Rising costs may deflate home building 'bubble' in Poland

Shares of home builders are up more than any other industry on the Polish stock market during the past year, but rising costs are clouding the future.

Industry profit will be hurt by rising costs for materials and wages as emigration shrinks the work force, said Tomasz Adamus of Credit Suisse Asset Management Polska.

The shares of builders like Dom Development and Echo Investment have gained, helped by a doubling in house prices in Warsaw since Poland joined the European Union in May 2004. Home values rose more than 50 percent during the past year, according to redNet Property Consulting, a Warsaw research firm.

"The whole frenzy about developers in Poland reminds me of the Internet bubble we had in 2000," said Piotr Zarebski, of PZU Asset Management in Warsaw. "Both then and now, the valuations of many stocks were completely divorced from reality."

The surge has made building companies more than twice as expensive as the overall market. Construction stocks in Poland trade at an average of 37.5 times estimated profit compared with 15.7 for the benchmark WIG20 index, according to data compiled by Bloomberg.

Shares of Dom, the second-largest Polish home builder, have more than doubled since its initial public offering in October. Echo, a developer that gets 40 percent of sales from home construction, has jumped 64 percent in the past year.

A gauge of 26 Polish construction stocks including home builders has soared 128 percent in the past 12 months, the biggest gain among seven industries tracked by the Warsaw Stock Exchange. The WIG20 has risen 20 percent, underpinned by the fastest economic growth in a decade.

Some companies are taking advantage of the rally by issuing shares. J.W. Construction, the largest Polish home builder, plans an initial public offering by mid-May. Erbud, a builder of houses and hospitals, said last week that it would raise about 150 million zloty, or $53 million, selling stock to pay for acquisitions.

Polnord's stock has been among the best performers, rising more than tenfold in the past year. The company, which has posted an annual profit only once in the past five years, said in August that it would focus on home building rather than commercial projects. The company forecast cumulative earnings of 2.9 billion zloty by 2012.

Shares of BBI Development NFI are up 266 percent in the past year even though the company will not complete its first major projects, including the conversion of a 19th-century distillery into luxury apartments, until at least 2010.

The price of Masters has almost tripled since mid-March after the company, a clothing manufacturer, said that it might start building apartments in eastern Polish cities.

"People are buying the shares because they see the house price rally and expect developers to show solid profits," said Adamus. "But the big risks for their future profitability are rising costs."

The average cost of apartment building in Warsaw jumped by about 800 zloty per square meter, or 10.76 square feet, in the past year to more than 4,000 zloty, excluding land costs, Zbigniew Koryl of the Union of Polish Developers, an industry group, said. Apartments in Warsaw sell for an average 8,000 zloty per square meter on average.

The average monthly wage for construction workers has risen 30 percent in the past year to 3,500 zloty after taxes, Koryl said.

Koryl figured that at least 150,000 construction workers, or a fifth of the industry's work force, have left Poland to seek better-paid jobs in Western Europe since the EU entry.

Borrowing costs in Poland will probably rise this year for the first time in almost three years, further slowing demand for apartments. According to the median forecast of economists surveyed by Bloomberg News, the central bank will probably raise its benchmark interest rate by a quarter of a percentage point as soon as this month.

"Last year was exceptional for Polish developers," Ryszard Matkowski, the president of J.W. Construction, said. "House prices cannot rise forever because Poles' purchasing power is limited."

Source: By Paweł Kozlowski Bloomberg News, iht.com