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The Warsaw Voice » Business » January 27, 2011
Building Industry
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Recovering from Crisis
January 27, 2011   
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Prospects for the Polish construction industry this year are brighter than last, but 2011 is nevertheless likely to prove a pale shadow of the optimism-fueled era before the global economic crisis hit.

In November last year, construction and assembly output in Poland rose by over 10 percent for the first time in months. Data from the Central Statistical Office (GUS) shows that the year-on-year increase totaled 10.9 percent, up from 9.7 percent in October, when seasonal factors are taken into account. If seasonal factors are disregarded, then the improvement was even greater, at 14.2 percent. The results for the first 11 months of 2010 were far less impressive, at just 2.3 percent up from the same period of 2009, but that was a consequence of weak performance in the first half of 2010 when the construction industry was still going through a decline.

The industry owed its good results in November mainly to “specialist works,” such as finishing works, where the annual increase reached 30.3 percent. Companies whose operations focus on civil and hydraulic engineering reported an increase of 20 percent, while works related to the construction of buildings generated an increase of only 1.8 percent. Experts note that the clear revival in the “specialist building” sector, which includes the preparation of land for construction, may with time lead to better trends in building construction.

The Central Statistical Office (GUS) data on production in the construction sector applies to businesses with more than nine employees, which is one of the reasons why the figures for construction and assembly output differ considerably from the office’s data on sentiment in the construction industry. The data for November showed that mood in the industry worsened rather than improved. The number of business people polled who said the market situation was on a decline was 8 percentage points higher than those who said otherwise and that was the worst result since February. Views on the economic situation differed dramatically between the largest and smallest companies. Among the former, optimists outnumbered pessimists by 2 percentage points, whereas among small companies, pessimists prevailed, at 13 percentage points.

A better year?

Much seems to suggest that this year will be much better for the building industry than last year. A December report by CEEC Research, consulting company KPMG and market research agency Norstat shows that throughout 2010, the Polish construction sector reported a growth of 0.8 percent, while this year construction companies expect an increase of 3.2 percent.

The 0.8-percent building sector growth anticipated in 2010 would mean a far worse performance than indicated by a March survey in which respondents predicted an increase of 4.7 percent last year.

“Poland was the only Visegrad Group country whose construction market did not report a decline in 2009,” said Steven Baxted, a partner and head of the construction and real estate consulting team at KPMG in Poland. “The industry started experiencing serious difficulties only at the beginning of 2010 when its performance was a dozen or so percent worse than in 2009, in part due to the cold winter. By the end of October, the industry managed to make up for its losses, but the performance can hardly be called impressive. There seems to be no way in the near future for the industry to develop the high growth rate from before the crisis.”

The report also points to a worsening mood among construction companies. In the previous survey from March last year, 75 percent of companies expected to do better than the competition, whereas at present only 57 percent are expecting the same. A total of 70 percent of respondents believe their market situation will improve this year, while in March 2010 such responses came from 79 percent of respondents. According to the report, the industry is making use of 80 percent of its production capacity, up from 70 percent in March last year, while at the same time 37 percent of construction companies have fewer contracts under their belt than last year, 35 percent have the same number of contracts, and 28 percent have more contracts.

Tied up in red tape

Bureaucracy remains the main constraint for construction companies, especially when it comes to ever changing and increasingly strict legal regulations coupled with increasingly complex public tendering procedures. Red tape has had the worst effect on small and medium-sized construction enterprises.

Almost 93 percent of respondents point to serious obstacles stemming from high labor costs. Large enterprises have also named stiff competition as a factor constraining their development.

The third biggest obstacle identified by 82 percent of enterprises (SMEs and general-construction companies) is insufficient demand generated by private investors. This factor has gained the most importance of all development constraints taken into account in the survey. Insufficient demand generated by public investors is seen as less of a problem at the moment.

The findings of a survey conducted by the PMR market research company are far more optimistic and suggest that this year may become a turning point for the building industry in terms of output. If the weather this winter is relatively good, the average annual increase this year may reach 10 percent, the survey shows, owing to large engineering projects and a major revival in building construction works. PMR has compiled a report entitled Construction Sector in Poland, Latter Half of 2010—A Comparative Analysis of Provinces and Forecasts for 2010-2013, which indicates that, after 2009 and 2010, which were difficult years for the industry, the coming years will be characterized by sharper increases. The 20th report from PMR paints quite a positive picture of the construction market in Poland despite certain problems reported by construction companies.

Civil engineering projects will continue to be the driving force of Poland’s building industry in the coming years, but given the sharp increases in 2009 and thus a higher comparison base, the increases in the years to follow will be less impressive, according to the report. Since a vast majority of engineering projects are public ones, some of these may be completed with a delay. It is a particularly risky situation when many major road construction projects are being carried out simultaneously, as a result of which some of the projects may encounter all kinds of obstacles.

Compared with forecasts from six months ago, prospects for non-housing construction have somewhat improved, mainly owing to a more stable situation in commercial construction and the expected continuing upward trend in the public building segment (40 percent in 2010). The situation is also expected to improve thanks to better trends in the financial sector, faster growth of the Polish economy and stronger flow of foreign direct investment to Poland.

Despite the abrupt slowdown on the housing market, the PMR report is optimistic about the market’s prospects in the long run. The crisis on the Polish housing market proved to be less severe than widely expected and far milder than in most other EU member states.

According to PMR analysts, in 2009 developers caught up with private projects in terms of the number of housing units completed.

Since new projects carried out by developers took a plunge in 2008 and 2009, it is expected that in the coming years people building houses on their own will continue to account for the largest part of the housing market. Still, developers are expected to account for a growing part of the market in the long run, because, apart from apartment buildings, a growing number of developers are venturing into smaller housing projects, including residences and single-family houses, as a result of which wealthy customers will opt for services provided by developers rather than build houses on their own.

Growth driven by road construction

Forecasts contained in the report are confirmed by views voiced by the largest construction companies about the most promising segments of the construction market. A total of 81 respondents said road construction would be the most attractive segment of the market in the next two years, followed by construction projects for the power, gas and fuel industry sectors. According to one in five respondents (up from 9 percent last year), railroad construction is the most attractive sector. A similar percentage of respondents (up from 12 percent last year) listed housing as a promising sector.

Environmental engineering (comprising sewage treatment plants, sewage systems and pipelines), which in previous reports came in as the third most attractive segment of the construction market, scored 14 percent in the latest report, down from 31 percent in September 2009. Industrial construction (industrial plants, production halls, and so on) was identified as the most attractive sector by 11 percent of respondents.

In the previous survey, construction of sports facilities and recreation venues was considered the most attractive market segment by one in three respondents, while in the latest survey it was mentioned by only 7 percent. This is because construction on most new stadiums is at an advanced stage.
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