking. Seemingly outlandish discussions about whether or not to employ Portuguese or Malaysian labour are more common than ever.   

The lack of personnel, the increase in material prices and the rate of investment in Poland is naturally causing problems for general contractors at the subcontractor level. Most general contractors are largely, if not almost entirely, dependent on subcontractors who are currently hard to come by. If found, it is not uncommon for subcontractors to breach contracts in search for projects with better margins, despite looming penalties. This lack of available subcontractors also makes quick mobilisation for a new project difficult. This in turn motivates investors to start negotiations with general contractors earlier, but puts the general contractors at risk of seeing prices drastically increase as the time between the contract signing and the completion of the projects extends.

And finally, the market is witnessing a jump in debt on behalf of contractors of all sizes. With liquidity being one of the main challenges for contractors, institutions such as BIK have noticed a 7% increase in debt  in the first half of 2017, thus reaching a whopping sum of around 4 billion zlotys for the entire construction sector in Poland. As credit levels rise and projects increasingly run the risk of being less profitable, the outcome of such debt can only be destabilising.

Now, going back to our wave! So what happens with a wave if there is too much friction from the sea bed? The base of the wave begins to slow down and instead of having a smooth orbital shape, it  begins to become elliptical, until the top of the wave eventually breaks over. This then causes water to smash up on the beach and clash with the backwash of the previous wave. This is economic recession. The smashing and the backwash cause the displacement of the sand, shells, algae and rocks. In other words, as the economy collapses, companies suffer and shrink or even go bankrupt.

So the question that remains is: how big and how elliptical is the current wave? That, I am unable to say but… two things are certain: economies are cyclical in nature –  they grow and they collapse –  and the construction market is a resistor at the moment. I believe that we are likely to see a consolidation of the construction market in the next 18 to 24 months with existing contractors and general contractors either losing their position on  the market or even disappearing from the market all together. For more information on how to survive the smashing of a wave, stay tuned!

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