Market Monitor Construction Poland 2020

Slower economic growth in the Polish construction sector will have its impact. Infrastructure development is ongoing, especially railway and road construction. Market Monitor Construction Poland 2020 According to Statistics Poland, output of construction and assembly works increased 2.6% in 2019. [Asset Included(Id:1435206493976;Type:AT_Media_C)] Main contributors were ongoing road and railway infrastructure projects, residential housing, office and warehouse construction. However, as construction activity is highly correlated with the economic cycle, growth in this sector will slow down in line with lower Polish GDP growth in 2020 and 2021. According to Statistics Poland, the number of residential buildings delivered increased more than 11% year-on-year between January and November 2019, together with a 4.5% increase in construction permits. Low interest and unemployment rates as well as quickly rising wages continue to contribute to high demand. There is currently a need for 2-2.5 million dwellings in Poland. However, due to a shrinking population the gap will narrow in the coming ten years. Despite the current robust demand, residential construction businesses have problems finding and keeping employees and with high labour and material/commodity costs. In the commercial construction sector new office buildings increased by about 15% in 2019. Low vacancy rates encourage new investments, especially in larger cities. The number of retail-related buildings delivered increased 6% year-on-year between January and September 2019. However, market saturation of shopping centers is already high, leading to lower growth in 2020. Demand of warehouses (up 8% in 2019) is driven by logistics operators (mainly due to increasing e-commerce retail), with steady growth expected in 2020.  Infrastructure builders severely impacted by price increases Infrastructure development is ongoing, especially railway and road construction. Planned expenditures for road construction in 2020 amount to 23.5 billion Polish zloty (EUR 5.5 billion). However, the prices companies offered for 2015 and 2016 infrastructure tenders were often far below budgets. Therefore, those long-term contracts had a negative impact on the results of general contractors in 2018 and 2019. The main reasons were significant increases in prices for construction materials (mainly asphalt and concrete), labour and subcontractors (adjusting their prices to changing conditions). Investors terminated many contracts due to slow work progress. In 2020, the profitability of public construction businesses will remain low due to still elevated input costs (material, labour, energy). The profits of construction businesses increased in 2019 compared to 2018, but are still far from a satisfying level. The increase did not compensate for the decrease in 2018, when profits were severely impacted by substantial increases in construction material prices and expenses for wages and subcontractors. Many construction businesses suffered significant losses due to those costs, having signed project contracts with fixed prices beforehand. While the share of such unprofitable contracts decreased in 2019, price pressure remained high due to still rising labour costs (lack of qualified staff). Competition is fierce, with foreign businesses participating in tenders with low price offerings. [Asset Included(Id:1435206494225;Type:AT_Media_C)] Suppliers, not banks, mainly finance construction businesses as the latter massively reduced their engagement in the industry during and after the last major construction crisis in relation to the UEFA Euro 2012 championship. Turnover of trade receivables and trade payables in the construction sector is longer than in other sectors. While total indebtedness of businesses is often quite high, net gearing is at an acceptable level. High overdue payments remain common Payments in the construction industry take 75 days on average. The payment experience over the past two years has been bad, with overdues of up to 30 days being quite common. The number of non-payment notifications is high and expected to increase by about 10% in 2020, due to lower output growth and higher input prices. Construction insolvencies are expected to increase in line with the ongoing slowdown of Polish economic growth (Polish business insolvencies are forecast to increase 3% year-on-year in 2020). Our underwriting stance for the construction industry remains generally neutral to restrictive due to the major issues ahead (GDP slowdown in the coming years, issues in road infrastructure subsector, lack of qualified staff and increase in minimal wages), and the still elevated level of credit insurance claims. [Asset Included(Id:1435206494422;Type:AT_Media_C)] [Asset Included(Id:1435206494360;Type:AT_Media_C)]