Informational chaos

Customers, being bombarded with sales offers on one hand, and on the other with contradictory information regarding price trends in the following months, will more often delay final purchase decisions. Those who expected spectacular sales - miscalculated, others postponed the decision due to the change in the financial status of their households as regarded by the loan banks, and often by themselves. The immediate tightening of mortgages granting criteria by banks was the response to the financial crisis in the USA and the Western countries, and the everpresent uncertainty regarding the scope of its influence on the Polish economy. There is  growing number of  economic-financial forecasts. Yey the difficulty in setting a common trend and dynamic changes in short periods makes it impossible to estimate the situation, forcing developers and construction companies to keep preparing numerous budgets, feasibility plans along with action plans, basing them on rapidly changing factors.
Unfortunately, none of us has a remote control to, at least for a moment, stop the economic wheel of change and calmly estimate the course of events. Each week brings new indicators and informantion we should consider. Neither do we have the crystal ball to predict the approaching changes. In such moments it is worth to use the fundamental rules of economy and market trends for each single purchase-sale transaction.

The developer’s point
of view

The product offered by a developer is a housing unit which is defined as either
a multi-unit house, single-family, terraced, semi-detached or detached house. This effects in simple market segmentation according to the type of building/dwelling. 
Along with the housing estate market in Poland becoming one of more mature nature than 3-4 years ago, developers have started to position their product much more consciously with an aim of quick and firm  creation of market segments: popular, medium and high. Taking a closer look on the Warsaw market, where more than 25% of Polish domestic developments built for sale or rent is being carried out, it can be stated that in reality, within the middle part of the market there are now two segments that stand out: lower-middle and upper-middle. At the same time we should remember that for the investments often with the similar standard of finishing of units, it is the location and the price that plays
a very important role in its positioning – hence sale offer structure.
As for a simple example; technically-wise very similar investments in Wawer district with the price PLN 7,000 per m2   and in Wola district – PLN 9,000 per m2 we should rate as two different segments.
The correct positioning of the product may be crucial for developers when facing such strong economic fluctuations as we experience nowadays. Every customer would like to buy a dwelling of the highest possible standard and in good location, but throughout the decision making process he has to consider his financial situation and narrow his choice accordingly. It is worth noticing that nowadays it is not the price of square meter of the floor area that is most important for the potential buyer, but the total value of the flat. Looking closely once again at the Warsaw primary housing estate market, we can assume that in the present mortgage market situation, a family with the monthly income equal to the level of two average salaries (app. PLN 8,000) can obtain the mortgage of PLN 350,000. Accordingly – to purchase one of the still most popular two- room flat of app. 45-55 square meters, the buyer will have to choose from offers in the popular and the lower-middle segments.
In the last few years, we notice that people who are deciding on buying a flat expect in fact to buy into a certain ‘life style’. Apart from the unit itself they consider as important elements as: direct closeness to a park and shops or service centers, as well as low-density of buildings or the possibility of purchasing an additional parking space. In order to keep/obtain a higher standard of life, buyers have been seriousely considering flats located in the outskirts of Warsaw or in neighboring satellite towns that have good transportation links with the centre of Warsaw. Thus we can assume that the largest segment, one to attract the greatest number of buyers from the current and future  market is – and will be – the medium standard one.
  The accurate recognition of client’s needs is not the only key to success these days. The developer must take care of  good relations with the other participants in the market, namely general constructors and co-financing institutions. Due to the echo of the financial crunch in the Western countries, the cooperation with the above mentioned parties becomes the biggest challenge. It is most important especially since, in most cases, both sides of the transaction- the seller and the buyer of the flat need loan financing from banks. Developers are already facing constrained conditions of presale based on a 20-30% level, while their clients very often cannot obtain mortgage due to the low advancement or lack of constructing works of the particular development project the purchased unit is in. Because of the enormous role of the banking sector in the majority of real estate transactions, the developers will have to spare no effort to make their investments noticeable. They should make the banks consider each investment individually, rather than by a generally understood risk earmarked project. They will also have to get involved and support their clients in obtaining mortgages to buy a property.
An individual mortgage on preferential terms in banks co-financing the investment could be an example of a solution to this problem.

What will happen with
the price?

The prices of flats remain one of the main issues in the public debate concerning the entire Polish real estate market. Some people point out the need of a rapid price reduction, others predict a slow decrease, yet some others expect stabilization and gradual rise in prices in the future. Certainly, we can never come to a coherent conclusion, especially if the discussion stays on such a general level as we observe these days.  The nation’s housing development is a long-lasting process being carried out on the basis of mutual agreements with general contractors  and banks, settled in the first phase of the undertaking. A promise of very high profit margins which developers could have had obtained in the period of dynamic raise in prices of flats in years 2006 and 2007 surely have come to an end. In this situation, quick and significant  price reductions can be expected only in upper segments of the market, in which the mark-ups are usually the highest and in case of the last flats remaining in an already completed investment project (most often with flats of big floor area or unattractive layout).
The same time it is worth noticing that the attempts of attracting clients by offering free parking spaces, discounts, various incentives, etc. did not bring in practice noticeable effects. In a situation of a significant raise of the loan cost (the interest is calculated in accordance with the still high, variable  WIBOR rate and a three times higher bank mark-ups), such bonuses are not attractive any more. It is worth noticing that a general price reduction would be possible only with the investment overall cost reduction, which is neither an easy nor a quick process – especially for a development in progress. So far as the prices of building materials are subject to continual fluctuations, the cost of labour remains high. According to the December 2008 GUS (National Statistical Office) report, the labour costs invariably remain one of the main obstacles for building contractors for lowering their costs . Even if – along with a  lower demand and increased competition - the constractors reduce their costs and mark-ups, the positive effects of this situation will remain limited by high land prices and growing costs of investment financing (due to the higher bank margins and lower presale rate forecasts).
Developers are facing a lot of difficult moments and decissions today. Some of them have already been initiating considerable restructuring; the others will be forced to end or sell-off their business activity. Nevertheless, according to the Polish Ministry of Infrastructure, it is estimated that there is still a housing gap for a 1.5 million flats in Poland. We can then say that, although the real estate market is going through a difficult period, it is still far from satisfying the housing need. Those fundamental arguments allow a final conclusion that despite the informational chaos and difficult relations within the property sector, stabilization of the market and its further, balanced development is just a matter of time.

Agnieszka Turowska - Analyst MT Development Group by European Property Institute Invitation

Property Journal 02-03/09